PROSPECTUS DECEMBER 30, 1996
AMERICAN SKANDIA TRUST
One Corporate Drive,
Shelton, Connecticut 06484
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American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing investment objectives of its
Portfolios. The Portfolios offered through 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 American Skandia Trust are neither insured nor guaranteed by the
United States Government. Such investments are not bank deposits, and are not
insured by, guaranteed by, obligations of, or otherwise supported by, any bank.
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 30,
1996, containing additional information about the Trust has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference into
this Prospectus. That Statement is available without charge upon request to the
Trust at the address listed above or by calling (203) 926-1888.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Shares of the Trust are available, and are marketed as a pooled funding vehicle,
for life insurance companies ("Participating Insurance Companies") writing
variable annuity contracts and variable life insurance policies. Shares of the
Trust also may be offered directly to qualified pension and retirement plans,
including, but not limited to, plans under sections 401, 403, 408 and 457 of the
Internal Revenue Code of 1986, as amended ("Qualified Plans"). As of the date of
this Prospectus, the only Participating Insurance 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. 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 PROS (12/96)
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TABLE OF CONTENTS
Caption Page
Financial Highlights 4
Investment Objectives and Policies 8
JanCap Growth Portfolio 8
T. Rowe Price International Equity Portfolio 10
Founders Capital Appreciation Portfolio 12
INVESCO Equity Income Portfolio 17
PIMCO Total Return Bond Portfolio 19
PIMCO Limited Maturity Bond Portfolio 23
Berger Capital Growth Portfolio 28
Certain Risk Factors and Investment Methods 30
Regulatory Matters 36
Portfolio Turnover 37
Brokerage Allocation 37
Investment Restrictions 38
Net Asset Values 38
Purchase and Redemption of Shares 38
Management of the Trust 38
Tax Matters 44
Organization and Description of Shares of the Trust 45
Portfolio Annual Expenses 45
Performance 46
Transfer and Shareholder Servicing Agent Custodian 47
Counsel and Auditors 48
Other Information 48
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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. Financial information for the years
ended December 31, 1991 through December 31, 1995 has been audited. Audited
Financial Statements for the year ended December 31, 1995, including the
Independent Auditors' Report thereon, and Unaudited Financial Statements for the
period ended June 30, 1996 are included in the Trust's Statement of Additional
Information, which is available without charge upon request to the Trust at One
Corporate Drive, Shelton, Connecticut or by calling (203) 926-1888.
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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PORTFOLIO
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JANCAP GROWTH
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SIX MONTHS FOR THE YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1996 -------------------------------------------
(UNAUDITED) 1995 1994 1993 1992(2)
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<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................ $ 15.40 $ 11.22 $ 11.78 $ 10.53 $ 10.00
-------- -------- -------- -------- -------
Increase (Decrease) from
Investment Operations
Net Investment Income (Loss)...................... 0.01 0.06 0.06 0.03 (0.01)
Net Realized & Unrealized Gains
(Losses) on Investments and Foreign
Currency Transactions........................... 2.35 4.18 (0.59) 1.22 0.54
-------- -------- -------- -------- -------
Total Increase (Decrease) From
Investment Operations...................... 2.36 4.24 (0.53) 1.25 0.53
-------- -------- -------- -------- -------
Less Dividends and Distributions
Dividends from Net Investment Income.............. (0.02) (0.06) (0.03) -- --
Distributions from Net Realized
Capital Gains................................... (0.80) -- -- -- --
-------- -------- -------- -------- -------
Total Dividends and Distributions............ (0.82) (0.06) (0.03) -- --
-------- -------- -------- -------- -------
Net Asset Value at End of Period...................... $ 16.94 $ 15.40 $ 11.22 $ 11.78 $ 10.53
======== ======== ======== ======== =======
Total Return.......................................... 15.72% 37.98% (4.51%) 11.87% 5.30%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)............ $ 611,024 $431,321 $245,645 $157,852 $15,218
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................ 1.10%(1) 1.12% 1.18% 1.22% 1.33%(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................ 1.10%(1) 1.12% 1.18% 1.22% 2.21%(1)
Ratios of Net Investment Income (Loss) to
Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................ 0.25%(1) 0.51% 0.62% 0.35% (0.90%)(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................ 0.25%(1) 0.51% 0.62% 0.35% (1.78%)(1)
Portfolio Turnover Rate............................... 65.51% 113.32% 93.92% 92.16% 1.52%
Average Commission Rate Paid+......................... $ 0.0630 -- -- -- --
</TABLE>
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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 for the period beginning January 1,
1996.
(1) Annualized.
(2) Commenced operations on November 6, 1992.
(3) Commenced operations on January 4, 1994.
See Notes to Financial Statements.
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PORTFOLIO
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PIMCO TOTAL RETURN BOND INVESCO EQUITY INCOME
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SIX MONTHS FOR THE YEAR ENDED SIX MONTHS FOR THE YEAR ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
JUNE 30, 1996 -------------------- JUNE 30, 1996 --------------------
(UNAUDITED) 1995 1994(3) (UNAUDITED) 1995 1994(3)
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<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period....... $ 11.34 $ 9.75 $ 10.00 $ 12.50 $ 9.75 $ 10.00
-------- -------- ------- -------- -------- -------
Increase (Decrease) from
Investment Operations
Net Investment Income (Loss)............. 0.21 0.25 0.26 0.15 0.25 0.16
Net Realized & Unrealized Gains
(Losses) on Investments and Foreign
Currency Transactions.................. (0.44) 1.55 (0.51) 0.71 2.65 (0.41)
-------- -------- ------- -------- -------- -------
Total Increase (Decrease) From
Investment Operations............. (0.23) 1.80 (0.25) 0.86 2.90 (0.25)
-------- -------- ------- -------- -------- -------
Less Dividends and Distributions
Dividends from Net Investment Income..... (0.28) (0.21) -- (0.24) (0.15) --
Distributions from Net Realized
Capital Gains.......................... (0.31) -- -- (0.33) -- --
-------- -------- ------- -------- -------- -------
Total Dividends and Distributions... (0.59) (0.21) -- (0.57) (0.15) --
-------- -------- ------- -------- -------- -------
Net Asset Value at End of Period............. $ 10.52 $ 11.34 $ 9.75 $ 12.79 $ 12.50 $ 9.75
======== ======== ======= ======== ======== =======
Total Return................................. (2.07%) 18.78% (2.50%) 7.04% 30.07% (2.50%)
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)... $ 287,645 $225,335 $46,493 $ 236,140 $176,716 $65,201
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement............... 0.88%(1) 0.89% 1.02%(1) 0.98%(1) 0.98% 1.14%(1)
Before Advisory Fee Waiver and
Expense Reimbursement............... 0.88%(1) 0.89% 1.02%(1) 0.98%(1) 0.98% 1.14%(1)
Ratios of Net Investment Income (Loss) to
Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement............... 5.25%(1) 5.95% 5.57%(1) 2.99%(1) 3.34% 3.41%(1)
Before Advisory Fee Waiver and
Expense Reimbursement............... 5.25%(1) 5.95% 5.57%(1) 2.99%(1) 3.34% 3.41%(1)
Portfolio Turnover Rate...................... 318.44% 124.41% 139.25% 28.83% 89.48% 62.87%
Average Commission Rate Paid+................ N/A -- -- $ 0.0604 -- --
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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PORTFOLIO
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T. ROWE PRICE
FOUNDERS CAPITAL APPRECIATION INTERNATIONAL EQUITY
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SIX MONTHS FOR THE YEAR ENDED SIX MONTHS FOR THE YEAR ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
JUNE 30, 1996 -------------------- JUNE 30, 1996 -----------------------
(UNAUDITED) 1995 1994(3) (UNAUDITED) 1995 1994(3)
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<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of
Period............................ $ 14.25 $ 10.84 $ 10.00 $ 10.65 $ 9.62 $ 10.00
-------- -------- -------- ------- ------- ------
Increase (Decrease) from
Investment Operations
Net Investment Income (Loss).... 0.02 (0.04) 0.11 0.07 0.07 0.02
Net Realized & Unrealized Gains
(Losses) on Investments and
Foreign Currency
Transactions.................. 2.28 3.54 0.73 0.85 0.99 (0.40)
-------- -------- -------- ------- ------- ------
Total Increase (Decrease)
From
Investment Operations.... 2.30 3.50 0.84 0.92 1.06 (0.38)
-------- -------- -------- ------- ------- ------
Less Dividends and Distributions
Dividends from Net Investment
Income........................ (0.09) (0.09) -- (0.08) (0.01) --
Distributions from Net Realized
Capital Gains................. (0.18) -- -- -- (0.02) --
-------- -------- -------- ------- ------- ------
Total Dividends and
Distributions............ (0.27) (0.09) -- (0.08) (0.03) --
-------- -------- -------- ------- ------- ------
Net Asset Value at End of Period.... $ 16.28 $ 14.25 $ 10.84 $ 11.49 $ 10.65 $ 9.62
======== ======== ======== ======= ======= ======
Total Return........................ 16.33% 32.56% 8.40% 8.68% 11.09% (3.80%)
Ratios/Supplemental Data
Net Assets at End of Period
(in 000's).................... $ 147,916 $ 90,460 $ 28,559 $ 306,150 $195,667 $108,751
Ratios of Expenses to Average Net
Assets:
After Advisory Fee Waiver and
Expense Reimbursement...... 1.15%(1) 1.22% 1.30%(1) 1.29%(1) 1.33% 1.75%(1)
Before Advisory Fee Waiver and
Expense Reimbursement...... 1.15%(1) 1.22% 1.55%(1) 1.29%(1) 1.33% 1.77%(1)
Ratios of Net Investment Income
(Loss) to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement...... (0.25%)(1) (0.28%) 2.59%(1) 1.68%(1) 1.03% 0.45%(1)
Before Advisory Fee Waiver and
Expense Reimbursement...... (0.25%)(1) (0.28%) 2.34%(1) 1.68%(1) 1.03% 0.43%(1)
Portfolio Turnover Rate............. 46.57% 68.32% 197.93% 6.99% 17.11% 15.70%
Average Commission Rate Paid+....... $ 0.0554 -- -- $ 0.0232 -- --
</TABLE>
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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 for the period beginning January 1,
1996.
(1) Annualized.
(3) Commenced operations on January 4, 1994.
(4) Commenced operations on October 20, 1994.
(5) Commenced operations on May 2, 1995.
See Notes to Financial Statements.
<PAGE>
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PORTFOLIO
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PIMCO LIMITED
BERGER CAPITAL GROWTH MATURITY BOND
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SIX MONTHS FOR THE YEAR ENDED SIX MONTHS
ENDED DECEMBER 31, ENDED FOR THE YEAR ENDED
JUNE 30, 1996 --------------------- JUNE 30, 1996 DECEMBER 31,
(UNAUDITED) 1995 1994(4) (UNAUDITED) 1995(5)
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<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of
Period............................ $ 12.40 $ 9.97 $ 10.00 $ 10.47 $ 10.00
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Increase (Decrease) from
Investment Operations
Net Investment Income (Loss).... -- 0.04 0.01 0.27 0.05
Net Realized & Unrealized Gains
(Losses) on Investments and
Foreign Currency
Transactions.................. 1.55 2.40 (0.04) (0.26) 0.42
-------- -------- -------- ------- -------
Total Increase (Decrease)
From
Investment Operations.... 1.55 2.44 (0.03) 0.01 0.47
-------- -------- -------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment
Income........................ (0.03) (0.01) -- (0.05) --
Distributions from Net Realized
Capital Gains................. -- -- -- (0.02) --
-------- -------- -------- ------- -------
Total Dividends and
Distributions............ (0.03) (0.01) -- (0.07) --
-------- -------- -------- ------- -------
Net Asset Value at End of Period.... $ 13.92 $ 12.40 $ 9.97 $ 10.41 $ 10.47
======== ======== ======== ======= =======
Total Return........................ 12.54% 24.42% (0.30%) 0.05% 4.70%
Ratios/Supplemental Data
Net Assets at End of Period
(in 000's).................... $ 84,683 $ 45,979 $ 3,030 $ 195,372 $161,940
Ratios of Expenses to Average Net
Assets:
After Advisory Fee Waiver and
Expense Reimbursement...... 1.00%(1) 1.17% 1.25%(1) 0.87%(1) 0.89%(1)
Before Advisory Fee Waiver and
Expense Reimbursement...... 1.00%(1) 1.17% 1.70%(1) 0.87%(1) 0.89%(1)
Ratios of Net Investment Income
(Loss) to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement...... 0.14%(1) 0.70% 1.41%(1) 5.81%(1) 4.87%(1)
Before Advisory Fee Waiver and
Expense Reimbursement...... 0.14%(1) 0.70% 0.97%(1) 5.81%(1) 4.87%(1)
Portfolio Turnover Rate............. 58.88% 84.21% 5.36% 158.19% 204.85%
Average Commission Rate Paid+....... $ 0.0590 -- -- N/A --
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES: The investment objective and policies for
each of the Portfolios are described below, and should be considered separately.
While certain policies apply to all Portfolios, generally each Portfolio has a
different investment objective and certain policies may vary. As a result, the
risks, opportunities and returns in each Portfolio may differ. The investment
objective of each Portfolio which is specifically identified as "fundamental"
may not be changed without approval of the shareholders of the affected
Portfolio. Each Portfolio's investment objective or investment policies, unless
otherwise specified, is not a fundamental policy and may be changed without
shareholder approval. There can be no assurance that any Portfolio's investment
objective will be achieved. Risk factors in relation to various securities and
instruments in which the Portfolios may invest are described in the sections of
this Prospectus and the Trust's Statement of Additional Information entitled
"Certain Risk Factors and Investment Methods." Additional information about the
investment objectives and policies of each Portfolio may be found in the Trust's
Statement of Additional Information under "Investment Objectives and Policies."
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) JanCap Growth Portfolio: Janus Capital
Corporation; (b) T. Rowe Price International Equity Portfolio: Rowe
Price-Fleming International, Inc.; (c) Founders Capital Appreciation Portfolio:
Founders Asset Management, Inc.; (d) INVESCO Equity Income Portfolio: INVESCO
Trust Company; (e) PIMCO Total Return Bond Portfolio: Pacific Investment
Management Company; (f) PIMCO Limited Maturity Bond Portfolio: Pacific
Investment Management Company; and (g) Berger Capital Growth Portfolio: Berger
Associates, Inc.
Subject to approval of the Board of Trustees of the Trust, the Trust
may add one or more portfolios and may cease to offer one or more portfolios,
any such cessation to be subject to obtaining required regulatory approvals.
Each Portfolio may be subject to state regulatory requirements which
may be more restrictive than the stated investment policies, in which case, the
Sub-advisors will adhere to the more restrictive standard.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the JanCap Growth Portfolio is
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Portfolio's investments, therefore, will be incidental to
the Portfolio's objective. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in
common stocks. Common stock investments will be in industries and companies that
the Sub-advisor believes are experiencing favorable demand for their products
and services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Portfolio's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Portfolio may also invest to a lesser degree in preferred
stocks, convertible securities, warrants, and debt securities when the Portfolio
perceives an opportunity for capital growth from such securities or so that the
Portfolio may receive a return on its idle cash. Debt securities that the
Portfolio may purchase include corporate bonds and debentures (not to exceed 5%
of net assets in bonds rated below investment grade), government securities,
mortgage- and asset-backed securities, zero-coupon bonds, indexed/structured
notes, high-grade commercial paper, certificates of deposit and repurchase
agreements. For a discussion of risks involved in lower-rated securities,
mortgage- and asset-backed securities and zero coupon bonds, see this Prospectus
and the Trust's Statement of Additional Information under "Certain Risk Factors
and Investment Methods."
Although it is the general policy of the Portfolio to purchase and hold
securities for capital growth, changes in the Portfolio will be made as the
Sub-advisor deems advisable. For example, Portfolio changes may result from
liquidity needs, securities having reached a price objective, or by reason of
developments not foreseen at the time of the original investment decision.
Portfolio changes may be effected for other reasons. In such circumstances,
investment income will increase and may constitute a large portion of the return
on the Portfolio and the Portfolio will not participate in the market advances
or declines to the extent that it would if it were fully invested.
Because investment changes usually will be made without reference to
the length of time a security has been held, a significant number of short-term
transactions may result. To a limited extent, the Portfolio may also purchase
individual securities in anticipation of relatively short-term price gains, and
the rate of portfolio turnover will not be a determining factor in the sale of
such securities. However, certain tax rules may restrict the Portfolio's ability
to sell securities in some circumstances when the security has been held for
less than three months. Increased portfolio turnover necessarily results in
correspondingly higher brokerage costs for the Portfolio.
The Portfolio may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or a new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and 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, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Risks of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Futures, 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.
Risks of Futures and Options Transactions. There are risks involved in
futures and options transactions. For a discussion of futures and options
transactions and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies" and "Certain Risk Factors
and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements,
which involve the purchase of a security by the Portfolio and a simultaneous
agreement (generally with a bank or dealer) to repurchase the security from the
Portfolio at a specified date or upon demand. The Portfolio's repurchase
agreements will at all times be fully collateralized. Pursuant to an exemptive
order granted by the Securities and Exchange Commission, the Portfolio and other
funds advised by the Sub-advisor may invest in repurchase agreements and other
money market instruments through a joint trading account. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price. For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio
may purchase securities on a when-issued or delayed delivery basis, which
generally involves the purchase of a security with payment and delivery due at
some time in the future. The Portfolio does not earn interest on such securities
until settlement and bears the risk of market value fluctuations in between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may also invest up to 15% of its total
assets in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Portfolio's restrictions
on lending, the Portfolio may borrow money from or lend money to other
Portfolios of the Trust or other funds that permit such transactions and are
managed by the Investment Manager or are advised by the Sub-advisor if the Trust
seeks, on behalf of the Portfolio, permission to do so from the Securities and
Exchange Commission. There is no assurance that such permission will be sought
or granted. For a discussion of the risks involved in lending, see the
Prospectus under "Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
Lower-rated debt obligations are generally considered to be high risk
investments. The Portfolio does not have any minimum rating criteria applicable
to the fixed-income securities in which it invests. For a discussion of these
instruments and the risks involved therein, see this Prospectus and the
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the
Portfolio may also borrow money from banks. For a discussion of the limitations
on borrowing by the Portfolio and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
Statement of Additional Information under "Investment Objectives and Policies."
T. Rowe Price International Equity Portfolio:
Investment Objective: The T. Rowe Price International Equity Portfolio seeks a
total return on its assets from long-term growth of capital and income,
principally through investments in common stocks of established, non-U.S.
companies. Investments may be made solely for capital appreciation or solely for
income or any combination of both for the purpose of achieving a higher overall
return. Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses. This is a fundamental 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).
Risks of Currency Fluctuations. The Portfolio will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Under certain circumstances, the Portfolio may commit
a substantial portion or the entire value of its portfolio to the consummation
of these contracts. Sub-advisor will consider the effect such a commitment of
its portfolio to forward contracts would have on the investment program of the
Portfolio and the flexibility of the Portfolio to purchase additional
securities. Although forward contracts will be used primarily to protect the
Portfolio from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the
Portfolio's total return could be adversely affected as a result.
For a discussion of foreign currency contracts and the risks involved
therein, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into stock index
or currency futures contracts (or options thereon) to hedge a portion of the
portfolio, to provide an efficient means of regulating the Portfolio's exposure
to the equity markets, or as a hedge against changes in prevailing levels of
currency exchange rates. The Portfolio will not use futures contracts for
leveraging purposes. The Portfolio will limit its use of futures contracts so
that initial margin deposits and premiums on such contracts used for non-hedging
purposes will not equal more than 5% of the Portfolio's net assets. Such
contracts may be traded on U.S. or foreign exchanges. The Portfolio may write
covered call options and purchase put and call options on foreign currencies,
securities, and stock indices. The aggregate market value of the Portfolio's
currencies or portfolio securities covering call or put options will not exceed
25% of the Portfolio's total assets. The Portfolio will not commit more than 5%
of its total assets to premiums when purchasing call or put options.
Risks of Options and Futures Transactions. There are risks involved in
options and futures transactions. For a discussion of futures contracts and
options and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies" and "Certain Risk Factors."
Hybrid Investments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, security index or commodity
at a future point in time. The risks of such investments would reflect both the
risks of investing in futures, options, currencies, and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid investments and the
risks involved therein, see the Trust's Statement of Additional Information
under "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods."
Passive Foreign Investment Companies. The Portfolio may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
trusts' expenses (management fees and operating expenses) shareholders will also
indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). The Portfolio will not invest more than 10% of its
total assets in restricted securities (other than securities eligible for resale
under Rule 144A of the Securities Act of 1933). For a discussion of illiquid
securities and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the
purpose of realizing additional income, the Portfolio may lend securities with a
value of up to 33 1/3% of its total assets to broker-dealers, institutional
investors, or other persons. Any such loan will be continuously secured by
collateral at least equal to the value of the security loaned. For an additional
discussion of limitations on lending and risks of lending, see this Prospectus
under "Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
Portfolio Turnover. The Portfolio will not generally trade in
securities for short-term profits, but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held.
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and risks involved in borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Restrictions."
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Founders Capital
Appreciation Portfolio is capital appreciation. This is a fundamental objective
of the Portfolio.
<PAGE>
Investment Policies:
To achieve its objective, the Portfolio will normally invest at least
65% of its total assets in common stocks of U.S. companies with market
capitalizations of $1.5 billion or less. Market capitalization is a measure of
the size of a company and is based upon the total market value of a company's
outstanding equity securities. Ordinarily, the common stocks of the U.S.
companies selected for this Portfolio will not be listed on a national
securities exchange but will be traded in the over-the-counter market.
Companies selected for investment generally will be small corporations
still in the developing stages of their life cycles that are 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;
provide efficient services; and possess pricing flexibility.
Risks of Small Cap Investing. Investments in such companies may involve
greater risk than is associated with more established companies. Smaller
companies often have limited product lines, markets or financial resources, and
may be dependent upon one-person management. Securities of smaller companies may
have limited marketability and may be subject to more abrupt or erratic
movements in prices than securities of larger companies or the market averages
in general. Therefore, the net asset value of the Portfolio may fluctuate more
widely than the popular market averages.
Fixed Income Securities. The Portfolio may invest in convertible
securities, preferred stocks, bonds, debentures, and other corporate obligations
when the Sub-advisor believes that these investments offer opportunities for
capital appreciation. Current income will not be a substantial factor in the
selection of these securities. Bonds, debentures, and corporate obligations
other than convertible securities and preferred stock purchased by the Portfolio
will be rated at or above investment grade at the time of purchase (Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's ("S&P")). Bonds in the lowest investment grade category (Baa
or BBB) may have speculative characteristics, with changes in the economy or
other circumstances more likely to lead to a weakened capacity of the bonds to
make principal and interest payments than would occur with bonds rated in higher
categories. Convertible securities and preferred stocks purchased by the
Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or
lower by Moody's and BB or lower by S&P), but will not be rated lower than B.
The Portfolio may also invest in unrated convertible securities and preferred
stocks in instances in which the Sub-advisor believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Portfolio rated in categories no lower than B. Securities rated
B are referred to as "high risk" securities, generally lack characteristics of a
desirable investment, and are deemed speculative with respect to the issuer's
capacity to pay interest and repay principal over a long period of time. At no
time will the Portfolio have more than 5% of its assets invested in any
fixed-income securities which are unrated or are rated below investment grade
either at the time of purchase or as a result of a reduction in rating after
purchase. For a description of ratings of securities, see the Appendix to the
Trust's Statement of Additional Information. For a discussion of the special
risks involved in lower-rated debt securities, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
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 debt
securities whose ratings are downgraded below these ratings 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 which are traded on exchanges or over-the-counter
in the United States without limit, and in foreign securities. The term "foreign
securities" refers to securities of issuers, wherever organized, which in the
judgment of the Sub-advisor have their principal business activities outside of
the United States. The determination of whether an issuer's principal activities
are outside of the United States will be based on the location of the issuer's
assets, personnel, sales, and earnings, and specifically on whether more than
50% of the issuer's assets are located, or more than 50% of the issuer's gross
income is earned, outside of the United States.
Foreign investments may include securities issued by 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. Examples of 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.
Foreign Securities Risks. 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 foreign investing, in general, see this Prospectus
and the Trust's Statement of Additional Information under "Certain Risk Factors
and Investment Methods."
Risks of Currency Fluctuations. Since a portion of the Portfolio's
assets may be invested in foreign securities and some of its revenue received in
foreign currencies, the Portfolio's net asset value may be affected by changes
in currency exchange rates. Changes in foreign currency exchange rates may also
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by the Portfolio. The rate of exchange between the
U.S. dollar and other currencies is determined by the forces of supply and
demand in the foreign exchange markets and in some cases, exchange controls. For
an additional discussion of the risks of currency fluctuations, see this
Prospectus and Trust's Statement of Additional Information under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. For a discussion of foreign currency transactions, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
The Portfolio may conduct its foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market, or on a forward basis to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, the Portfolio attempts to protect itself against
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold and the date on which such
payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Portfolio may enter into forward
contracts to sell, for a fixed dollar or other currency amount, foreign currency
approximating the value of some or all of the its securities denominated in that
currency. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible. The future value of such
securities in foreign currencies changes as a consequence of market movements in
the value of those securities between the date on which the contract is entered
into and the date it expires.
The Portfolio generally will not enter into forward contracts with a
term greater than one year, or enter into forward contracts or maintain a net
exposure to such contracts where the fulfillment of the contracts would require
the Portfolio to deliver an amount of foreign currency in excess of the value of
its securities or other assets denominated in that currency. Under normal
circumstances, consideration of the possibility of changes in currency exchange
rates will be incorporated into the Portfolio's long-term investment strategies.
In the event that forward contracts and any securities placed in a segregated
account in an amount at least equal to the value of the total assets of the
Portfolio committed to the consummation of a forward contract 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 Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of the market value of
its net assets in securities which are not readily marketable, including
repurchase agreements maturing in more than seven days. The Portfolio may invest
in Rule 144A securities (securities issued in offerings made pursuant to Rule
144A under the Securities Act of 1933), which may or may not be deemed to be
readily marketable. Factors which may be considered by Sub-advisor in evaluating
whether such a security is readily marketable include eligibility for trading,
trading activity, dealer interest, purchase interest, and ownership transfer
requirements. The Sub-advisor is required to monitor the readily marketable
nature of each Rule 144A security no less frequently than quarterly.
For an additional discussion of illiquid or restricted securities and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's Statement of Additional Information under
"Investment Options and Policies."
Borrowing. The Portfolio may borrow money from banks for extraordinary
or emergency purposes in amounts up to 10% of its net assets. While any
borrowings are outstanding, no purchases of securities will be made. For a
discussion of limitations on borrowing by the Portfolio and risks involved in
borrowing, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts and Options. 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.
Temporary Investments. The Portfolio may invest up to 100% of its
assets for temporary defensive purposes in U.S. government obligations,
commercial paper, bank obligations, repurchase agreements relating to each of
these securities, negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions, cash, or in other
cash equivalents, if the Sub-advisor determines it to be appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions. There can be no assurance that the Portfolio will
be able to achieve its investment objective; however, while it is in a defensive
position, the opportunity to achieve capital growth will be limited; moreover,
to the extent that this assessment of market conditions is incorrect, the
Portfolio will be foregoing the opportunity to benefit from capital growth
resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, may also be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Portfolio
will be subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The Portfolio may enter into repurchase agreements with banks or
well-established securities dealers meeting the criteria established by the
Sub-advisor. All repurchase agreements entered into by the Portfolio will be
fully collateralized and marked to market daily. The Portfolio has not adopted
any limits on the amount of its total assets that may be invested in repurchase
agreements which mature in less than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Portfolio. The Portfolio may
engage in short-term trading and therefore normally will have annual portfolio
turnover rates in excess of 100%. Such portfolio turnover rates, which are
considered to be high, often may be greater than those of other investment
companies seeking capital appreciation. Such turnover rates would cause the
Portfolio to incur greater brokerage commissions than would otherwise be the
case. A 100% portfolio turnover rate would occur if all of the securities in the
portfolio were replaced during the period. 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.
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the INVESCO Equity Income
Portfolio is to seek high current income while following sound investment
practices. This is a fundamental 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 industrial 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 industrial issuers
which are marketable; and will not invest more than 5% of the Portfolio's assets
in the securities of any one company or more than 25% of the Portfolio's assets
in any one industry.
Debt Securities. The Portfolio's investments in debt securities will
generally be subject to both credit risk and market risk. Credit risk relates to
the ability of the issuer to meet interest or principal payments, or both, as
they come due. Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of debt securities, whereas a decline in interest rates
will tend to increase their values. Although the Sub-advisor will limit the
Portfolio's debt security investments to securities it believes are not highly
speculative, both kinds of risk are increased by investing in debt securities
rated below the top four grades by Standard & Poor's Corporation ("Standard &
Poor's) or Moody's Investors Services, Inc. ("Moody's") and unrated debt
securities, other than Government National Mortgage Association modified
pass-through certificates. For an additional discussion of the special risks
involved in lower-rated debt securities, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
In order to decrease its risk in investing in debt securities, the
Portfolio will invest no more than 15% of its assets in debt securities rated
below AAA, AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's,
and in no event will the Portfolio ever invest in a debt security rated below
Caa by Moody's or CCC by Standard & Poor's. Lower rated bonds by Moody's
(categories Ba, B, Caa) are of poorer quality and may have speculative
characteristics. Bonds rated Caa may be in default or there may be present
elements of danger with respect to principal or interest. Lower rated bonds by
Standard & Poor's (categories BB, B, CCC) include those which are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with their terms; BB indicates
the lowest degree of speculation and CCC a high degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. For more information on debt securities, see the Appendix to the
Trust's Statement of Additional Information.
While the Sub-advisor will monitor all of the debt securities in the
Portfolio for the issuers' ability to make required principal and interest
payments and other quality factors, the Sub-advisor may retain in the Portfolio
a debt security whose rating is changed to one below the minimum rating required
for purchase of such a security.
Risks Involved in Lower-Rated High-Yield Bonds. For a discussion of the
special risks involved in lower-rated bonds, see this Prospectus and the
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover. The rate of portfolio turnover may fluctuate as a result of constantly
changing economic conditions and market circumstances. Securities initially
satisfying the Portfolio's basic objectives and policies may be disposed of when
they are no longer suitable. As a result, it is anticipated that the Portfolio's
annual portfolio turnover rate may be in excess of 100%, and may be higher than
that of other investment companies seeking current income with capital growth as
a secondary consideration. Increased portfolio turnover would cause the
Portfolio to incur greater brokerage costs than would otherwise be the case.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio. These
agreements are entered into with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers which
are deemed creditworthy. A repurchase agreement is a means of investing moneys
for a short period. In a repurchase agreement, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
In the event that the original seller defaults on its obligation to repurchase
the security, the Portfolio could incur costs or delays in seeking to sell such
security. To minimize risk, the securities underlying each repurchase agreement
will be maintained with the Portfolio's custodian in an amount at least equal to
the repurchase price under the agreement (including accrued interest), and such
agreements will be effected only with parties that meet certain creditworthiness
standards established by the Trust's Board of Trustees. The Portfolio will not
enter into a repurchase agreement maturing in more than seven days if as a
result more than 15% of the Portfolio's total net assets would be invested in
such repurchase agreements and other illiquid securities. The Portfolio has not
adopted any limit on the amount of its total assets that may be invested in
repurchase agreements maturing in seven days or less.
Lending Portfolio Securities. The Portfolio also may lend its
securities to qualified brokers, dealers, banks, or other financial
institutions. This practice permits the Portfolio to earn income, which, in
turn, can be invested in additional securities to pursue the Portfolio's
investment objective. Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies, equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. The Sub-advisor
monitors the creditworthiness of borrowers in order to minimize such risks. The
Portfolio will not lend any security if, as a result of such loan, the aggregate
value of securities then on loan would exceed 33-1/3% of the Portfolio's total
net assets (taken at market value). For an additional discussion on lending, see
this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 25% of its total
assets in foreign securities. Investments in securities of foreign companies and
in foreign markets involve certain additional risks not associated with
investments in domestic companies and markets. The Portfolio may invest in
countries considered to be developing which may involve special risks. For a
discussion of these risks and the risks of foreign investing in general, see
this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market. The Board of Trustees or
the Investment Manager, acting pursuant to authority delegated by the Board of
Trustees, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or
any successor to that rule, and therefore that such securities are not subject
to the foregoing limitation. For a discussion of restricted securities and the
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowing. For a discussion of the risks involved with and the limitations
on borrowing and risks involved in borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods."
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the PIMCO Total Return Bond
Portfolio is to maximize total return, consistent with preservation of capital.
The Sub-advisor will seek to employ prudent investment management techniques,
especially in light of the broad range of investment instruments in which the
Portfolio may invest.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Portfolio will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities; corporate commercial paper;
mortgage and other asset-backed securities; variable and floating rate debt
securities; bank certificates of deposit; fixed time deposits and bankers'
acceptances; repurchase agreements and reverse repurchase agreements;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies or supranational entities; and foreign
currency exchange-related securities, including foreign currency warrants.
The Portfolio will invest in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration from three to six
years. The duration of the Portfolio will vary within the three- to six-year
time frame based upon the Sub-advisor's forecast for interest rates. The
Sub-advisor bases its analysis of the average duration of the bond market on
bond market indices which it believes to be representative, and other factors.
The Portfolio may invest up to 10% of its assets in fixed income securities that
are rated below investment grade but rated B or higher by Moody's Investors
Services, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") (or, if
unrated, determined by the Sub-advisor to be of comparable quality). The
Portfolio will maintain an overall dollar-weighted average quality of at least A
(as rated by Moody's or S&P). Securities rated B are judged to be predominantly
speculative with respect to their capacity to pay interest and repay principal
in accordance with the terms of the obligations. The Sub-advisor will seek to
reduce the risks associated with investing in such securities by limiting the
Portfolio's holdings in such securities and by the depth of its own credit
analysis. For a discussion of the risks involved in lower-rated high-yield
bonds, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may engage in foreign currency transactions. Foreign
currency exchange transactions may be entered into the purpose of hedging
against foreign currency exchange risk arising from the Portfolio's investment
or anticipated investment in securities denominated in foreign currencies.
The Portfolio may enter into swap agreements for the purposes of
attempting to obtain a particular investment return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
provided that desired return. In addition, the Portfolio may purchase and sell
securities on a when-issued and delayed delivery basis and enter into forward
commitments to purchase securities; lend its securities to brokers, dealers and
other financial institutions to earn income; and borrow money for investment
purposes. See the Appendix to the Trust's Statement of Additional Information
for a description of Moody's and S&P's ratings applicable to fixed income
securities.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return of the Portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to any fixed-income portfolio, the longer the duration of the portfolio, the
greater the potential for total return, with, however, greater attendant market
risk and price volatility than for a portfolio with a shorter duration. The
market value of securities denominated in currencies other than U.S. dollars
also may be affected by movements in foreign currency exchange rates.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. The Portfolio may invest in U.S. Government
Securities. U.S. Government securities are obligations of, or guaranteed by, the
U.S. Government, its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as the
Student Loan Marketing Association, are supported only by the credit of the
instrumentality.
Corporate Debt Securities. The Portfolio may invest in corporate debt
securities. Corporate debt securities include corporate bonds, debentures, notes
and other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate
income-producing securities may also include forms of preferred or preference
stock. The rate of return or return of principal on some debt obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies. Investment in corporate debt securities that are
below investment grade (rated below Baa (Moody's) or BBB (S&P)) are described as
"speculative" both by Moody's and S&P. For a description of the special risks
involved with lower-rated high-yield bonds, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. These investments involve special risks. For a description of
these securities and the special risks involved therein, see this Prospectus and
the Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. For the purpose of achieving income, the
Portfolio may enter into repurchase agreements, subject to guidelines
promulgated by the Board of Trustees of the Trust. The Portfolio will not invest
more than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Reverse Repurchase Agreements and Other Borrowings. The Portfolio may
enter into reverse repurchase agreements. For a discussion of reverse repurchase
agreements, see this Prospectus under "Certain Risk Factors and Investment
Methods." The Portfolio will maintain a segregated account consisting of cash,
U.S. Government securities or high-grade debt obligations, maturing not later
than the expiration of the reverse repurchase agreement, to cover its
obligations under reverse repurchase agreements. The Portfolio may also borrow
money for investment purposes. Such a practice will result in leveraging of the
Portfolio's assets. Leverage will tend to exaggerate the effect on net asset
value of any increase or decrease in the value of the Portfolio and may cause
the Portfolio to liquidate portfolio positions when it would not be advantageous
to do so.
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned, (2) the Portfolio may at any time call the loan and
obtain the return of securities loaned, (3) the Portfolio will receive any
interest or dividends received on the loaned securities, and (4) the aggregate
value of the securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For a discussion of the risks involved in
lending, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued or Delayed-Delivery Transactions. The Portfolio may
purchase or sell securities on a when-issued or delayed delivery basis. These
transactions involve a commitment by the Portfolio to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Portfolio will set aside and maintain until the
settlement date, in a segregated account, cash, U.S. Government securities or
high grade debt obligations in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities purchased on a delayed delivery basis
prior to time delivery of the securities is made, although the Portfolio may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a delayed delivery basis, the Portfolio assumes the
rights and risks of ownership of the security, including the risk of price and
yield fluctuations, and takes such fluctuations into account when determining
its net asset value. Because the Portfolio is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Portfolio's other investments. If the Portfolio remains
substantially fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases may result in a form of leverage.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the security, the Portfolio could miss a favorable price or yield
opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate
a delayed delivery transaction after it is entered into, and may sell
when-issued securities before they are delivered, which may result in a capital
gain or loss. There is no percentage limitation on the extent to which the
Portfolio may purchase or sell securities on a delayed delivery basis.
Foreign Securities. The Portfolio may invest directly in U.S. dollar-
or foreign currency-denominated fixed income securities. The Portfolio will
limit its foreign investments to securities of issuers based in developed
countries (including newly industrialized countries, such as Taiwan, South Korea
and Mexico). For a discussion of the risks involved in investing in foreign
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Portfolio will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
Options on Securities, Securities Indexes and Currencies. The Portfolio
may purchase and write call and put options on securities, securities indexes
and on foreign currencies, and enter into futures contracts and use options on
futures contracts as further described below. The Portfolio may also enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency, exchange rates or securities prices
or as part of its overall investment strategy.
The Portfolio may purchase options on securities to protect holdings in
an underlying or related security against a substantial decline in market value.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. The
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Portfolio may write a call or put option
only if it is "covered" by the Portfolio holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Portfolio's obligation as writer of the option. Prior to exercise or expiration,
an option may be closed out by an offsetting purchase or sale of an option on of
the same series.
Risks of Options. The Portfolio may invest in foreign-denominated
securities and may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. For a discussion of the risks involved in investing in
foreign currency, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods." For a
discussion of options and the risks involved therein, see this Prospectus and
the Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Swaps. The Portfolio may enter into interest rate, index and currency
exchange rate swap agreements for the purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded the desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate or "cap"; interest floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of a swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement ("net amount"). The Portfolio's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Portfolio) and any
accrued unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Portfolio. The Portfolio will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Portfolio's total assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the Portfolio's
ability to predict correctly whether certain types of investment are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they have terms of greater than seven days, swap
agreements may be considered illiquid. Moreover, the Portfolio bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of a default or bankruptcy of a swap agreement counterparty. The Sub-advisor
will cause the Portfolio to enter into swap agreements only with counterparties
that would be eligible for consideration as repurchase agreement counterparties
under the Portfolio's repurchase agreement guidelines. Certain restrictions
imposed on the Portfolio by the Internal Revenue Code may limit the Portfolio's
ability to use swap agreements. The swaps market is relatively new and is
largely unregulated. It is possible that developments in the swaps market,
including potential governmental regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon that are traded on a U.S.
or foreign exchange or board of trade. The Portfolio will only enter into
futures contracts or futures options which are standardized and traded on a U.S.
or foreign exchange or board of trade, or similar entity, or quoted on an
automated quotation system. The Portfolio will use financial futures contracts
and related options only for "bona fide" hedging purposes, as such term is
defined in the applicable regulations of the CFTC, or, with respect to positions
in financial futures and related options that do not qualify as "bona fide
hedging" positions, will enter such non-hedging positions only to the extent
that aggregate initial margin deposit plus premiums paid by it for the open
futures options position, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total assets.
Risks of Futures Contracts and Related Options. There are risks
involved in futures and options contracts. For a discussion of futures contracts
and related options, and the risks involved therein, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Other Foreign Currency Transactions. The Portfolio may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and certain risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the PIMCO Limited Maturity
Bond Portfolio is to seek to maximize total return, consistent with preservation
of capital and prudent investment management. This is a fundamental objective of
the Portfolio.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor utilizes
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of each Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets, and other factors.
The Portfolio will invest at least 65% of its total assets in the
following types of securities, which may be issued by domestic or foreign
entities and denominated in U.S. dollars or foreign currencies: securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government securities"); corporate debt securities; corporate commercial
paper; mortgage and other asset-backed securities; variable and floating rate
debt securities; bank certificates of deposit, fixed time deposits and bankers'
acceptances; repurchase agreements and reverse repurchase agreements;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies or supranational entities; and foreign
currency exchange-related securities, including foreign currency warrants.
The Portfolio may hold different percentages of its assets in these
various types of securities, and may invest all of its assets in derivative
instruments or in mortgage- or asset-backed securities. There are special risks
involved in these instruments.
The Portfolio will invest in a diversified portfolio of fixed income
securities of varying maturities with a portfolio duration from one to three
years. The Portfolio may invest up to 10% of its assets in corporate debt
securities that are rated below investment grade but rated B or higher by
Moody's or S&P (or, if unrated, determined by the Sub-advisor to be of
comparable quality). The Portfolio may also invest up to 20% of its assets in
securities denominated in foreign currencies. The Portfolio will make use of use
of average portfolio credit quality standards to assist institutional investors
whose own investment guidelines limit its investments accordingly. In
determining the Portfolio's overall dollar-weighted average quality, unrated
securities are treated as if rated, based on the Sub-advisor's view of their
comparability to rated securities. The Portfolio's investments may range in
quality from securities rated in the lowest category in which the Portfolio is
permitted to invest to securities rated in the highest category (as rated by
Moody's or S&P or, if unrated, determined by the Sub-advisor to be of comparable
quality). The percentage of a the Portfolio's assets invested in securities in a
particular rating category will vary.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may invest in securities denominated in foreign currencies
also may engage in foreign currency exchange transactions by means of buying or
selling foreign currencies on a spot basis, entering into foreign currency
forward contracts, and buying and selling foreign currency options, foreign
currency futures, and options on foreign currency futures. Foreign currency
exchange transactions may be entered into for the purpose of hedging against
foreign currency exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. The
Portfolio also may enter into foreign currency forward contracts and buy or sell
foreign currencies or foreign currency options for purposes of increasing
exposure to a particular foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may enter into swap agreements for purposes of attempting
to obtain a particular investment return at a lower cost to the Portfolio than
if the Portfolio had invested directly in an instrument that provided that
desired return. In addition, the Portfolio may purchase and sell securities on a
when-issued or delayed-delivery basis, sell securities short, and enter into
forward commitments to purchase securities; lend their securities to brokers,
dealers and other financial institutions to earn income; and borrow money for
investment purposes. See the Appendix to the Statement of Additional Information
for a description of Moody's and S&P ratings applicable to fixed income
securities.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in market value of fixed income securities
(and therefore their capital appreciation or depreciation) is largely a function
of changes in the current level of interest rates. When interest rates are
falling, a portfolio with a shorter duration generally will not generate as high
a level of total return as a portfolio with a longer duration. Conversely, when
interest rates are rising, a portfolio with a shorter duration will generally
outperform longer duration portfolios. When interest rates are flat, shorter
duration portfolios generally will not generate as high a level of total return
as longer duration portfolios (assuming that long-term interest rates are higher
than short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the anticipated potential for total return, with,
however, greater attendant market risk and price volatility than for a portfolio
with a shorter duration. The market value of securities denominated in
currencies other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Moody's also describes securities rated Baa as having
speculative characteristics. For a description of the special risks involved
with lower-rated high-yield bonds, see this Prospectus and the Trust's Statement
of Additional Information under "Certain Risk Factors and Investment Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage- or asset-backed securities. The value of
some mortgage- or asset-backed securities in which the Portfolio invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Portfolio, the ability of the Portfolio to successfully
utilize these instruments may depend in part upon the ability of the Sub-advisor
to forecast interest rates and other economic factors correctly.
Mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, such as CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be structured
in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. In addition, the Portfolio may invest in
other asset-backed securities that have been offered to investors.
Risks of Mortgage-related and Other Asset-Backed Securities. For a
discussion of the risks involved in mortgage-related and other asset-backed
securities, see this Prospectus and the Trust's Statement of Additional
information under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, for the purpose of achieving income, the Portfolio may
enter into repurchase agreements, which entail the purchase of a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time (normally
one day). The Portfolio will not invest more than 15% of its net assets (taken
at current market value) in repurchase agreements maturing in more than seven
days. For a discussion of repurchase agreements and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements and Other Borrowings. A reverse
repurchase agreement is a form of leverage that involves the sale of a security
by the Portfolio and its agreement to repurchase the instrument at a specified
time and price. The Portfolio will maintain a segregated account consisting of
cash, U.S. Government securities or high-grade debt obligations, maturing not
later than the expiration of the reverse repurchase agreement, to cover its
obligations under reverse repurchase agreements. The Portfolio also may borrow
money for investment purposes, subject to requirements imposed by the 1940 Act
that the Portfolio maintain a continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. Such a practice will result in leveraging of the Portfolio's
assets. Leverage will tend to exaggerate the effect on net asset value of any
increase or decrease in the value of the Portfolio's portfolio and may cause the
Portfolio to liquidate portfolio positions when it would not be advantageous to
do so.
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided: (i) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (ii) the Portfolio may at any time call the loan and
obtain the return of the securities loaned; (iii) the Portfolio will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For a discussion of risks involved in lending,
see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued or Delayed Delivery Transactions. The Portfolio may
purchase or sell securities on a when-issued or delayed delivery basis. These
transactions involve a commitment by the Portfolio to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Portfolio will set aside and maintain until the
settlement date in a segregated account, cash, U.S. Government securities or
high grade debt obligations in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities purchased on a delayed delivery basis
prior to the time delivery of the securities is made, although the Portfolio may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a delayed delivery basis, the Portfolio assumes the
rights and risks of ownership of the security, including the risk of price and
yield fluctuations, and takes such fluctuations into account when determining
its net asset value. Because the Portfolio is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Portfolio's other investments. If the Portfolio remains
substantially fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases may result in a form of leverage.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Portfolio could miss a favorable price or yield
opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate
a delayed delivery transaction after it is entered into, and may sell
when-issued securities before they are delivered, which may result in a capital
gain or loss. There is no percentage limitation on the extent to which the
Portfolios may purchase or sell securities on a delayed-delivery basis.
Short Sales. The Portfolio may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale against the box) is a transaction in which the Portfolio sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Portfolio engages in
short sales, it must (except in the case of short sales "against the box")
maintain asset coverage in the form of cash, U.S. Government securities or high
grade debt obligations in a segregated account. A short sale is "against the
box" to the extent that the Portfolio contemporaneously owns, or has the right
to obtain at no added cost, securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in U.S. dollar-
or foreign currency-denominated fixed income securities of non-U.S. issuers. The
Portfolio will limit its foreign investments to securities of issuers based in
developed countries (including Newly Industrialized Countries, "NICs", such as
Taiwan, South Korea and Mexico). Investing in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. companies. For a discussion of the risks
involved in foreign investing, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Options on Securities, Securities Indexes, and Currencies. The
Portfolio may purchase put options on securities. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. The Portfolio may also purchase call
options on securities. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly manner.
The Portfolio may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. The Portfolio may write a call or put
option only if the option is "covered" by the Portfolio holding a position in
the underlying securities or by other means which would permit immediate
satisfaction of the Portfolio's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
Risks of Options. The purchase and writing of options involves certain
risks. The Portfolio may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. For a discussion of the risks involved in investing in
foreign currency, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods." For a
discussion of options and the risks involved therein, see this Prospectus and
the Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Portfolio's obligations under a swap
agreement will be accrued daily (offset against amounts owed to the Portfolio)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of segregated assets consisting of cash, U.S.
Government securities, or high grade debt obligations, to avoid any potential
leveraging of the Portfolio. A Portfolio will not enter into a swap agreement
with any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Portfolio's assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the
Sub-advisor's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two-party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the Portfolio by the Internal Revenue Code may limit the
Portfolio's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon ("futures options") that
are traded on a U.S. or foreign exchange or board of trade. The Portfolio will
only enter into futures contracts or futures options which are standardized and
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system. Each Portfolio will use financial
futures contracts and related options only for "bona fide hedging" purposes, as
such term is defined in applicable regulations of the CFTC, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total net assets.
Risks of Futures and Related Options. There are risks involved in
futures and options contracts. For a discussion of futures contracts and related
options, and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Other Foreign Currency Transactions. The Portfolio may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Berger Capital Growth Portfolio:
Investment Objective: The investment objective of the Berger Capital Growth
Portfolio is long-term capital appreciation. The Portfolio seeks to achieve this
objective by investing primarily in common stocks of established companies which
the Sub-advisor believes offer favorable growth prospects. Current income is not
an investment objective of the Portfolio, and any income produced will be a
by-product of the effort to achieve the Portfolio's objective.
Investment Policies:
In general, investment decisions for the Portfolio are based on an
approach which seeks out successful companies because they are believed to be
more apt to become profitable investments. To evaluate a prospective investment,
the Sub-advisor analyzes information from various sources, including industry
economic trends, earnings expectations and fundamental securities valuation
factors to identify companies which in the Sub-advisor's opinion are more likely
to have predictable, above average earnings growth, regardless of the company's
size and geographic location. The Sub-advisor also takes into account a
company's management and its innovations in products and services in evaluating
its prospects for continued or future earnings growth.
In selecting its portfolio securities, the Portfolio places primary
emphasis on established companies which it believes to have favorable growth
prospects. Common stocks usually constitute all or most of the Portfolio's
investment holdings, but the Portfolio remains free to invest in securities
other than common stocks, and may do so when deemed appropriate by the
Sub-advisor to achieve the objective of the Portfolio. The Portfolio may, from
time to time, take substantial positions in securities convertible into common
stocks, and it may also purchase government securities, preferred stocks and
other senior securities if its Sub-advisor believes these are likely to be the
best suited at that time to achieve the Portfolio's objective. The Portfolio's
policy of investing in securities believed to have a potential for capital
growth means that a Portfolio share may be subject to greater fluctuations in
value than if the Portfolio invested in other securities.
Short-Term. The Portfolio may increase its investment in government
securities and other short-term interest-bearing securities without limit when
the Sub-advisor believes market conditions warrant a temporary defensive
position, during which period it may be more difficult for the Portfolio to
achieve its investment objective.
Put and Call Options. The Portfolio may purchase put and call options
on stock indices for the purpose of hedging, which includes establishing a
position in an equity equivalent as a temporary substitute for the purchase of
individual stocks. To hedge the Portfolio to cushion against a decline in value,
the Portfolio may buy puts on stock indices; to hedge against increases in
prices of equities, pending investments in equities, the Portfolio may buy calls
on stock indices. No more than 1% of the market value of the Portfolio's net
assets at the time of purchase may be invested in put and call options. For a
discussion of the risks associated with options, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Foreign Securities. The Portfolio may invest in both domestic and foreign
securities. Investments in foreign securities involve some risks that are
different from the risks of investing in securities of U.S. issuers. For a
discussion of risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Convertible Securities. The Portfolio may purchase securities which are
convertible into common stock when the Sub-advisor believes they offer the
potential for a higher total return than nonconvertible securities. While fixed
income securities generally have a priority claim on a corporation's assets over
that of common stock, some of the convertible securities which the Portfolio may
hold are high-yield/high-risk securities that are subject to special risks,
including the risk of default in interest or principal payments which could
result in a loss of income to the Portfolio or a decline in the market value of
the securities. Convertible securities often display a degree of market price
volatility that is comparable to common stocks. The credit risk associated with
convertible securities generally is reflected by their being rated below
investment grade by organizations such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation. The Portfolio has no pre-established minimum
quality standards for convertible securities and may invest in convertible
securities of any quality, including lower rated or unrated securities. However,
the Portfolio will not invest in any security in default at the time of purchase
or in any nonconvertible debt securities rated below investment grade, and the
Portfolio will invest less than 20% of the market value of its assets at the
time of purchase in convertible securities rated below investment grade. For a
more detailed discussion of the risks associated with these securities and their
ratings, see the Appendix to the Trust's Statement of Additional Information.
Zero Coupon Bonds. The Portfolio may invest in zero coupon bonds or in
"strips." Zero coupon bonds do not make regular interest payments; rather, they
are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. "Strips" are
debt securities that are stripped of their interest coupons after the securities
are issued, but otherwise are comparable to zero coupon bonds. The market values
of "strips" and zero coupon bonds generally fluctuate in response to changes in
interest rates to a greater degree than do interest-paying securities of
comparable term and quality. The Portfolio will not invest in mortgage-backed or
other asset-backed securities.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities, including repurchase agreements maturing in more than seven
days. Securities eligible for resale under Rule 144A of the Securities Act of
1933 could be deemed "liquid" when saleable in a readily available market. For a
discussion of illiquid or restricted securities and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
<PAGE>
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Portfolios are described in
the "Investment Objectives and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods" section of the Trust's Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Portfolios which may invest in such securities and instruments or use such
techniques. Also included is a general description of some of the investment
instruments, techniques and methods which may be used by one or more of the
Portfolios. The methods described only apply to those Portfolios which may use
such methods.
Derivative Instruments:
To the extent permitted by the investment objectives and policies of a
Portfolio, a Portfolio may purchase and write call and put options on
securities, securities indexes and foreign currencies, and enter into futures
contracts and use options on futures contracts. A Portfolio also may enter into
swap agreements with respect to foreign currencies, interest rates, and
securities indexes. A Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency exchange rates or securities prices
or as part of their overall investment strategies. A Portfolio may also purchase
and sell options relating to foreign currencies for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
Derivative instruments may consist of securities or other instruments
whose value is derived from or related to the value of some other instrument or
asset, and does not include those securities whose payment of principal and/or
interest depend upon cash flows from underlying assets, such as mortgage or
asset-backed securities. The value of some derivative instruments in which a
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of a Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. If the Sub-advisor incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing market trends,
the Portfolio could be exposed to the risk of a loss.
A Portfolio might not employ any of the strategies described below, and
no assurance can be given that any strategy used will succeed. If a Sub-advisor
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for a Portfolio, the Portfolio might have been
in a better position if it had not entered into the transaction at all. The use
of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments; the fact
that, while some strategies involving derivative instruments can reduce the risk
of loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in related investments; and the
possible inability of the Portfolio to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or the possible need
for the Portfolio to sell a portfolio security at a disadvantageous time, due to
the need for the Portfolio to maintain asset coverage or offsetting positions in
connection with transactions in derivative instruments and the possible
inability of the Portfolio to close out or to liquidate its derivatives
positions.
Asset-Backed Securities:
Asset-backed securities represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, for
example, credit card, automobile or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
Mortgage Pass-Through Securities:
Mortgage pass-through securities are securities representing interests
in "pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) expose a Portfolio to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, in the event of prepayment the value
of the premium would be lost. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-related security will generally decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed-income securities. The value of these securities also may change because
of changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs):
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities. CMOs may also be less marketable than other
securities.
Stripped Agency Mortgage-Backed Securities:
Stripped Agency Mortgage-Backed securities represent interests in a
pool of mortgages, the cash flow of which has been separated into its interest
and principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities may be issued by
U.S. Government Agencies or by private issuers similar to those described above
with respect to CMOs and privately-issued mortgage-backed certificates. As
interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage-backed securities
described herein, like other debt instruments, will tend to move in the opposite
direction compared to interest rates.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Options:
Call Options. A call option on a security gives the purchaser of the
option, in return for a premium paid to the writer (seller), the right to buy
the underlying security at the exercise price at any time during the option
period. Upon exercise by the purchaser, the writer (seller) of a call option has
the obligation to sell the underlying security at the exercise price. When a
Portfolio purchases a call option, it will pay a premium to the party writing
the option and a commission to the broker selling the option. If the option is
exercised by such Portfolio, the amount of the premium and the commission paid
may be greater than the amount of the brokerage commission that would be charged
if the security were to be purchased directly. By writing a call option, a
Portfolio assumes the risk that it may be required to deliver the security
having a market value higher than its market value at the time the option was
written. The Portfolio will write call options in order to obtain a return on
its investments from the premiums received and will retain the premiums whether
or not the options are exercised. Any decline in the market value of Portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
During the option period the writer of a call option has given up the
opportunity for capital appreciation above the exercise price should market
price of the underlying security increase, but has retained the risk of loss
should the price of the underlying security decline. Writing call options also
involves the risk relating to a Portfolio's ability to close out options it has
written.
A call option on a securities index is similar to a call option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash. A call option may be terminated by the writer (seller) by entering
into a closing purchase transaction in which it purchases an option of the same
series as the option previously written.
Put Options. A put option on a security gives the purchaser of the
option, in return for premium paid to the writer (seller), the right to sell the
underlying security at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. By writing a put option,
a Portfolio assumes the risk that it may be required to purchase the underlying
security at a price in excess of its current market value.
A put option on a securities index is similar to a put option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash.
A Portfolio may sell a call option or a put option which it has
previously purchased prior to purchase (in the case of a call) or the sale (in
the case of a put) of the underlying security. Any such sale would result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the call or put which
is sold.
Futures Contracts and Related Options:
A financial futures contract calls for delivery of a particular
security at a certain time in the future. The seller of the contract agrees to
make delivery of the type of security called for in the contract and the buyer
agrees to take delivery at a specified future time. A Portfolio may also write
call options and purchase put options on financial futures contracts as a hedge
to attempt to protect the Portfolio's securities from a decrease in value. When
a Portfolio writes a call option on a futures contract, it is undertaking the
obligation of selling a futures contract at a fixed price at any time during a
specified period if the option is exercised. Conversely, the purchaser of a put
option on a futures contract is entitled (but not obligated) to sell a futures
contract at a fixed price during the life of the option.
Financial futures contracts consist of interest rate futures contracts
and securities index futures contracts. An interest rate futures contract
obligates the seller of the contract to deliver, and the purchaser to take
delivery of, interest rate securities called for in a contract at a specified
future time at a specified price. A stock index assigns relative values to
common stocks included in the index and the index fluctuates with changes in the
market values of the common stocks included. A stock index futures contract is a
bilateral contract pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume a
position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
Futures contracts and options can be highly volatile and could result
in reduction of a Portfolio's total return, and a Portfolio's attempt to use
such investments for hedging purposes may not be successful. Successful futures
strategies require the ability to predict future movements in securities prices,
interest rates and other economic factors. A Portfolio's potential losses from
the use of futures extends beyond its initial investment in such contracts.
Also, losses from options and futures could be significant if a Portfolio is
unable to close out its position due to distortions in the market or lack of
liquidity.
The use of futures, options and forward contracts involves investment
risks and transaction costs to which a Portfolio would not be subject absent the
use of these strategies. If a Sub-advisor seeks to protect a Portfolio against
potential adverse movements in the securities, foreign currency or interest rate
markets using these instruments, and such markets do not move in a direction
adverse to such Portfolio, such Portfolio could be left in a less favorable
position than if such strategies had not been used. Risks inherent in the use of
futures, options, forward contracts and swaps include: (a) the risk that
interest rates, securities prices and currency markets will not move in the
directions anticipated; (b) imperfect correlation between the price of futures,
options and forward contracts and movements in the prices of the securities or
currencies being hedged; (c) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. A Portfolio's ability to terminate option positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to such
Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of a hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of the Portfolio
diverges from the composition of the relevant index. The successful use of these
strategies also depends on the ability of the Sub-advisor to correctly forecast
interest rate movements and general stock market price movements.
Foreign Securities:
Investments in securities of foreign issuers may involve risks that are
not present with domestic investments. While investments in foreign securities
are intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to credit and market risks.
Sovereign risk includes local political or economic developments, potential
nationalization, withholding taxes on dividend or interest payments, and
currency blockage (which would prevent cash from being brought back to the
United States). Compared to United States issuers, there is generally less
publicly available information about foreign issuers and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers and
listed companies. Fixed brokerage commissions on foreign securities exchanges
are generally higher than in the United States. Foreign issuers are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers. Securities of some foreign issuers are less liquid and their prices are
more volatile than securities of comparable domestic issuers. In some countries,
there may also be the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, difficulty in enforcing
contractual and other obligations, political or social instability or
revolution, or diplomatic developments which could affect investments in those
countries. Settlement of transactions in some foreign markets may be delayed or
less frequent than in the United States, which could affect the liquidity of
investments. For example, securities which are listed on foreign exchanges or
traded in foreign markets may trade on days (such as Saturday or Holidays) when
a Portfolio does not compute its price or accept orders for the purchase,
redemption or exchange of its shares. As a result, the net asset value of a
Portfolio may be significantly affected by trading on days when shareholders
cannot make transactions. Further, it may be more difficult for the Trust's
agents to keep currently informed about corporate actions which may affect the
price of portfolio securities. Communications between the U.S. and foreign
countries may be less reliable than within the U.S., increasing the risk of
delayed settlements or loss of certificates for portfolio securities.
Investments by a Portfolio in foreign companies may require such
Portfolio to hold securities and funds denominated in a foreign currency.
Foreign investments may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations. Thus, such a Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders of such a Portfolio. Foreign currency exchange rates generally are
determined by the forces of supply and demand in foreign exchange markets and
the relative merits of investment in different countries, actual or perceived
changes in interest rates or other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene, or by currency controls or political developments in
the U.S. or abroad. In addition, a Portfolio may incur costs in connection with
conversions between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are often
heightened for investments in emerging or developing countries.
Developing Countries. Investing in developing countries involves
certain risks not typically associated with investing in U.S. securities, and
imposes risks greater than, or in addition to, risks of investing in foreign,
developed countries. These risks include: the risk of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; social, economic and political
uncertainty and instability (including the risk of war); more substantial
government involvement in the economy; higher rates of inflation; less
government supervision and regulation of the securities markets and participants
in those markets; controls on foreign investment and limitations on repatriation
of invested capital and on a Portfolio's ability to exchange local currencies
for U.S. dollars; unavailability of currency hedging techniques in certain
developing countries; the fact that companies in developing countries may be
smaller, less seasoned and newly organized companies; the difference in, or lack
of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets.
American 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.
Currency Fluctuations:
Investments in foreign securities may be denominated in foreign
currencies. The value of Portfolio investments denominated in foreign currencies
may be affected, favorably or unfavorably, by the relative strength of the U.S.
dollar, changes in foreign currency and U.S. dollar exchange rates and exchange
control regulations. A Portfolio's net asset value per share may, therefore, be
affected by changes in currency exchange rates. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by a Portfolio. The rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets and in some cases,
exchange controls. For an additional discussion, see "Foreign Securities" above.
Forward Foreign Currency Exchange Contracts:
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date, which may be any fixed
number of days from the date the contract is agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency contract, a Portfolio "locks in" the exchange rate between the currency
it will deliver and the currency it will receive for the duration of the
contract. As a result, a Portfolio reduces its exposure to changes in the value
of the currency it will deliver and increases its exposure to changes in the
value of the currency into which it will exchange. The effect on the value of a
Portfolio is similar to selling securities denominated in one currency and
purchasing securities denominated in another. The Portfolios may enter into
these contracts for the purposes of hedging against foreign exchange risk
arising from such Portfolio's investment or anticipated investment in securities
denominated in 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:
In general the market for lower-rated high-yield-bonds (commonly known
as "junk bonds") is more limited than the market for higher-rated bonds, and
because their markets may be thinner and less active, the market prices of
lower-rated high-yield bonds may fluctuate more than the prices of higher-rated
bonds, particularly in times of market stress. In addition, while the market for
high-yield corporate debt securities has been in existence for many years, the
market in recent years has experienced a dramatic increase in the large-scale
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high-yield bond market, especially
during periods of economic recession. Other risks which may be associated with
lower-rated high-yield bonds include their relative insensitivity to interest
rate changes; the exercise of any of their redemption or call provisions in a
declining market may result in their replacement by lower yielding bonds; and
legislation, from time to time, may adversely affect their market. Since the
risk of default is higher among lower-rated high-yield bonds, a Sub-advisor's
research and analysis are an important ingredient in the selection of
lower-rated high-yield bonds. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates and
economic conditions, investment risk may be reduced, although there is no
assurance that losses will not occur.
Illiquid or Restricted Securities:
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities. Illiquid securities are deemed as such because
they are subject to restrictions on their resale ("restricted securities") or
because, based upon their nature or the market for such securities, they are not
readily marketable. Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. However, the restrictions on resale may make it difficult for
a Portfolio to dispose of such securities at the time considered most
advantageous by its Sub-advisor, and/or may involve expenses that would not be
incurred in the sale of securities that were freely marketable. A Portfolio that
may purchase restricted securities may qualify for and trade restricted
securities in the "institutional trading market" pursuant to Rule 144A of the
Securities Act of 1933. Trading in the institutional trading market may enable a
Sub-advisor to dispose of restricted securities at a time the Sub-advisor
considers advantageous and/or at a more favorable price than would be available
if such securities were not traded in such market. However, the institutional
trading market is relatively new and liquidity of a Portfolio's investments in
such market could be impaired if trading does not develop or declines. Risks
associated with restricted securities include the potential obligation to pay
all or part of the registration expenses in order to sell certain restricted
securities. A considerable period of time may elapse between the time of the
decision to sell a security and the time a Portfolio may be permitted to sell it
under an effective registration statement. If, during such a period, adverse
conditions were to develop, a Portfolio might obtain a less favorable price than
prevailing when it decided to sell.
Repurchase Agreements:
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements. Repurchase agreements are agreements by which
a Portfolio purchases a security and obtains a simultaneous commitment from the
seller to repurchase the security at an agreed upon price and date. The resale
price is in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. A repurchase transaction
is usually accomplished either by crediting the amount of securities purchased
to the account of a Portfolio's custodian maintained in a central depository or
book-entry system or by physical delivery of the securities to a Portfolio's
custodian in return for delivery of the purchase price to the seller. Repurchase
transactions are intended to be short-term transactions with the seller
repurchasing the securities, usually within seven days.
A Portfolio which enters into a repurchase agreement bears a risk of
loss in the event that the other party to such an agreement defaults on its
obligation and such Portfolio is delayed or prevented from exercising its rights
to dispose of the collateral securities, including the risk of a possible
decline in value of the underlying securities during the period such Portfolio
seeks to assert these rights, as well as the risk of incurring expenses in
asserting these rights and the risk of losing all or part of the income from
such an agreement. If the seller institution defaults, a Portfolio might incur a
loss or delay in the realization of proceeds if the value of the collateral
securing the repurchase agreement declines and it might incur disposition costs
in liquidating the collateral. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by a
Portfolio might be delayed pending court action.
Reverse Repurchase Agreements:
In a reverse repurchase agreement, a Portfolio transfers possession of
a portfolio instrument to another person, such as a broker-dealer or financial
institution in return for a percentage of the instrument's market value in cash
and agrees that on a stipulated date in the future such Portfolio will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. When effecting reverse repurchase agreements,
assets of a Portfolio, in a dollar amount sufficient to make payment for the
obligations to be repurchased, are segregated on such Portfolio's records at the
trade date and are maintained until the transaction is settled. Reverse
repurchase agreements involve the risk that the market value of the securities
retained by the Portfolio may decline below the repurchase price of the
securities sold by the Portfolio which it is obligated to repurchase.
Borrowing:
Each Portfolio's borrowings are limited so that immediately after such
borrowing the value of the Portfolio's assets (including borrowings) less its
liabilities (not including borrowings) is at least three times the amount of the
borrowings. Should a Portfolio, for any reason, have borrowings that do not meet
the above test then, within three business days, such Portfolio must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, such
Portfolio may have to liquidate securities at a time when it is disadvantageous
to do so. Gains made with additional funds borrowed will generally cause the net
asset value of such Portfolio's shares to rise faster than could be the case
without borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of such Portfolio could decrease faster than if
there had been no borrowings.
Convertible Securities and Warrants:
Convertible securities generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. Warrants are options to buy a stated number of shares of common
stock at a specified price any time during the life of the warrants. The value
of warrants may fluctuate more than the value of the securities underlying such
warrants. The value of a warrant detached from its underlying security will
expire without value if the rights under such warrant are not exercised prior to
its expiration date.
Lending:
With respect to the lending of securities, there is the risk of delays
in receiving additional collateral or in the recovery of securities and possible
loss of rights in collateral in the event that a borrower fails financially.
REGULATORY MATTERS:
In connection with its proposed futures and options transactions, the
Trust filed with the CFTC a notice of eligibility for exemption from the
definition of (and therefore from CFTC regulation as) a "commodity pool
operator" under the Commodity Exchange Act for the Portfolios. The Trust
represents in its notice of eligibility that:
(i) the Trust will not purchase or sell futures or options on futures
contracts or stock indices for purposes other than bona fide hedging
transactions (as defined by the CFTC) if as a result the sum of the initial
margin deposits and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions would exceed 5% of the fair market value of each
Portfolio's net assets; and
(ii) a Portfolio will not enter into any futures contracts if the
aggregate amount of that Portfolio's commitments under outstanding futures
contracts positions would exceed the market value of its total assets.
Currently, the Trust either has or will make a commitment regarding
each Portfolio to the State of California Department of Insurance to limit its
borrowings to 10% of the Portfolio's net asset value when borrowing for any
general purpose and to an additional 15% (for a total of 25%) when borrowing as
a temporary measure to facilitate redemptions. For purposes of the foregoing
commitment, net asset value is the market value of all investments or assets
owned by a Portfolio, less its outstanding liabilities, at the time that any new
or additional borrowing is undertaken.
Additionally, the Trust either has made or will make a commitment
regarding each Portfolio to the State of California Department of Insurance with
respect to diversification of its foreign investments. Such commitment generally
requires that a Portfolio: (i) (consistent with the Portfolio's investment
policies) invest in a minimum of five different foreign countries; except that
this minimum may be reduced to four when foreign country investments comprise
less than 80% of the Portfolio's net asset value, to three when less than 60% of
such assets, to two when less than 40% of such assets, or to one when less than
20% of such assets; and (ii) have no more than 20% of its net asset value
invested in securities of issuers located in any one foreign country; except
that, a Portfolio may have an additional 15% of its net asset value invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany. (Investments in U.S.
issuers are not subject to any of the foregoing.)
The Trust currently does not foresee any disadvantages to the holders
of variable annuity contracts and variable life insurance policies of affiliated
or unaffiliated Participating Insurance Companies or participants of Qualified
Plans (see page 2) arising from the fact that the interests of the holders of
variable annuity contracts and variable life insurance policies and participants
of Qualified Plans may differ due to differences of tax treatment or other
considerations or due to conflicts between the affiliated or unaffiliated
Participating Insurance Companies or Qualified Plans. Nevertheless, the Trustees
intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies. The Trust assumes no
responsibility for such prospectuses.
PORTFOLIO TURNOVER:
Each Portfolio may generally change its investments at any time in
accordance with its Sub-advisor's appraisal of factors affecting any particular
issuer or the market or economy in general. The frequency of the Portfolio's
transactions -- the Portfolio's turnover rate -- will vary from year to year
depending upon market conditions. High turnover involves correspondingly greater
brokerage commissions, other transaction costs and a possible increase in
short-term capital gains or losses. The anticipated annual rate of turnover for
each Portfolio of the Trust is as follows:
JanCap Growth Portfolio: not to exceed 200% under normal market conditions.
T. Rowe Price International Equity Portfolio: not to exceed 100% under
normal market conditions.
Founders Capital Appreciation Portfolio: not to exceed 200% under normal
market conditions.
INVESCO Equity Income Portfolio: not to exceed 200% under normal market
conditions.
PIMCO Total Return Bond Portfolio: not to exceed 150% under normal market
conditions.
PIMCO Limited Maturity Bond Portfolio: not to exceed 150% under normal
market conditions.
Berger Capital Growth Portfolio: not to exceed 100% under normal market
conditions.
For further details regarding the portfolio turnover rates, see
"Portfolio Turnover" in the Trust's Statement of Additional Information.
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing Portfolio securities
transactions with broker-dealers for execution is to obtain, and maintain the
availability of, execution at the best net price available and in the most
effective manner possible. The Trust's brokerage allocation policy may permit a
Portfolio to pay a broker-dealer which furnishes research services a higher
commission than that which might be charged by another broker-dealer which does
not furnish research services, provided that such commission is deemed
reasonable in relation to the value of the services provided by such
broker-dealer. In addition, each Portfolio's Sub-advisor may consider the use of
broker-dealers which might be deemed to be their affiliates, and may consider
sale of shares of the Portfolio, as well as the recommendations of the
Investment Manager, as a factor in selection of broker-dealers to execute
transactions, subject to the requirements of best net price and most favorable
execution. For a complete discussion of portfolio transactions and brokerage
allocation, see "Brokerage Allocation" in the Statement of Additional
Information.
<PAGE>
INVESTMENT RESTRICTIONS:
For each Portfolio the Trust has adopted a number of investment
restrictions which are fundamental policies and may not be changed without the
approval of the holders of a majority of the affected Portfolio's outstanding
voting securities as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). The Statement of Additional Information describes all the
restrictions on each Portfolio's investment activities.
NET ASSET VALUES:
The net asset value per share of each Portfolio, other than the AST
Money Market Portfolio, is determined by dividing the market value of that
Portfolio's securities as of the close of trading plus any cash or other assets
(including dividends and accrued interest) less all liabilities (including
accrued expenses) by the number of shares outstanding in that Portfolio. Each
Portfolio will determine the net asset value of its shares on each "business"
day, which is each day that the New York Stock Exchange (the "NYSE") is open for
business, exclusive of national holidays. The Trust's Board of Trustees has
established procedures for valuing the Portfolios' securities. In general, these
valuations are based on market value with special provisions for: securities not
listed on an exchange or securities market; securities for which recent market
quotations are not readily available; short-term obligations; and open short
positions and options written on securities. See "Computation of Net Asset
Values" in the Statement of Additional Information.
PURCHASE AND REDEMPTION OF SHARES:
Purchases of shares of the Portfolios may be made only by separate
accounts of Participating Insurance Companies for the purpose of funding
variable annuity contracts and variable life insurance policies or by Qualified
Plans. The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Trust based on, among other things,
the amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Trust or
the Trust's transfer agent are effected on days on which the NYSE is open for
trading. For orders received before 4:00 P.M. Eastern time, purchases and
redemptions of the shares of the Trust are effected at the net asset values per
share determined as of 4:00 P.M. Eastern time on that same day. Orders received
after 4:00 P.M. Eastern time, are effected at the next calculated net asset
values. Payment for redemptions will be made by the Trust's transfer agent on
behalf of the Trust within seven days after the request is received. The Trust
does not assess any fees, either when it sells or when it redeems its
securities. Surrender charges, mortality and expense risk fees and other charges
may be assessed by Participating Insurance Companies under the variable annuity
contracts or variable life insurance policies. These fees should be described in
the Participating Insurance Companies' prospectuses.
As of the date of this Prospectus, American Skandia Life Assurance
Corporation 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).
MANAGEMENT OF THE TRUST:
As of the date of this Prospectus, the Trust has twenty-three
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 the form of Management Agreements and
Sub-advisory Agreements between the Investment Manager and the Trust and the
Investment Manager and each Sub-advisor, respectively.
The Trustees are David E.A. Carson, 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 Statement of
Additional Information under the section "Management."
Investment Manager: American Skandia Investment Services, Incorporated
("ASISI"), One Corporate Drive, Shelton, Connecticut, acts as Investment Manager
to the Trust. ASISI, a Connecticut corporation organized in 1991, is registered
as an investment adviser with the Securities and Exchange Commission, as well as
with the securities commissions of thirty-eight state jurisdictions. Prior to
April 7, 1995, ASISI was known as American Skandia Life Investment Management,
Inc. ASISI is a wholly-owned subsidiary of American Skandia Investment Holding
Corporation, whose indirect parent is Skandia Insurance Company Ltd.
("Skandia"). Skandia is a Swedish company that owns, directly or indirectly, a
number of insurance companies in many countries. The predecessor to Skandia
commenced operations in 1855.
The only Participating Insurance Companies as of the date of this
Prospectus are American Skandia Life Assurance Corporation, which is also a
wholly-owned subsidiary of American Skandia Investment Holding Corporation, and
Kemper Investors Life Insurance Company. 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:
JanCap Growth Portfolio: Janus Capital Corporation ("Janus"), 100
Fillmore Street, Denver, Colorado 80206-4923, acts as the 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, 1996,
Janus managed assets worth over $39 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 Portfolio is Thomas
F. Marsico. Mr. Marsico has managed Janus Growth and Income Fund since its
inception in May 1991 and Janus Twenty Fund since April 1985.
T. Rowe Price International Equity Portfolio: Rowe Price-Fleming
International, Inc. ("Price-Fleming") was founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings Limited.
Price-Fleming is one of the world's largest international mutual fund asset
managers with approximately $25 billion under management as of June 30, 1996 in
its offices in Baltimore, London, Tokyo and Hong Kong. The Portfolio has an
investment advisory group that has day-to-day responsibility for managing the
Portfolio and developing and executing the Portfolio's investment program.
The advisory group for the T. Rowe Price International Equity Portfolio
consists of Martin G. Wade, Christopher Alderson, Peter Askew, Richard J. Bruce,
Mark J.T. Edwards, John R. Ford, Robert C. Howe, James B.M. Seddon, Benedict
R.F. Thomas, and David J.L. Warren. Martin Wade joined Price-Fleming in 1979 and
has 27 years of experience with Fleming Group (Fleming Group includes Robert
Fleming Holdings Ltd. and/or Jardine Fleming International Holdings Ltd.) in
research, client service and investment management, including assignments in the
Far East and the United States. Christopher Alderson joined Price-Fleming in
1988, and has 9 years of experience with the Fleming Group in research and
portfolio management, including an assignment in Hong Kong. Peter Askew joined
Price-Fleming in 1988 and has 21 years of experience managing multicurrency
fixed income portfolios. Richard J. Bruce joined Price-Fleming in 1991 and has 7
years of experience in investment management with the Fleming Group in Tokyo.
Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years of experience in
financial analysis, including 4 years in Fleming European research. John R. Ford
joined Price-Fleming in 1982 and has 16 years of experience with Fleming Group
in research and portfolio management, including assignments in the Far East and
the United States. Robert C. Howe joined Price-Fleming in 1986 and has 16 years
of experience in economic research in Japan. James B.M. Seddon joined
Price-Fleming in 1987 and has 9 years of experience in investment management.
Benedict R.F. Thomas joined Price-Fleming in 1988 and has 7 years of portfolio
management experience, including assignments in London and Baltimore. David J.L.
Warren joined Price-Fleming in 1984 and has 16 years experience in equity
research, fixed income research and portfolio management, including an
assignment in Japan.
Founders Capital Appreciation Portfolio: Founders Asset Management,
Inc. ("Founders"), Founders Financial Center, 2930 East Third Avenue, Denver,
Colorado 80206, has acted as an investment advisor since 1938 and serves as
investment advisor to Founders Discovery, Frontier, Passport, Special,
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 $4 billion as of June 30, 1996.
The portfolio manager responsible for management of the Founders
Capital Appreciation Portfolio is Michael K. Haines, a Senior Vice President of
investments of Founders. Mr. Haines has been associated with Founders since
1985, serving as assistant portfolio manager and as a lead portfolio manager.
INVESCO Equity Income Portfolio: INVESCO Trust Company, a trust company
founded in 1969, is a wholly-owned subsidiary of INVESCO Funds Group, Inc., P.O.
Box 173706, Denver, Colorado 80217-3706, which was established in 1932. INVESCO
Trust Company serves as sub-advisor to INVESCO Growth Fund, Inc., INVESCO
Dynamics Fund, Inc.; INVESCO Money Market Funds, Inc.; INVESCO Income Funds,
Inc.; INVESCO Tax-Free Income Funds, Inc.; INVESCO Strategic Portfolios, Inc.;
INVESCO Emerging Opportunity Funds, Inc.; INVESCO Industrial Income Fund, Inc.;
INVESCO Multiple Asset Funds, Inc.; INVESCO Specialty Funds, Inc.; and INVESCO
Variable Investment Funds, Inc. INVESCO Funds Group, Inc. and INVESCO Trust
Company are part of a global financial services firm that managed approximately
$90 billion of assets as of June 30, 1996. The parent company, INVESCO PLC, was
organized in 1935 and is based in London, with money managers located in Europe,
North America and the Far East.
INVESCO PLC has recently announced its agreement to merge with AIM
Management Group, a large United States mutual fund manager. This merger is
expected to be completed in February 1997, subject to certain conditions
including approval by the shareholders of both INVESCO and AIM as well as
INVESCO and AIM institutional clients and the holders of INVESCO and AIM mutual
funds. It is not currently anticipated that the merger would result in any
change in the operations of INVESCO PLC or INVESCO Trust Company. Nonetheless,
the merger may result in an "assignment," as defined in the 1940 Act, of the
sub-advisory agreement between INVESCO Trust Company and the Investment Manager
with respect to the INVESCO Equity Income Portfolio, which, in turn, would
result in the automatic termination of the sub-advisory agreement and require
the approval of a new sub-advisory agreement by the shareholders of the
Portfolio.
The portfolio managers responsible for management of the INVESCO Equity
Income Portfolio are Charles P. Mayer, Portfolio Co-Manager; and Donovan J.
(Jerry) Paul, Portfolio Co-Manager. Mr. Mayer has served as Co-Portfolio Manager
of the INVESCO Industrial Income Fund since 1993 and also has served as
Portfolio Manager and Senior Vice President of INVESCO Trust Company since 1993.
Mr. Paul has served as Co-Portfolio Manager of the INVESCO Industrial Income
Fund since 1994 and has served as Senior Vice President (1994 to present) of
INVESCO Trust Company.
PIMCO Total Return Bond Portfolio and PIMCO Limited Maturity Bond
Portfolio: Pacific Investment Management Company ("PIMCO") serves as Sub-advisor
to the PIMCO Total Return Bond Portfolio and PIMCO Limited Maturity Bond
Portfolio. It is an investment counseling firm founded in 1971 and, as of June
30, 1996, has over $79 billion of assets under management. PIMCO is a subsidiary
general partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority
interest in PIMCO Advisors is held by PIMCO Partners, G.P., a general
partnership between Pacific Financial Asset Management Corporation, an indirect
wholly owned subsidiary of Pacific Mutual Life Insurance Company, and PIMCO
Partners, LLC, a California limited liability company controlled by the managing
directors of PIMCO. PIMCO's address is 840 Newport Center Drive, Suite 360,
Newport Beach, California 92660. PIMCO is a registered investment advisor with
the Securities and Exchange Commission and a commodity trader advisor with the
CFTC.
The portfolio manager responsible for management of the PIMCO Total Return
Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio is William H.
Gross. Mr. Gross is managing director of PIMCO Investment Management Company and
has been associated with the firm for 24 years.
Berger Capital Growth Portfolio: Berger Associates, Inc. ("Berger
Associates"), 210 University Blvd., Suite 900, Denver, Colorado, 80206, has
acted as an investment advisor since 1973. Berger Associates serves as the
investment advisor to the Berger Capital Growth Portfolio and other mutual
funds, as well as for retirement plans and institutional and private investors.
As of June 30, 1996, Berger Associates managed assets worth approximately $3.6
billion. Kansas City Southern Industries, Inc. ("KCSI") owns approximately 84%
of the outstanding voting stock of Berger Associates, most of which it acquired
in 1994. KCSI is a publicly-traded holding company with principal operations in
rail transportation, through its subsidiary the Kansas City Southern Railway
Company, and financial asset management businesses.
The portfolio manager responsible for the management of the Portfolio
is Rodney L. Linafelter. Mr. Linafelter, owner of approximately 8% of the
outstanding voting stock of Berger Associates, is Vice President, Chief
Investment Officer and a Director of Berger Associates. Mr. Linafelter joined
Berger Associates in January 1990, where he has served as portfolio manager of
the Berger One Hundred Fund and the Berger Growth and Income Fund, as well as
for retirement plans and institutional and private investors. From April 1986 to
December 1989, Mr. Linafelter was employed as a Financial Consultant (registered
representative) with Merrill Lynch, Pierce, Fenner & Smith, Inc., providing
investment advice to institutions and individuals.
Investment Management Agreements: The Trust has entered into Investment
Management Agreements with the Investment Manager (the "Management Agreements")
which provide that the Investment Manager will furnish each applicable Portfolio
with investment advice and investment management and administrative services
with respect to the applicable Portfolio subject to the supervision of the Board
of Trustees and in conformity with the stated policies of the applicable
Portfolio. The Investment Manager has engaged the Sub-advisors noted above to
conduct the investment programs of each Portfolio, including the purchase,
retention, disposition and lending of securities. Such Sub-advisors are required
to provide research and statistical analysis and to keep books and records of
securities transactions. The Investment Manager is responsible for monitoring
the activities of the Sub-advisors and reporting on the activities of the
Sub-advisors to the Trustees. The Investment Manager must also provide or obtain
for the Trust, and thereafter supervise, such executive, administrative,
accounting, custody, transfer agent and shareholder servicing services as are
deemed advisable by the Board of Trustees.
Under the terms of the Management Agreements, each Portfolio pays all
of its expenses, including, but not limited to, the costs incurred in connection
with the maintenance of its registration under the Securities Act of 1933, as
amended, and the 1940 Act, printing and mailing prospectuses and statements of
additional information to shareholders, certain office and financial accounting
services, taxes or governmental fees, brokerage commissions, Portfolio pricing,
custodial, transfer and shareholder servicing agent costs, expenses of outside
counsel and independent accountants, preparation of shareholder reports and
expenses of trustee and shareholder meetings. Expenses incurred by the Trust not
directly attributable to any specific Portfolio or Portfolios are allocated on
the basis of the net assets of the respective Portfolios.
The Investment Manager receives a fee, payable each month, for the
performance of its services. The Investment Manager pays each Sub-advisor a
portion of such fee for the performance of the Sub-advisory services. The
Investment Management fee payable may differ from Portfolio to Portfolio,
reflecting the objective, policies and restrictions of each Portfolio and the
nature of each Sub-advisory Agreement. Each Portfolio's fee is accrued daily for
the purposes of determining the offering and redemption price of the Portfolio's
shares. The fees payable to the Investment Manager are as follows:
JanCap Growth Portfolio: An annual rate of .90% of the average daily
net assets of the Portfolio. For the year ended December 31, 1995, the amount of
the fee paid by the Trust to the Investment Manager was $2,977,217.
T. Rowe Price International Equity Portfolio: An annual rate of 1.00% of
the average daily net assets of the Portfolio. For the year ended December 31,
1995, the amount of the fee paid by the Trust to the Investment Manager was
$1,412,350.
Founders Capital Appreciation Portfolio: An annual rate of .90% of the
average daily net assets of the Portfolio. For the year ended December 31, 1995,
the amount of the fee paid by the Trust to the Investment Manager was $486,749.
INVESCO Equity Income Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio. For the year ended December 31, 1995, the
amount of the fee paid by the Trust to the Investment Manager was $821,220.
PIMCO Total Return Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio. For the year ended December 31, 1995,
the amount of the fee paid by the Trust to the Investment Manager was $652,311.
PIMCO Limited Maturity Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio. For the period May 2, 1995
(commencement of operations) to December 31, 1995, the amount of the fee paid by
the Trust to the Investment Manager was $100,949.
Berger Capital Growth Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio. For the year ended December 31, 1995, the
amount of the fee paid by the Trust to the Investment Manager was $160,794.
The Investment Manager has agreed, by the terms of the Management
Agreements, to reimburse each 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 may differ
between the Portfolios, reflecting the objective, policies and restrictions of
each Portfolio and the expenses involved in conducting an investment program for
each Portfolio. For an additional discussion of Portfolio expense limitations,
see "Management of the Trust: Investment Management Agreements" in the Trust's
Statement of Additional Information.
Sub-Advisory Agreements: The Investment Manager pays each Sub-advisor for the
performance of sub-advisory services. The fee to Sub-advisors may differ from
Portfolio to Portfolio, reflecting the objectives, policies and restrictions of
each Portfolio and the nature of each Sub-advisory Agreement. Each Sub-advisor's
fee is accrued daily for purposes of determining the amount payable to the
Sub-advisor. The fees payable to the present Sub-advisors are as follows:
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. For the year ended December 31,
1995, the amount paid by the Investment Manager to the Sub-advisor was
$1,869,411.
Rowe Price-Fleming International, Inc. for the T. Rowe Price
International Equity Portfolio: An annual rate of .75 of 1% of the portion of
the average daily net assets of the Portfolio not in excess of $20 million; plus
.60 of 1% of the portion of the net assets over $20 million but not in excess of
$50 million; and .50 of 1% of the portion in excess of $50 million. Commencing
May 1, 1996, the Sub-advisor has voluntarily agreed to waive a portion of its
fee equal to .25 of 1% of the portion of the Portfolio's average daily net
assets not in excess of $20 million and .10 of 1% of the portion of the net
assets over $20 million but not in excess of $50 million, so long as the average
daily net assets of the Portfolio equal or exceed $200 million. The Sub-advisor
may terminate this voluntary agreement at any time. For the year ended December
31, 1995, the amount paid by the Investment Manager to the Sub-advisor was
$786,175.
Founders Asset Management, Inc. for the Founders Capital Appreciation
Portfolio: An annual rate of .65 of 1% of the portion of the average daily net
assets of the Portfolio not in excess of $75 million; plus .60 of 1% of the
portion of the net assets over $75 million but not in excess of $150 million;
and .55 of 1% of the net assets in excess of $150 million. For the year ended
December 31, 1995, the amount paid by the Investment Manager to the Sub-advisor
was $350,949.
INVESCO Trust Company for the INVESCO Equity Income Portfolio: An
annual rate of .50 of 1% of the portion of the average daily net assets of the
Portfolio not in excess of $25 million; plus .45 of 1% of the portion of the net
assets over $25 million but not in excess of $75 million; plus .40 of 1% of the
portion of the net assets in excess of $75 million but not in excess of $100
million; and .35 of 1% of the portion of the net assets over $100 million. For
the year ended December 31, 1995, the amount paid by the Investment Manager to
the Sub-advisor was $482,833.
Pacific Investment Management Company for the PIMCO Total Return Bond
Portfolio: An annual rate of .30 of 1% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25 of 1% on the portion of the net
assets over $150 million. For the year ended December 31, 1995, the amount paid
by the Investment Manager to the Sub-advisor was $299,969.
Pacific Investment Management Company for the PIMCO Limited Maturity
Bond Portfolio: An annual rate of .30 of 1% of the average daily net assets of
the Portfolio not in excess of $150 million; and .25 of 1% on the portion of the
net assets over $150 million. For the period May 2, 1995 (commencement of
operations) to December 31, 1995, the amount paid by the Investment Manager to
the Sub-advisor was $47,155.
Berger Associates, Inc. for the Berger Capital Growth Portfolio: An
annual rate of .55% of the average daily net assets of the Portfolio not in
excess of $25 million; plus .50% of the portion of average daily net assets over
$25 million but not in excess of $50 million; plus .40% of the portion of the
average daily net assets over $50 million. For the year ended December 31, 1995,
the amount paid by the Investment Manager to the Sub-advisor was $116,002.
The Annual Report of the Trust for the year ended December 31, 1995
contains a discussion by the Trust's management of the performance of each
Portfolio. The Annual Report is available free of charge upon request.
Administrator: PFPC Inc., a Delaware corporation which is an indirect
wholly-owned subsidiary of PNC Financial Corp. and has its principal offices at
103 Bellevue Parkway, Wilmington, Delaware 19809, is the administrator for the
Trust (the "Administrator"). The Administrator provides administrative services
to investment companies and other accounts.
The Administration Agreement: The Trust has entered into a Fund Accounting and
Administration Agreement with the Administrator (the "Administration Agreement")
dated May 1, 1992, under which the Administrator has agreed to provide certain
fund accounting and administrative services to the Trust, including, among other
services, accounting relating to the Trust and investment transactions of the
Trust; computation of daily net asset values; maintaining the Trust's books of
account; assisting in monitoring, in conjunction with the Investment Manager,
compliance with the Trust's investment objectives, policies and restrictions;
providing office space and equipment necessary for the proper administration and
accounting functions of the Trust; monitoring investment activity and income of
the Trust for compliance with applicable tax laws; preparing and filing Trust
tax returns; preparing financial information in connection with the preparation
of the Trust's annual and semi-annual reports and making requisite filings
thereof; preparing schedules of Trust share activity for footnotes to financial
statements; furnishing financial information necessary for the completion of
certain items to the Trust's registration statement, and necessary to prepare
and file Rule 24f-2 notices; providing an administrative interface between the
Investment Manager and the Trust's custodian; creating and maintaining all
necessary records in accordance with applicable laws, rules and regulations,
including, but not limited to, those records required to be kept pursuant to the
1940 Act; and performing such other duties related to the administration of the
Trust as may be requested by the Board of Trustees. The Administrator does not
have any responsibility or authority for the management of the assets of the
Trust, the determination of its investment policies, or for any matter
pertaining to the distribution of securities issued by the Trust.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreement, the Trust has agreed to pay to
the Administrator its out-of pocket expenses plus the greater of certain maximum
percentages of the average daily net assets of the Trust or certain specified
minimums calculated for each Portfolio. The maximum percentages of the average
daily net assets are: (a) 0.10% of the first $200 million; (b) 0.075% of the
next $200 million; (c) 0.050% of the next $200 million; and (d) 0.03% of average
daily net assets over $600 million. The initial year of this Administration
Agreement commenced on May 1, 1992. The minimum amount for the fifth year of
this Administration Agreement is $75,000 for each of the the JanCap Growth
Portfolio, the Founders Capital Appreciation Portfolio, the INVESCO Equity
Income Portfolio, the PIMCO Total Return Bond Portfolio and the Berger Capital
Growth Portfolio. The minimum for the fifth year of this Administration
Agreement is $100,000 for the T. Rowe Price International Equity Portfolio. The
minimum amount for the PIMCO Limited Maturity Bond Portfolio is $75,000 per
year. For a description of the "out-of-pocket" expenses the Trust is to pay the
Administrator, see "The Administration and Accounting Services Agreement" in the
Trust's Statement of Additional Information.
Sale of Shares: Shares are sold at net asset value to Participating Insurance
Companies and Qualified Plans. Owners of variable annuity contracts and variable
insurance policies and plan participants will receive annual and semi-annual
reports including the financial statement of the Portfolios that they have
authorized for investment. The Trust has entered into 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.
TAX MATTERS:
This discussion of federal income tax consequences applies to the
Participating Insurance Companies, Qualified Plans and plan participants in
certain types of Qualified Plans since the separate accounts of the
Participating Insurance Companies, the Qualified Plans and plan participants in
certain Qualified Plans will be the shareholders of the Trust. Holders of
variable annuity contracts or variable life insurance policies must consult the
prospectuses of their respective contracts or policies for information on the
federal income tax consequences to such holders, and plan participants must
consult with any applicable plan documents for information on the federal income
tax consequences to such holders. The Trust intends to qualify as a regulated
investment company by satisfying the requirements under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), including requirements
with respect to diversification of assets, distribution of income and sources of
income. It is the Trust's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the timing requirements imposed by the Code so that
the Trust will satisfy the distribution requirement of Subchapter M and not be
subject to federal income taxes or the 4% excise tax.
Distributions by the Trust of its net investment income and the excess,
if any, of its net short-term capital gain over its net long-term capital loss
are taxable to shareholders as ordinary income. These distributions are treated
as dividends for federal income tax purposes, but will not qualify for the 70%
dividends-received deduction for corporate shareholders. Distributions by the
Trust of the excess, if any, of its net long-term capital gain over its net
short-term capital loss are designated as capital gain dividends and are taxable
to shareholders as long-term capital gains, regardless of the length of time the
shareholder held his shares.
Portions of certain Portfolio's investment income may be subject to
foreign income taxes withheld at source. The Trust may elect to "pass-through"
to the shareholders of such Portfolios these foreign taxes, in which event each
shareholder will be required to include his pro rata portion thereof in his
gross income, but will be able to deduct or (subject to various limitations)
claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Trust. In general, distributions by the Trust are taken into
account by the shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Trust and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
or deemed made during the year, including any amount of foreign taxes "passed
through," will be sent to shareholders promptly after the end of each year.
Notwithstanding the foregoing, distributions by the Trust to certain Qualified
Plans may be exempt from federal income tax.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in Treasury
regulations. For purposes of these alternative diversification tests, a
segregated asset account investing in shares of a regulated investment company
will be entitled to "look-through" the regulated investment company to its pro
rata portion of the regulated investment company's assets, provided the
regulated investment company satisfies certain conditions relating to the
ownership of its shares. The Trust intends to satisfy these ownership
conditions. Further, the Trust intends that each Portfolio separately will be
adequately diversified. Accordingly, a segregated asset account investing solely
in shares of a Portfolio will be adequately diversified, and a segregated asset
account investing in shares of one or more Trust Portfolios and shares of other
adequately diversified funds generally will be adequately diversified.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. As the foregoing
discussion is for general information only, a prospective shareholder should
also review the more detailed discussion of federal income tax considerations
relevant to the Trust that is contained in the Statement of Additional
Information. In addition, each prospective shareholder should consult with his
own tax advisor as to the tax consequences of investments in the Trust,
including the application of state and local taxes which may differ from the
federal income tax consequences described above.
ORGANIZATION AND DESCRIPTION OF SHARES OF THE TRUST: The Trust is a managed,
open-end investment company organized as a Massachusetts business trust, whose
separate Portfolios are diversified, unless otherwise indicated. The Trust's
Declaration of Trust dated October 31, 1988, which governs certain Trust
matters, permits the Trust's Board of Trustees to issue multiple classes of
shares, and within each class, an unlimited number of shares of beneficial
interest with a par value of $.001 per share. Each share entitles the holder to
one vote for the election of Trustees and on all other matters that are not
specific to one class of shares, and to participate equally in dividends,
distributions of capital gains and net assets of each applicable Portfolio. Only
shareholders of shares of a specific Portfolio may vote on matters specific to
that Portfolio. Shares of one class may not bear the same economic relationship
to the Trust as shares of another class. In the event of dissolution or
liquidation, holders of shares of a Portfolio will receive pro rata, subject to
the rights of creditors, the proceeds of the sale of the assets held in such
Portfolio less the liabilities attributable to such Portfolio. Shareholders of a
Portfolio will not be liable for the expenses, obligations or debts of another
Portfolio.
There are no preemptive or conversion rights applicable to any of the
Trust's shares. The Trust's shares, when issued, will be fully paid,
non-assessable and transferable. The Trustees may at any time create additional
series of shares without shareholder approval.
Generally, there will not be annual meetings of shareholders. A Trustee
may, in accordance with certain rules of the Securities and Exchange Commission,
be removed from office when the holders of record of not less than two-thirds of
the outstanding shares either present a written declaration to the Trust's
custodian or vote in person or by proxy at a meeting called for this purpose. In
addition, the Trustees will promptly call a meeting of shareholders to remove a
Trustee(s) when requested to do so in writing by record holders of not less than
10% of the outstanding shares. Finally, the Trustees shall, in certain
circumstances, give such shareholders access to a list of the names and
addresses of all other shareholders or inform them of the number of shareholders
and the cost of mailing their request.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees to all parties, and each party thereto must expressly waive all rights
of action directly against shareholders. The Declaration of Trust provides for
indemnification out of the Trust's property for all loss and expense of any
shareholder of the Trust held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations wherein the complaining party was held not to be
bound by the disclaimer.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involving the conduct of
his office. The Declaration of Trust provides for indemnification by the Trust
of the Trustees and officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust's
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. The Declaration of Trust also authorizes
the purchase of liability insurance on behalf of Trustees and officers.
PORTFOLIO ANNUAL EXPENSES (as a percentage of average net assets): Unless
otherwise indicated, the expenses shown on the following page are for the year
ending December 31, 1995. "N/A" indicates that no entity has agreed to reimburse
the particular expense indicated. The expenses of the portfolios either are
currently being partially reimbursed or may be partially reimbursed in the
future. Management Fees, Other Expenses and Total Annual Expenses are provided
on both a reimbursed and not reimbursed basis, if applicable.
* Because shares of the Portfolios may be purchased through variable insurance
contacts, the prospectus of the Participating Insurance Company sponsoring such
contract should be carefully reviewed for information on relevant charges and
expenses. The table on the following page does not reflect any such charges.
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)
NONE* Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price) NONE* Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable) NONE* Redemption Fees (as a
percentage of amount redeemed, if applicable) NONE* Exchange Fee NONE*
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Total
Annual Annual
Management Management Other Other Expenses Expenses
Fee Fee Expenses Expenses after any without any
after any without any after any without any applicable applicable
Portfolio: voluntary voluntary any applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JanCap Growth N/A 0.90% 0.22% 0.22% 1.12% 1.12%
T. Rowe Price Int'l Equity N/A 1.00% 0.33% 0.33% 1.33% 1.33%
Founders Capital Appreciation N/A 0.90% 0.32% 0.32% 1.22% 1.22%
INVESCO Equity Income N/A 0.75% 0.23% 0.23% 0.98% 0.98%
PIMCO Total Return Bond N/A 0.65% 0.24% 0.24% 0.89% 0.89%
PIMCO Limited Maturity Bond(1) N/A 0.65% 0.24% 0.24% 0.89% 0.89%
Berger Capital Growth N/A 0.75% 0.42% 0.42% 1.17% 1.17%
</TABLE>
(1) This Portfolio commenced operation in May, 1995. Expenses shown are
annualized.
The purpose of the above table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor in
the Portfolio(s).
EXPENSE EXAMPLES: The examples reflect expenses of the Portfolio.
The examples shown assume that the total annual expenses for the Portfolios
throughout the period specified will be the lower of the total annual expenses
without any applicable reimbursement or expenses after any applicable
reimbursement.
THE EXAMPLES ARE ILLUSTRATIVE ONLY - THEY SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE PORTFOLIOS - ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
You would pay the following expenses rounded to the nearest dollar on a
$1,000 investment assuming 5% annual return at the end of each time period.
<TABLE>
<CAPTION>
After: Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
JanCap Growth 11 35 61 135
T. Rowe Price International Equity 14 43 74 161
Founders Capital Appreciation 13 39 67 148
INVESCO Equity Income 10 31 54 120
PIMCO Total Return Bond 9 28 49 110
PIMCO Limited Maturity Bond 9 28 49 110
Berger Capital Growth 12 37 64 142
</TABLE>
PERFORMANCE: The Portfolios may measure performance in terms of total return,
which is calculated for any specified period of time by assuming the purchase of
shares of the Portfolio at the net asset value at the beginning of the period.
Each dividend or other distribution paid by each Portfolio during such period is
assumed to have been reinvested at the net asset value on the reinvestment date.
The shares then owned as a result of this process are valued at the net asset
value at the end of the period. The percentage increase is determined by
subtracting the initial value of the investment from the ending value and
dividing the remainder by the initial value. Each Portfolio's total return shows
a Portfolio's overall dollar or percentage change in value, including changes in
share price and assuming each Portfolio's dividends and capital gains
distributions are reinvested. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if a Portfolio's performance had been constant over the entire
period. Total return figures are based on the overall change in value of a
hypothetical investment in each Portfolio. Because average annual returns for
more than one year tend to smooth out variations in each Portfolio's return,
investors should recognize that such figures are not the same as actual
year-by-year results. To illustrate the components of overall performance, a
Portfolio may separate its cumulative and average annual returns into income
results and capital gains or losses.
The Portfolios may also measure performance in terms of yield. Each
Portfolio's yield shows the rate of income the Portfolio earns on its
investments as a percentage of the Portfolio's share price. To calculate yield,
the Portfolio takes the interest and dividend income it earned from its
investments for a 30-day period (net of expenses), divides it by the average
number of Portfolio shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Portfolio's net asset value
at the end of the 30-day period. For the Portfolio's investments denominated in
foreign currencies, income and expenses are calculated in their respective
currencies and then converted to U.S. dollars. Yields are calculated according
to methods that are standardized for all stock and bond funds. Because yield
calculation methods differ from the method used for other accounting purposes
(in particular, currency gains and losses are not reflected in the yield
calculation), a Portfolio's yield may not equal the income paid to shareholders'
accounts or the income reported in the Portfolio's financial statements.
The Portfolios impose no sales or other charges that would impact the
total return or yield computations. Portfolio performance figures are based upon
historical results and are not intended to indicate future performance. The
investment return and principal value of an investment in any of the Portfolios
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Yield and total returns quoted from the Portfolios include the effect
of deducting each Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Because shares of the
Portfolios may be purchased through variable insurance contracts, the prospectus
of the Participating Insurance Company sponsoring such contract should be
carefully reviewed for information on relevant charges and expenses. Excluding
these charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. The effect of these charges should be
considered when comparing a Portfolio's performance to that of other mutual
funds. In advertising and sales literature, these figures will be accompanied by
figures that reflect the applicable contract charges.
From time to time in advertisements or sales material, the Portfolios
(or Participating Insurance Companies) may discuss their performance ratings or
other information as published by recognized mutual fund statistical or rating
services, such as Lipper Analytical Services, Inc., Morningstar or by
publications of general interest, such as Forbes or Money. The Portfolios may
also compare their performance to that of other selected mutual funds, mutual
fund averages or recognized stock market indicators, including the Standard &
Poor's 500 Stock Index, the Standard & Poor Midcap Index, the Dow Jones
Industrial Average, the Russell 2000 and the NASDAQ composite. In addition, the
Portfolios may compare their total return or yield to the yield on U.S. Treasury
obligations and to the percentage change in the Consumer Price Index. The T.
Rowe Price 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 AND CUSTODIAN: The custodian for all
cash and securities 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 of the other Portfolios is PNC Bank, Airport
Business Center, International Court 2, 200 Stevens Drive, Philadelphia,
Pennsylvania 19113. For these Portfolios, Morgan Stanley Trust Company will
serve as co-custodian with respect to foreign securities. The Trust's transfer
and shareholder servicing agent is PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware 19809.
COUNSEL AND AUDITORS: The firm of Werner & Kennedy, 1633 Broadway, 46th Floor,
New York, New York 10019, is counsel for the Trust. Deloitte & Touche LLP, 117
Campus Drive, Princeton, New Jersey 08540, has been appointed independent
auditor for the Trust.
OTHER INFORMATION: This Prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted herefrom, may be obtained
from the Commission by paying the charges prescribed under its rules and
regulations. The Statement of Additional Information included in such
registration statement may be obtained without charge from the Trust's office at
One Corporate Drive, Shelton, Connecticut 06484 or by calling (203) 926-1888.
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.
