PROSPECTUS December 22, 1997
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
respective investment objectives are as follows:
JanCap Growth Portfolio seeks growth of capital in a manner consistent with
preservation of capital. T. Rowe Price International Equity Portfolio seeks
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. Founders Capital Appreciation Portfolio seeks capital appreciation.
INVESCO Equity Income Portfolio seeks high current income while following sound
investment practices. Capital growth potential is an additional, but secondary,
consideration in the selection of portfolio securities. PIMCO Total Return Bond
Portfolio seeks to maximize total return, consistent with preservation of
capital. PIMCO Limited Maturity Bond Portfolio seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
Berger Capital Growth Portfolio seeks long-term capital appreciation.
Investments in the 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.
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 December 22, 1997
(the "SAI"), containing additional information about the Trust has been filed
with the Securities and Exchange Commission (the "Commission") and is hereby
incorporated by reference into this Prospectus. The Trust's SAI is available
without charge upon request to the Trust at the above address or by calling
(800) 752-6342. The Commission maintains a Web site (http:/ /www.sec.gov) that
contains the SAI, material incorporated by reference, and other information
regarding the Trust.
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.
Shares of the Trust are available to, and are marketed as a pooled funding
vehicle for, life insurance companies ("Participating Insurance Companies")
writing variable annuity contracts and variable life insurance policies. As of
the date of this Prospectus, the only Participating Insurance Companies are
American Skandia Life Assurance Corporation and Kemper Investors Life Insurance
Company. From time to time, however, the Trust may enter into participation
agreements with other Participating Insurance Companies. 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"). 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. WF AST PRO (12/97)
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TABLE OF CONTENTS
Caption Page
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Portfolio Annual Expenses.........................................................................................3
Financial Highlights..............................................................................................4
Investment Objectives and Policies................................................................................6
JanCap Growth Portfolio......................................................................................6
T. Rowe Price International Equity...........................................................................7
Founders Capital Appreciation Portfolio.....................................................................10
INVESCO Equity Income Portfolio.............................................................................14
PIMCO Total Return Bond Portfolio...........................................................................16
PIMCO Limited Maturity Bond Portfolio.......................................................................22
Berger Capital Growth Portfolio.............................................................................29
Certain Risk Factors and Investment Methods......................................................................31
Regulatory Matters...............................................................................................37
Portfolio Turnover...............................................................................................38
Brokerage Allocation.............................................................................................38
Investment Restrictions..........................................................................................38
Net Asset Values.................................................................................................38
Purchase and Redemption of Shares................................................................................39
Organization and Management of the Trust.........................................................................39
Tax Matters......................................................................................................44
Description of Shares of the Trust...............................................................................45
Performance......................................................................................................46
Transfer and Shareholder Servicing Agent.........................................................................47
Custodian........................................................................................................47
Counsel and Auditors.............................................................................................47
Other Information................................................................................................47
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PORTFOLIO ANNUAL EXPENSES (as a percentage of average net assets): Unless
otherwise indicated, the expenses shown below are for the year ending December
31, 1996. "N/A" indicates that no entity has agreed to reimburse the particular
expense indicated. 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.
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*
* 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.
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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
Portfolio: voluntary voluntary applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
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JanCap Growth N/A 0.90% N/A 0.20% N/A 1.10%
T. Rowe Price International Equity N/A 1.00% N/A 0.30% N/A 1.30%
Founders Capital Appreciation N/A 0.90% N/A 0.26% N/A 1.16%
INVESCO Equity Income N/A 0.75% N/A 0.23% N/A 0.98%
PIMCO Total Return Bond N/A 0.65% N/A 0.24% N/A 0.89%
PIMCO Limited Maturity Bond N/A 0.65% N/A 0.24% N/A 0.89%
Berger Capital Growth N/A 0.75% N/A 0.26% N/A 1.01%
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EXPENSE EXAMPLES:
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.
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You would pay the following expenses rounded to the nearest dollar on a $1,000 investment, assuming a 5% hypothetical
annual return at the end of each time period shown below:
After:
Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
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<S> <C> <C> <C> <C>
JanCap Growth 11 35 61 135
T. Rowe Price International Equity 13 41 71 156
Founders Capital Appreciation 12 37 64 141
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 10 32 56 125
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The above tables are provided to assist you in understanding the various costs
and expenses that you would bear directly or indirectly as an investor in the
Portfolio(s). THE ABOVE EXPENSE EXAMPLES ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED AS A REPRESENTATION OF THE PORTFOLIOS' PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS (Selected Per Share Data for an Average Share Outstanding
and Ratios Throughout Each Period): The tables below contain unaudited financial
information and 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. Audited Financial Statements for
the year ended December 31, 1996 and the Independent Auditors' Report thereon,
and unaudited Financial Statements for the period ended June 30, 1997, are
included in the Trust's SAI, which is available without charge upon request to
the Trust at One Corporate Drive, Shelton, Connecticut or by calling (800)
752-6342. Further information about the performance of the Portfolios is
contained in the annual reports of the separate accounts funding the variable
annuity contracts and variable life insurance policies, which also may be
obtained without charge upon request to the Trust at that address or phone
number. The information presented in these financial highlights is historical
and is not intended to indicate future performance of the Portfolios.
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INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
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JanCap Growth 06/30/97* $ 18.79 $ 0.03 $ 3.42 $ 3.45 $(0.05) $(0.81) $ (0.86) $ 21.38
12/31/96 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82) 18.79
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
12/31/93 10.53 0.03 1.22 1.25 -- -- -- 11.78
12/31/92(2) 10.00 (0.01) 0.54 0.53 -- -- -- 10.53
PIMCO Total 06/30/97* $ 11.11 $ 0.24 $ 0.09 $ 0.33 $(0.45) $ -- $ (0.45) $ 10.99
Return Bond 12/31/96 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59) 11.11
12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
12/31/94(5) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity 06/30/97* $ 13.99 $ 0.15 $ 1.74 $ 1.89 $(0.26) $(0.37) $ (0.63) $ 15.25
Income
12/31/96 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57) 13.99
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
12/31/94(5) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders 06/30/97* $ 16.80 $(0.02) $(0.16) $(0.18) $ -- $ -- $ -- $ 16.62
Capital
Appreciation 12/31/96 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27) 16.80
12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
12/31/94(5) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 06/30/97* $ 12.07 $ 0.08 $ 1.25 $ 1.33 $(0.07) $(0.08) $ (0.15) $ 13.25
International 12/31/96 10.65 0.06 1.44 1.50 (0.08) -- (0.08) 12.07
Equity
12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
12/31/94(5) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
Berger Capital 06/30/97* $ 14.39 $ 0.01 $ 0.88 $ 0.89 $(0.02) $(0.13) $ (0.15) $ 15.13
Growth
12/31/96 12.40 0.01 2.01 2.02 (0.03) -- (0.03) 14.39
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
12/31/94(3) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
PIMCO Limited 06/30/97* $ 10.81 $ 0.26 $ 0.08 $ 0.34 $(0.56) $ -- $ (0.56) $ 10.59
Maturity Bond 12/31/96 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
12/31/95(4) 10.00 0.05 0.42 0.47 -- -- -- 10.47
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+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
* Unaudited.
(1) Annualized.
(2) Commenced operations on November 6, 1992.
(3) Commenced operations on October 20, 1994.
(4) Commenced operations on May 2, 1995.
(5) Commenced operations on January 4, 1994.
See Notes to Financial Statements.
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RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
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18.82% $ 1,302,467 48% $ 0.0644 1.08%(1) 1.08%(1) 0.35% (1) 0.35%(1)
28.36% 892,324 79% 0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
3.03% $ 462,623 159% N/A 0.88%(1) 0.88%(1) 5.73% (1) 5.73%(1)
3.42% 360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57% (1) 5.57%(1)
13.92% $ 475,969 38% $ 0.0600 0.96%(1) 0.96%(1) 2.69% (1) 2.69%(1)
17.09% 348,680 58% 0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41% (1) 3.41%(1)
(1.13%) $ 240,594 31% $ 0.0523 1.14%(1) 1.14%(1) (0.35%)(1) (0.35%)(1)
20.05% 220,068 69% 0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59% (1) 2.34%(1)
11.09% $ 515,359 8% $ 0.0232 1.26%(1) 1.26%(1) 1.41% (1) 1.41%(1)
14.17% 402,559 11% 0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45% (1) 0.43%(1)
6.29% $ 152,523 158% $ 0.0605 0.99%(1) 0.99%(1) 0.20% (1) 0.20%(1)
16.34% 136,247 156% 0.0614 1.01% 1.01% 0.24% 0.24%
24.42% 45,979 84% -- 1.17% 1.17% 0.70% 0.70%
(0.30%) 3,030 5% -- 1.25%(1) 1.70%(1) 1.41% (1) 0.97%(1)
3.26% $ 261,194 21% N/A 0.89%(1) 0.89%(1) 5.77% (1) 5.77%(1)
3.90% 209,013 247% N/A 0.89% 0.89% 5.69% 5.69%
4.70% 161,940 205% -- 0.89%(1) 0.89%(1) 4.87% (1) 4.87%(1)
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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. Those investment
policies specifically labeled 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 SAI 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 SAI 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) Janus Capital Corporation: JanCap Growth
Portfolio (b) Rowe Price-Fleming International, Inc.: T. Rowe Price
International Equity Portfolio (c) Founders Asset Management, Inc.: Founders
Capital Appreciation Portfolio (d) INVESCO Trust Company: INVESCO Equity Income
Portfolio; (e) Pacific Investment Management Company: PIMCO Total Return Bond
Portfolio, PIMCO Limited Maturity Bond Portfolio; (f) Berger Associates, Inc.:
Berger Capital Growth Portfolio;
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.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
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 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 SAI 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.
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 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 depositary
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 depositary receipts and the risks involved in investing in foreign
securities, including the risk of currency fluctuations, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. 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. The Portfolio may also
use a variety of currency hedging techniques, including forward currency
contracts, to manage exchange rate risk with respect to investments exposed to
foreign currency fluctuations. For an additional discussion of futures and
options transactions and the risks involved therein, see this Prospectus and the
Trust's SAI 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,
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 between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Trust's SAI 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 net 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."
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.
For a discussion of these instruments and the risks involved therein, see this
Prospectus and the Trust's SAI 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 Portfolio's
limitations on borrowing and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Objectives and Policies."
Portfolio Turnover. 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. For a discussion of portfolio turnover and its
effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the 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. Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses. This is a fundamental 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 Depositary 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).
Foreign Currency Transactions. 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. For a discussion of foreign currency contracts and the risks
involved therein, see this Prospectus and the Trust's SAI 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. 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. For an additional discussion of futures contracts and options and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
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 these 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 SAI 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
Portfolio's 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 and
restricted securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI 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 the Portfolio's limitations on lending and certain risks involved
in lending, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's SAI under "Investment Objectives and Policies" and
"Investment Methods."
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 certain
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Objectives and
Policies."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Portfolio is capital
appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio normally will invest at least
65% of its total assets in common stocks of U.S. companies with market
capitalizations or annual revenues 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.
Risks of Investments in Small and Medium-Sized Companies. The Portfolio
normally will invest a significant proportion of its assets in the securities of
small and medium-sized companies. As used with respect to this Portfolio, small
and medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting 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 and marketing; provide efficient service; and
possess pricing flexibility. The Portfolio tries to avoid investing in companies
where operating results may be affected adversely by excessive competition,
severe governmental regulation, or unsatisfactory productivity.
Investments in small and medium-sized companies involve greater risk
than is customarily associated with more established companies. These companies
often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Portfolio's shares 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 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 ("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 (not including convertible securities and preferred
stock) which are rated below investment grade as a result of a reduction in
rating after purchase or are unrated. For a description of securities ratings,
see the Appendix to the Trust's SAI. For a discussion of the special risks
involved in lower-rated debt securities, see this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Portfolio may invest 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 and S&P provide
a generally useful guide as to such credit risk. The lower the rating given a
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 securities, while intended
to increase the yield produced by those assets, also will increase the credit
risk to which those assets are subject. Market risk relates to the fact that the
market values of securities in which the Portfolio may invest 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. Medium-rated securities (those rated Baa or
BBB) have speculative characteristics while lower-rated securities are
predominantly speculative. The Portfolio is not required to dispose of straight
debt securities whose ratings are downgraded below Baa or BBB subsequent to the
Portfolio's purchase of the securities, unless such a disposition is necessary
to reduce the Portfolio's holdings of such securities to less than 5% of its
total assets. Relying in part on ratings assigned by credit agencies in making
investments will not protect the Portfolio from the risk that fixed-income
securities in which it invests will decline in value, since credit ratings
represent evaluations of the safety of principal, dividend and interest payments
on preferred stocks and debt securities, not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Portfolio through diversification and consideration of
relevant factors affecting the value of securities. No assurance can be given,
however, regarding the degree of success that will be achieved in this regard or
in the Portfolio achieving its investment objective.
Foreign Securities. The Portfolio may invest in dollar-denominated
American Depositary Receipts ("ADRs") 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, or on whether the issuer's sole or principal stock exchange listing is
outside of the United States. Foreign securities typically will be traded on the
applicable country's principal stock exchange but may also be traded on regional
exchanges or over-the-counter. For a discussion of ADRs, see this Prospectus
under "Certain Risk Factors and Investment Methods."
Foreign investments of the Portfolio may include securities issued by
companies located in 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. Such countries
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, 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.
Investments in foreign securities involve certain risks which are not
typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Trust's SAI 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. 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 Portfolio's 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. In addition, the Portfolio generally will not 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 the Portfolio's 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. In the event that forward
contracts are considered to be illiquid, the securities would be subject to the
Portfolio's limitation on investing in illiquid securities. For an additional
discussion of foreign currency contracts and the risks involved therein, see
this Prospectus and the Trust's SAI 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 net assets, measured at the time of purchase, in securities that are not
readily marketable, including repurchase agreements maturing in more than seven
days. Securities that are not readily marketable are those that, for whatever
reason, cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Portfolio has valued the
investment.
The Portfolio may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A, and may or may not be deemed to be readily marketable. Factors
considered 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
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI 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 certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures
contracts (or options thereon) for hedging purposes. 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. 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. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Portfolio may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Portfolio's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Portfolio may purchase options on securities and stock indices.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price 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 exercise date. 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. The Portfolio may
also 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.
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
total assets after taking into account unrealized profits and losses on options
entered into. 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 an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI
under "Investment Objectives and Policies."
Temporary Investments. Up to 100% of the assets of the Portfolio may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, 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. While the Portfolio is in
a defensive position, the opportunity to achieve capital growth will be limited,
and, 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 Portfolio also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank").
The Portfolio may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Trustees of the
Trust, if any. A certificate of deposit is a short-term obligation of a bank. A
bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
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, also may 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
with banks or well-established securities dealers. 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."
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 which are considered to be high and may be greater than those of
other investment companies seeking capital appreciation. Portfolio turnover
rates may also increase as a result of the need for the Portfolio to effect
significant amounts of purchases or redemptions of portfolio securities due to
economic, market, or other factors that are not within the Sub-advisor's
control. For a discussion of portfolio turnover and its effects, see this
Prospectus and the Trust's SAI under "Portfolio Turnover."
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income while following sound investment practices. This is a fundamental
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 at least 65% of its assets in dividend-paying, marketable common
stocks of domestic and foreign issuers. Up to 10% of the Portfolio's assets may
be invested in equity securities that do not pay regular dividends. 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
common stocks and equity securities of domestic and foreign 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.
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 a description of securities ratings, see the Appendix to the
Trust's SAI.
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. For a discussion of the special risks involved
in lower-rated bonds, see this Prospectus and the Trust's SAI 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, the Portfolio's annual portfolio
turnover rate may be higher than that of other investment companies seeking
current income with capital growth as a secondary consideration. For a
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
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 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 of the
Portfolio's limitations on lending and certain risks involved in lending, see
this Prospectus under "Certain Risk Factors and Investment Methods" and the
Trust's SAI under "Investment Restrictions."
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 investing in foreign securities in
general, see this Prospectus and the Trust's SAI 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 or the Sub-advisor 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 Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek 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, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
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. The average portfolio duration of the
Portfolio normally will vary within a three- to six-year time frame based on the
Sub-advisor's forecast for interest rates. 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). In the event that
ratings services assign different ratings to the same security, the Sub-advisor
will determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
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 SAI under "Certain Risk Factors and Investment Methods." See the
Appendix to the Trust's SAI for a description of Moody's and S&P's ratings
applicable to fixed income securities.
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.
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 obtained by a 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 the composition of 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.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
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 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. 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 SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be unattractive or limited due
to insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
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. For a description of these securities and the special risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment Objectives
and Policies."
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, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices 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. The Portfolio will maintain a segregated account consisting of cash or
other liquid assets to cover its obligations under reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls will be subject
to the Portfolio's limitations on borrowing as discussed in the Trust's SAI
under "Investment Restrictions." Apart from transactions involving reverse
repurchase agreements and dollar rolls, the Portfolio will not borrow money,
except for temporary administrative purposes. For an additional discussion of
the risks of borrowing and of reverse repurchase agreements and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
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 an additional discussion of the Portfolio's
limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The
Portfolio may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment 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 such purchases are outstanding, the Portfolio will set aside and
maintain until the settlement date, in a segregated account, cash or other
liquid assets in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities the Portfolio has committed to purchase 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 when-issued, delayed delivery, or forward commitment 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 when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a 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 transaction after it is
entered into, and may sell when-issued or forward commitment 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 when-issued, delayed delivery, or forward commitment 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 or other liquid assets 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 fixed income
securities of non-U.S. issuers. The Portfolio will concentrate its foreign
investments to securities of issuers based in developed countries. The Portfolio
may invest up to 10% of its assets in securities of issuers based in countries
with emerging securities markets. The Sub-advisor has broad discretion to
identify and invest in countries that it considers to qualify as emerging
securities markets. 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 investing
in foreign securities, in general, and the special risks of investing in
developing countries, as well as the risks of currency fluctuations, see this
Prospectus and the Trust's SAI 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.
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 SAI under "Certain Risk Factors and Investment
Methods."
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. The 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 of
the same series.
The Portfolio may also 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 options and the risks involved therein, as well as the risks
involved in investing in foreign currency, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. 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 or other liquid assets 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 longer 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. For an
additional discussion of futures contracts and related options, and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI 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. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Trustees). Illiquid securities
may include privately placed securities, which are sold directly to a small
number of investors, usually institutions. Unlike public offerings, such
securities are not registered under the federal securities laws. Although
certain of these securities may be readily sold, for example, under Rule 144A,
others may be illiquid, and their sale may involve substantial delays and
additional costs.
Portfolio Turnover. The Portfolio may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Trust's SAI
under "Portfolio Turnover."
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
to maximize total return, consistent with preservation of capital and prudent
investment management. This is a fundamental 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.
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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, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
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. The average portfolio duration of the
Portfolio generally will vary within a one- to three-year time frame based on
the Sub-advisor's forecast for interest rates. 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. In the event that ratings
services assign different ratings to the same security, the Sub-advisor will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings. 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. See the Appendix to the Trust's SAI for a description of Moody's and S&P
ratings applicable to fixed income securities.
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 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,
and 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.
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.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
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. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be unattractive or limited due
to insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
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. For an
additional discussion of mortgage-related and other asset-backed securities and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
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, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices 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. The Portfolio will maintain a segregated account
consisting of cash or other liquid assets to cover its obligations under reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls will be subject to the Portfolio's limitations on borrowings as discussed
in the Trust's SAI under "Investment Restrictions." Apart from transactions
involving reverse repurchase agreements and dollar rolls, the Portfolio will not
borrow money, except for temporary administrative purposes. For an additional
discussion of the risks of borrowing, and of reverse repurchase agreements and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
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 an additional discussion of certain risks
involved in lending, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The
Portfolio may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment 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 such purchases are outstanding, the Portfolio will set aside and
maintain until the settlement date, in a segregated account, cash or other
liquid assets in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities the Portfolio has committed to purchase 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 when-issued, delayed delivery, or forward commitment 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 when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a 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 transaction after it is
entered into, and may sell when-issued or forward commitment 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 when-issued, delayed delivery, or forward commitment 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 or other liquid assets 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 fixed income
securities of non-U.S. issuers. The Portfolio will concentrate its foreign
investments to securities of issuers based in developed countries. The Portfolio
may invest up to 5% of its assets in securities of issuers based in countries
with emerging securities markets. The Sub-advisor has broad discretion to
identify and invest in countries that it considers to qualify as emerging
securities markets. 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 investing
in foreign securities, in general, and the special risks of investing in
developing countries, as well as the risks of currency fluctuations, see this
Prospectus and the Trust's SAI 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.
<PAGE>
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 SAI 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.
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 options and the risks
involved therein, as well as the risks involved in investing in foreign
currency, see this Prospectus and the Trust's SAI 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 or other
liquid assets 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.
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. For an
additional discussion of futures contracts and related options, and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI 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. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Trustees). Illiquid securities
may include privately placed securities, which are sold directly to a small
number of investors, usually institutions. Unlike public offerings, such
securities are not registered under the federal securities laws. Although
certain of these securities may be readily sold, for example, under Rule 144A,
others may be illiquid, and their sale may involve substantial delays and
additional costs.
Portfolio Turnover. The Portfolio may have portfolio turnover higher than
other mutual funds with similar investment objectives. For an additional
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
Berger Capital Growth Portfolio:
Investment Objective: The investment objective of the 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 Investments. 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 SAI 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 in investing in foreign securities, including the
risk of currency fluctuations, see this Prospectus and the Trust's SAI 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,
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 SAI.
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."
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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 and restricted securities and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may have portfolio turnover higher than
other mutual funds with similar investment objectives. For an additional
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
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" sections of the Trust's SAI. The following is a description of certain
additional risk factors related to various of these 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 invest in securities and other instruments that are
commonly referred to as "derivatives." For instance, 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, and 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.
In general, derivative instruments are those securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, but not 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 derivative 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. In addition, 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. Furthermore, a Portfolio may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or need to sell a portfolio security at a disadvantageous time, due to the need
to maintain asset coverage or offsetting positions in connection with
transactions in derivative instruments. Finally, a Portfolio may be unable to
close out or to liquidate its derivatives positions.
Options and Futures Contracts:
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.
If a Portfolio writes a call option on a security it already owns, it
gives up the opportunity for capital appreciation above the exercise price
should market price of the underlying security increase, but retains 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 the 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 specified price 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.
Risks of Options and Futures Contracts. 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 and options 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 the Portfolio, the Portfolio could be left in a less favorable
position than if such strategies had not been used. The successful use of these
strategies therefore may depend on the ability of the Sub-advisor to correctly
forecast interest rate movements and general stock market price movements. Risks
inherent in the use of futures and options 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 and options
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. Particularly with respect
to options on stock indices and stock index futures, the risk of imperfect
correlation increases as the composition of the Portfolio diverges from the
composition of the relevant index.
Pursuant to regulations of the Commodity Futures Trading Commission,
the Trust has represented that:
(i) a Portfolio 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 the
Portfolio's net assets; and
(ii) a Portfolio will not enter into any futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions would exceed the market value of the Portfolio's total
assets.
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. Unlike other debt instruments
and other mortgage-backed securities, the value of IOs tends to move in the same
direction as 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.
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. Brokerage commissions on foreign securities exchanges, which
may be fixed, 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.
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. 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 Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary 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. Depositary 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 Depositary 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
Depositary 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.
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 or exposed to 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:
Lower-rated high-yield bonds (commonly known as "junk bonds") are
generally considered to be high risk investments, as they are subject to a
higher risk of default than higher-rated bonds. In addition, the market for
lower-rated high-yield bonds generally 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: the exercise of any
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 and 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 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.
Other Investment Companies:
The Trust has made arrangements with certain money market mutual funds
so that the Sub-advisors for the various Portfolios can "sweep" excess cash
balances of the Portfolios to those funds for temporary investment purposes.
Mutual funds pay their own operating expenses, and the Portfolios, as
shareholders in the money market funds, will indirectly pay their proportionate
share of such funds' expenses. Investments in other mutual funds and investment
companies will be made subject to the restrictions of the Investment Company Act
of 1940, which, among other restrictions, places certain limits on the
proportion of a Portfolio's assets that can be invested in other investment
companies.
REGULATORY MATTERS:
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 of this Prospectus) 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 (generally in excess of 100%)
involves correspondingly greater brokerage commissions and other transaction
costs. Trading in fixed income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. A 100%
portfolio turnover rate would occur if all the securities in a portfolio of
investments were replaced during a given period. The following Portfolios have
anticipated annual rates of turnover exceeding 100%.
JanCap Growth Portfolio (not to exceed 200% under normal market
conditions).
Founders Capital Appreciation Portfolio (not to exceed 150% under
normal market conditions).
PIMCO Total Return Bond Portfolio (not to exceed 350% under normal
market conditions).
PIMCO Limited Maturity Bond Portfolio (not to exceed 350% under normal
market conditions).
Berger Capital Growth Portfolio (not to exceed 150% under normal market
conditions).
For further details regarding the portfolio turnover rates, see
"Portfolio Turnover" in the Trust's SAI.
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing Portfolio securities
transactions with broker-dealers 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. Each Portfolio's
Sub-advisor may consider the use of broker-dealers that are, or might be deemed
to be, their affiliates or affiliates of the Investment Manager. In addition, a
Sub-advisor may consider sale of shares of the Portfolios or variable insurance
products that use the Portfolios as investment vehicles, or may consider or
follow recommendations of the Investment Manager that take such sales into
account, as factors in selection of broker-dealers to effect transactions,
subject to the requirements of best net price available and most favorable
execution. In this regard, the Investment Manager has directed certain of the
Sub-advisors to try to effect a portion of their Portfolios' transactions
through broker-dealers that give prominence to variable insurance products using
the Portfolios as investment vehicles, to the extent consistent with best net
price available 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 Trust's SAI describes all the restrictions on each
Portfolio's investment activities.
NET ASSET VALUES:
The net asset value per share of each 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 as of 4:00 P.M. Eastern Time on each "business" day, which is each
day that the New York Stock Exchange (the "NYSE") is open for business. 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. See "Computation of Net Asset Values" in the Trust's SAI.
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) 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 value 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 value. 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 ("ASLAC") and Kemper Investors Life Insurance Company are the only
Participating Insurance Companies. 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 other 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). As of
December 1, 1997, more than 99% of each Portfolio of the Trust was owned of
record by ASLAC on behalf of the owners of variable annuity contracts issued by
ASLAC.
ORGANIZATION AND MANAGEMENT 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. As of the date of this Prospectus, the Trust has 28
Portfolios, seven of which are offered through this Prospectus. 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 new
Portfolios available and adopting forms of Investment Management Agreements and
Sub-advisory Agreements between the Investment Manager and the Trust and the
Investment Manager and each Sub-advisor, respectively.
The Trustees of the Trust have oversight responsibility for the operations
of each Portfolio. The Trustees are David E.A. Carson, Julian A. Lerner, 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 Trust's SAI 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.
American Skandia Life Assurance Corporation, a Participating Insurance
Company, 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:
Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver,
Colorado 80206-4923, serves as Sub-advisor for the JanCap Growth Portfolio.
Janus 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 June 30, 1997, Janus managed assets worth over
$60 billion. Kansas City Southern Industries, Inc. ("KCSI") owns approximately
83% of the outstanding voting stock of Janus, 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 JanCap Growth
Portfolio is Scott W. Schoelzel. Mr. Schoelzel, a Senior Portfolio Manager at
Janus who has managed the Portfolio since August, 1997, joined Janus in January,
1994 as Vice President of Investments. From 1991 to 1993, Mr. Schoelzel was a
Portfolio Manager with Founders Asset Management.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), 100 East Pratt
Street, Baltimore, Maryland 21202, serves as Sub-advisor for the T. Rowe Price
International Equity Portfolio. 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 $30 billion under management as of June 30,
1997 in its offices in Baltimore, London, Tokyo, Hong Kong and Singapore. Each
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 T. Rowe Price International Equity Portfolio
consists of Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Mark J.T.
Edwards, John R. Ford, 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. Christopher Alderson joined Price-Fleming in 1988, and
has 9 years of experience with the Fleming Group in research and portfolio
management. Peter Askew joined Price-Fleming in 1988 and has 21 years of
experience managing multicurrency fixed income portfolios. Mark J.T. Edwards
joined Price-Fleming in 1986 and has 15 years of experience in financial
analysis. John R. Ford joined Price-Fleming in 1982 and has 16 years of
experience with Fleming Group in research and portfolio management. James B.M.
Seddon joined Price-Fleming in 1987 and has 11 years of experience in investment
management. Benedict R.F. Thomas joined Price-Fleming in 1988 and has 7 years of
portfolio management experience. David J.L. Warren joined Price-Fleming in 1984
and has 16 years experience in equity research, fixed income research and
portfolio management.
Founders Asset Management, Inc. ("Founders"), Founders Financial
Center, 2930 East Third Avenue, Denver, Colorado 80206, serves as Sub-advisor
for the Founders Capital Appreciation Portfolio. Founders has acted as an
investment advisor since 1938 and serves as investment advisor to Founders
Discovery, Frontier, Passport, Special, International Equity, Worldwide Growth,
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 $5.7 billion as of June 30, 1997.
Founders has recently announced its agreement to be acquired by Mellon
Bank, N.A., which is part of a large bank holding company. It is not currently
anticipated that the acquisition would result in any change in Founders'
services to the Founders Capital Appreciation Portfolio or in the portfolio
manager of the Portfolio. Nonetheless, the acquisition will result in an
"assignment," as defined in the 1940 Act, of the sub-advisory agreement between
Founders and the Investment Manager with respect to the Portfolio. This
assignment, in turn, would result in the automatic termination of the
sub-advisory agreement and require that a new sub-advisory agreement be
submitted for approval by the shareholders of the Portfolio. The acquisition is
expected to be completed in the first quarter of 1998, subject to conditions
relating to, among other things, the approval of new advisory agreements by
mutual funds and other accounts advised or sub-advised by Founders.
Michael K. Haines, a Senior Vice President of Investments of Founders,
has been responsible for management of the Founders Capital Appreciation
Portfolio since the Portfolio commenced operations in January 1994. Mr. Haines
has been associated with Founders since 1985, serving as a lead portfolio
manager and an assistant portfolio manager.
INVESCO Trust Company ("INVESCO"), 7800 East Union Avenue, P.O. Box
173706, Denver, Colorado 80217-3706, serves as Sub-advisor for the INVESCO
Equity Income Portfolio. INVESCO, a trust company founded in 1969, is a
wholly-owned subsidiary of INVESCO Funds Group, Inc., which was established in
1932. INVESCO also 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., INVESCO
Strategic Portfolios, Inc., and INVESCO Variable Investment Funds, Inc. AMVESCAP
PLC, the parent of INVESCO Funds Group, Inc. and INVESCO, is one of the largest
independent investment management businesses in the world and managed
approximately $15.4 billion of assets as of June 30, 1997.
The portfolio managers responsible for management of the Portfolio are
Charles P. Mayer, Portfolio Co-Manager, and Donovan J. (Jerry) Paul, Portfolio
Co-Manager. Mr. Mayer has served as Co-Manager of the Portfolio since April,
1993. Mr. Mayer began his investment career in 1969 and is now a senior vice
president of INVESCO. From 1993 to 1994, he was vice president of INVESCO, and
from 1984 to 1993, he was a portfolio manager with Westinghouse Pension. Mr.
Paul has served as Co-Manager of the Portfolio since May 1994. Mr. Paul entered
the investment management industry in 1976, and has been a senior vice president
of INVESCO since 1994. From 1993 to 1994, he was president of Quixote Investment
Management, Inc.
Pacific Investment Management Company ("PIMCO"), 840 Newport Center
Drive, Suite 360, Newport Beach, California 92660 serves as Sub-advisor for the
PIMCO Total Return Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio.
PIMCO, a subsidiary general partnership of PIMCO Advisors L.P. ("PIMCO
Advisors"), is an investment counseling firm founded in 1971 and, as of June 30,
1997, had over $99 billion of assets under management. 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 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 the PIMCO Limited Maturity Bond Portfolio is William
H. Gross. Mr. Gross is managing director of PIMCO has been associated with the
firm since 1971, and has managed each Portfolio since their respective
commencement of operations.
Berger Associates, Inc. ("Berger Associates"), 210 University Blvd.,
Suite 900, Denver, Colorado, 80206, serves as Sub-advisor for the Berger Capital
Growth Portfolio. Berger Associates has acted as an investment adviser since
1973 and, as of June 30, 1997, managed assets worth approximately $3.6 billion.
Berger Associates also serves as investment adviser to other mutual funds and to
institutional investors. Kansas City Southern Industries, Inc. ("KCSI") owns
approximately 87% of the outstanding stock of Berger Associates, most of which
it acquired in 1994. 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 since
February, 1997 is Patrick S. Adams. Mr. Adams co-managed the Portfolio from
February, 1997 to December, 1997. Mr. Adams joined Berger Associates as a Senior
Vice President in February 1997. From June 1996 to January 1997, Mr. Adams
served as Senior Vice President with Zurich Kemper Investments, Inc. From March
1993 to May 1996, Mr. Adams served as portfolio manager with Founders Asset
Management, Inc., where he managed the Founders Blue Chip Growth Fund and the
Founders Balanced Fund. Prior to that, Mr. Adams served in various positions
with First of America Investment Corp. for over three years, including as Senior
Portfolio Manager/Senior Analyst from January 1992 to February 1993.
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 Trustees of the Trust.
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 differs from Portfolio to Portfolio,
reflecting the objective, policies and restrictions of each Portfolio and the
nature of each Investment Management Agreement and 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:
JanCap Growth Portfolio: An annual rate of .90% of the average daily
net assets of the Portfolio. The Investment Manager has voluntarily agreed to
waive a portion of its fee equal to .05% of the average daily net assets of the
Portfolio in excess of $1 billion. The Investment Manager may terminate this
voluntary agreement at any time.
T. Rowe Price International Equity Portfolio: An annual rate of 1.0% of the
average daily net assets of the Portfolio.
Founders Capital Appreciation Portfolio: An annual rate of .90% of the
average daily net assets of the Portfolio.
INVESCO Equity Income Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
PIMCO Total Return Bond Portfolio: An annual rate of .65% of the average
daily net assets of the Portfolio.
PIMCO Limited Maturity Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio.
Berger Capital Growth Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
The Investment Manager has agreed, by the terms of the Management
Agreements for certain Portfolios of the Trust, and voluntarily for the other
Portfolios of the Trust, to reimburse the Portfolio for certain operating
expenses so that total expenses of the Portfolio do not exceed a specified
percentage of the Portfolio's average daily net assets. Such specified
percentage differs between the Portfolios, reflecting the objective, policies
and restrictions of each Portfolio and the expenses involved in conducting an
investment program for each Portfolio. For an additional discussion of Portfolio
expense limitations, see "Investment Advisory and Other Services" in the Trust's
SAI.
Sub-Advisory Agreements: The Investment Manager pays each Sub-advisor for the
performance of sub-advisory services. The fee paid to the Sub-advisors differs
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:
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. Commencing
September 4, 1996, the Sub-advisor has voluntarily agreed to waive a portion of
its fee equal to .10% of the Portfolio's average daily net assets over $500
million but not in excess of $1 billion; and .05% of the portion of the
Portfolio's average daily net assets over $1 billion. The Sub-advisor may
terminate this voluntary agreement at any time.
Rowe Price-Fleming International, Inc. for the T. Rowe Price
International Equity Portfolio: An annual rate of .75% of the portion of the
average daily net assets of the Portfolio not in excess of $20 million; plus
.60% of the portion of the net assets over $20 million but not in excess of $50
million; and .50% 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 the portion of the Portfolio's average daily net assets not in excess
of $20 million and .10% 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.
Founders Asset Management, Inc. for the Founders Capital Appreciation
Portfolio: An annual rate of .65% of the portion of the average daily net assets
of the Portfolio not in excess of $75 million; plus .60% of the portion of the
net assets over $75 million but not in excess of $150 million; and .55% of the
net assets in excess of $150 million.
INVESCO Trust Company for the INVESCO Equity Income Portfolio: An
annual rate of .50% of the portion of the average daily net assets of the
Portfolio not in excess of $25 million; plus .45% of the portion of the net
assets over $25 million but not in excess of $75 million; plus .40% of the
portion of the net assets in excess of $75 million but not in excess of $100
million; and .35% of the portion of the net assets over $100 million.
Pacific Investment Management Company for the PIMCO Total Return Bond
Portfolio: An annual rate of .30% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25% on the portion of the net
assets over $150 million.
Pacific Investment Management Company for the PIMCO Limited Maturity
Bond Portfolio: An annual rate of .30% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25% on the portion of the net
assets over $150 million.
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.
Administrator: PFPC Inc. (the "Administrator"), 103 Bellevue Parkway,
Wilmington, Delaware 19809, a Delaware corporation that is an indirect
wholly-owned subsidiary of PNC Financial Corp., serves as the administrator for
the Trust pursuant to a Trust Accounting and Administration Agreement between
the Trust and the Administrator, dated May 1, 1992 (the "Administration
Agreement"). The Administrator provides certain fund accounting and
administrative services to the Trust, including, among other services,
accounting relating to the Trust and investment transactions of the Trust, and
computing daily net asset values. 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
percentages of the average daily net assets of the Trust or certain specified
minimum annual amounts calculated for each Portfolio. The percentages of the
average daily net assets are: (a) 0.10% of the first $200 million; (b) 0.06% of
the next $200 million; (c) 0.0375% of the next $200 million; and (d) 0.03% of
average daily net assets over $600 million. The minimum amount is $75,000 for
each of the JanCap Growth Portfolio, the Founders Capital Appreciation
Portfolio, the INVESCO Equity Income Portfolio, the PIMCO Total Return Bond
Portfolio, the PIMCO Limited Maturity Bond Portfolio, and the Berger Capital
Growth Portfolio. The minimum amount is $100,000 for the T. Rowe Price
International Equity Portfolio. For an additional discussion of the services
provided by the Administrator under the Administration Agreement, and the
"out-of-pocket" expenses the Trust is to pay the Administrator, see the Trust's
SAI under "Management of the Trust: The Administrator and Transfer and
Shareholder Servicing Agent."
Sale of Shares: Shares are sold at net asset value to Participating Insurance
Companies and Qualified Plans. The Trust has entered into separate agreements
for the sale of shares with American Skandia Life Assurance Corporation
("ASLAC") and Kemper Investors Life Insurance Company ("Kemper"), respectively.
Pursuant to these agreements, the Trust will pay ASLAC and Kemper 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 and Kemper. 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
account of ASLAC, and will pay Kemper 0.1%, on an annualized basis, of the net
asset value of the shares legally owned by the separate accounts of Kemper named
in the sales agreement. The Trust may enter into sales agreements with other
Participating Insurance Companies or certain Qualified Plans in the future.
Qualified Plans and owners of variable annuity contracts and variable insurance
policies will receive annual and semi-annual reports including the financial
statement of the Portfolios that they have authorized for investment.
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 Trust's SAI. 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.
DESCRIPTION OF SHARES OF THE TRUST:
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.
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
(for instance, 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. Each of
the AST Janus Overseas Growth Portfolio, T. Rowe Price International Equity
Portfolio, T. Rowe Price International Bond Portfolio, Founders Passport
Portfolio, Twentieth Century International Growth Portfolio and AST Putnam
International Equity 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: PFPC Inc., 103 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the Trust's transfer and shareholder
servicing agent.
CUSTODIAN: The custodian for all cash and securities holdings of the T. Rowe
Price International Equity Portfolio is Morgan Stanley Trust Company, One
Pierrepont, Brooklyn, New York. The custodian for all cash and securities
holdings 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 holdings.
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.
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.
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