File No. 33-24962
Investment Company No. 811-5186
As filed with the Securities and Exchange Commission on October 6, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
Registration Statement under The Securities Act of 1933
Post-Effective Amendment No. 23
Registration Statement under The Investment Company Act of 1940
Amendment No. 25
AMERICAN SKANDIA TRUST
(Exact Name of Registrant as Specified in Charter)
One Corporate Drive, Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
(203) 926-1888
(Registrant's Telephone Number, Including Area Code)
ERIC C. FREED, ESQ., SECRETARY
AMERICAN SKANDIA TRUST
ONE CORPORATE DRIVE, SHELTON, CONNECTICUT 06484
(Name and Address of Agent for Service)
Copies to:
ROBERT K. FULTON, ESQ.
WERNER & KENNEDY
1633 BROADWAY, 46TH FLOOR, NEW YORK, NEW YORK 10019
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
_____ on _______ pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
[X] 75 days after filing pursuant to paragraph (a)(2).
_____ on _______ pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Registrant has elected to maintain an indefinite
registration of shares under Rule 24f-2. The Rule
24f-2 Notice for Registrant's fiscal period ended
December 31, 1996 was filed on February 26, 1996.
AMERICAN SKANDIA TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Form N-1A
Item Number
Part A Prospectus Caption
1. Cover Page
2. Portfolio Annual Expenses
3. (a)(d) Financial Highlights
(b) *
(c) Performance
4. Investment Objectives and
Policies; Certain Risk Factors and
Investment Methods; Organization and
Management of the Trust
5. (a)(b)(c)(d) Organization and Management of the Trust
(e) Transfer and Shareholder Servicing Agent
(f) Portfolio Annual Expenses
(g) Brokerage Allocation
5A. *
6. (a) Description of Shares of the Trust
(b) Purchase and Redemption of Shares
(c)(d)(f)(h) *
(e) Cover Page; Other Information
(g) Tax Matters
7. (a) *
(b) Purchase and Redemption of Shares;
Net Asset Values
(c)(d)(e)(f)(g) *
8. Purchase and Redemption of Shares
9. *
<PAGE>
Statement of Additional
Part B Information Caption
10. Cover Page
11. Table of Contents
12. General Information and History
13. (a)(b)(c) Investment Objectives and Policies;
Investment Restrictions;
Allocation of Investments
(d) Portfolio Turnover
14. Management
15. Other Information
16. (a) (b) Investment Advisory and Other Services;
See also Prospectus
(c)(e)(f)(g)(i) *
(d) Investment Advisory and Other Services
(h) See Prospectus
17. (a)(b)(c) Brokerage Allocation
(d)(e) *
18. See Prospectus
19. (a) Purchase and Redemption of Shares;
See also Prospectus
(b) Computation of Net Asset Values
(c) *
20. Tax Matters; See also Prospectus
21. Underwriter
22. Performance
23. Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
* Not Applicable
PROSPECTUS December [INSERT], 1997
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
- --------------------------------------------------------------------------------
American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing investment objectives of its
Portfolios. The Portfolios as of the date of this Prospectus and their
respective investment objectives are as follows:
Lord Abbett Growth and Income Portfolio seeks long-term growth of capital and
income while attempting to avoid excessive fluctuations in market value. Lord
Abbett Small Cap Value Portfolio seeks long-term capital appreciation. JanCap
Growth Portfolio seeks growth of capital in a manner consistent with
preservation of capital. AST Janus Overseas Growth Portfolio seeks long-term
growth of capital. AST Money Market Portfolio seeks high current income and
maintenance of high levels of liquidity. Federated Utility Income Portfolio
seeks high current income and moderate capital appreciation by investing
primarily in equity and debt securities of utility companies. Federated High
Yield Portfolio seeks high current income by investing primarily in a
diversified portfolio of fixed income securities. T. Rowe Price Asset Allocation
Portfolio seeks a high level of total return by investing primarily in a
diversified group of fixed income and equity securities. T. Rowe Price
International Equity Portfolio seeks total return on its assets from long-term
growth of capital and income principally through investments in common stocks of
established, non-U.S. companies. T. Rowe Price Natural Resources Portfolio seeks
long-term growth of capital through investments primarily in common stocks of
companies which own or develop natural resources and other basic commodities. T.
Rowe Price International Bond Portfolio seeks to provide high current income and
capital appreciation by investing in high-quality, non dollar-denominated
government and corporate bonds outside the United States. T. Rowe Price Small
Company Value Portfolio seeks long-term capital appreciation by investing
primarily in small-capitalization stocks that appear to be undervalued. Founders
Capital Appreciation Portfolio seeks capital appreciation. Founders Passport
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. Robertson Stephens Value + Growth Portfolio
seeks capital appreciation. Robertson Stephens Contrarian Portfolio seeks
maximum long-term growth. Twentieth Century International Growth Portfolio seeks
capital growth. Twentieth Century Strategic Balanced Portfolio seeks capital
growth and current income. AST Putnam Value Growth & Income Portfolio seeks
capital growth. Current income is a secondary objective. AST Putnam
International Equity Portfolio seeks capital appreciation. AST Putnam Balanced
Portfolio seeks a balanced investment composed of a well-diversified portfolio
of stocks and bonds which will produce both capital growth and current income.
Cohen & Steers Real Estate Investment Portfolio seeks to maximize total return
through investment in real estate securities. Stein Roe Small Cap Blend
Portfolio seeks long-term capital appreciation. Bankers Trust Enhanced 500 Index
Portfolio seeks to replicate the total return of the Standard & Poor's 500
Composite Stock Price Index, an index emphasizing large capitalization stocks.
Marsico Capital Growth Portfolio seeks capital growth.
Investments in the Trust are neither insured nor guaranteed by the United States
Government. Such investments are not bank deposits, and are not insured by,
guaranteed by, obligations of, or otherwise supported by, any bank. Although the
AST Money Market Portfolio seeks to maintain a stable net asset value of $1.00
per share, there can be no assurance that it will be able to do so.
This Prospectus sets forth concisely the information that a prospective investor
should know before investing in shares of the Trust and should be retained for
future reference. A Statement of Additional Information, dated December
[INSERT], 1997 (the "SAI"), containing additional information about the Trust
has been filed with the Securities and Exchange Commission (the "Commission")
and is hereby incorporated by reference into this Prospectus. The Trust's SAI is
available without charge upon request to the Trust at the above address or by
calling (800) 752-6342. The Commission maintains a Web site (http:/
/www.sec.gov) that contains the SAI, material incorporated by reference, and
other information regarding the Trust.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (continued
on page 2)
Shares of the Trust are available to, and are marketed as a pooled funding
vehicle for, life insurance companies ("Participating Insurance Companies")
writing variable annuity contracts and variable life insurance policies. As of
the date of this Prospectus, the only Participating Insurance Companies are
American Skandia Life Assurance Corporation and Kemper Investors Life Insurance
Company. From time to time, however, the Trust may enter into participation
agreements with other Participating Insurance Companies. Shares of the Trust
also may be offered directly to qualified pension and retirement plans,
including, but not limited to, plans under sections 401, 403, 408 and 457 of the
Internal Revenue Code of 1986, as amended ("Qualified Plans"). The Trust sells
and redeems its shares at net asset value without any sales charges, commissions
or redemption fees. Each variable annuity contract and variable life insurance
policy involves fees and expenses not described in this Prospectus. Certain
Portfolios may not be available in connection with a particular variable annuity
contract or variable life insurance policy or Qualified Plan. Please read the
Prospectus of the variable annuity contracts and variable life insurance
policies issued by Participating Insurance Companies for information regarding
contract fees and expenses and any restrictions on purchases.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Caption Page
<S> <C> <C>
Portfolio Annual Expenses..........................................................................................
Financial Highlights...............................................................................................
Investment Objectives and Policies.................................................................................
Lord Abbett Growth and Income Portfolio.......................................................................
Lord Abbett Small Cap Value Portfolio.........................................................................
JanCap Growth Portfolio.......................................................................................
AST Janus Overseas Growth Portfolio...........................................................................
AST Money Market Portfolio....................................................................................
Federated Utility Income Portfolio............................................................................
Federated High Yield Portfolio................................................................................
T. Rowe Price Asset Allocation Portfolio......................................................................
T. Rowe Price International Equity Portfolio..................................................................
T. Rowe Price Natural Resources Portfolio.....................................................................
T. Rowe Price International Bond Portfolio....................................................................
T. Rowe Price Small Company Value Portfolio...................................................................
Founders Capital Appreciation Portfolio.......................................................................
Founders Passport Portfolio...................................................................................
INVESCO Equity Income Portfolio...............................................................................
PIMCO Total Return Bond Portfolio.............................................................................
PIMCO Limited Maturity Bond Portfolio.........................................................................
Berger Capital Growth Portfolio...............................................................................
Robertson Stephens Value + Growth Portfolio...................................................................
Robertson Stephens Contrarian Portfolio.......................................................................
Twentieth Century International Growth Portfolio..............................................................
Twentieth Century Strategic Balanced Portfolio................................................................
AST Putnam Value Growth & Income Portfolio....................................................................
AST Putnam International Equity Portfolio.....................................................................
AST Putnam Balanced Portfolio.................................................................................
Cohen & Steers Real Estate Investment Portfolio...............................................................
Stein Roe Small Cap Blend Portfolio...........................................................................
Bankers Trust Enhanced 500 Index Portfolio....................................................................
Marsico Capital Growth Portfolio..............................................................................
Certain Risk Factors and Investment Methods........................................................................
Regulatory Matters.................................................................................................
Portfolio Turnover.................................................................................................
Brokerage Allocation...............................................................................................
Investment Restrictions............................................................................................
Net Asset Values...................................................................................................
Purchase and Redemption of Shares..................................................................................
Organization and Management of the Trust...........................................................................
Tax Matters........................................................................................................
Description of Shares of the Trust.................................................................................
Performance........................................................................................................
Transfer and Shareholder Servicing Agent...........................................................................
Custodian..........................................................................................................
Counsel and Auditors...............................................................................................
Other Information..................................................................................................
</TABLE>
<PAGE>
PORTFOLIO ANNUAL EXPENSES (as a percentage of average net assets): Unless
otherwise indicated, the expenses shown below are for the year ending December
31, 1996. "N/A" indicates that no entity has agreed to reimburse the particular
expense indicated. The expenses of the portfolios either are currently being
partially reimbursed or may be partially reimbursed in the future. Management
Fees, Other Expenses and Total Annual Expenses are provided on both a reimbursed
and not reimbursed basis, if applicable.
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)
NONE* Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price) NONE* Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable) NONE* Redemption Fees (as a
percentage of amount redeemed, if applicable) NONE* Exchange Fee NONE*
* Because shares of the Portfolios may be purchased through variable insurance
contacts, the prospectus of the Participating Insurance Company sponsoring such
contract should be carefully reviewed for information on relevant charges and
expenses. The table on the following page does not reflect any such charges.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets)
<S> <C> <C> <C> <C> <C> <C>
Total Total
Annual Annual
Management Management Other Other Expenses Expenses
Fee Fee Expenses Expenses after any without any
after any without any after any without any applicable applicable
Portfolio: voluntary voluntary applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
- ---------------------------------------------------------------------------------------------------------------------------
Lord Abbett Growth and Income N/A 0.75% N/A 0.22% N/A 0.97%
Lord Abbett Small Cap Value(1) [INSERT] [INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
JanCap Growth N/A 0.90% N/A 0.20% N/A 1.10%
AST Janus Overseas Growth(2) N/A 1.00% N/A 0.42% N/A 1.42%
AST Money Market 0.45% 0.50% 0.15% 0.21% 0.60% 0.71%
Federated Utility Income N/A 0.67% N/A 0.26% N/A 0.93%
Federated High Yield N/A 0.75% N/A 0.28% N/A 1.03%
T. Rowe Price Asset Allocation N/A 0.85% N/A 0.35% N/A 1.20%
T. Rowe Price International Equity N/A 1.00% N/A 0.30% N/A 1.30%
T. Rowe Price Natural Resources N/A 0.90% N/A 0.40% N/A 1.30%
T. Rowe Price International Bond(3) N/A 0.80% N/A 0.36% N/A 1.16%
T. Rowe Price Small Company Value(2) N/A 0.90% N/A 0.37% N/A 1.27%
Founders Capital Appreciation N/A 0.90% N/A 0.26% N/A 1.16%
Founders Passport(4) N/A 1.00% N/A 0.36% N/A 1.36%
INVESCO Equity Income N/A 0.75% N/A 0.23% N/A 0.98%
PIMCO Total Return Bond N/A 0.65% N/A 0.24% N/A 0.89%
PIMCO Limited Maturity Bond N/A 0.65% N/A 0.24% N/A 0.89%
Berger Capital Growth N/A 0.75% N/A 0.26% N/A 1.01%
Robertson Stephens Value + Growth(5) N/A 1.00% N/A 0.24% N/A 1.24%
Robertson Stephens Contrarian(1) [INSERT] [INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
Twentieth Century International Growth(2) N/A 1.00% N/A 0.42% N/A 1.42%
Twentieth Century Strategic Balanced(2)N/A 0.85% N/A 0.33% N/A 1.18%
AST Putnam Value Growth & Income(2) N/A 0.75% N/A 0.33% N/A 1.08%
AST Putnam International Equity(6) N/A 0.89% N/A 0.27% N/A 1.16%
AST Putnam Balanced(7) N/A 0.75% N/A 0.24% N/A 0.99%
Cohen & Steers Real Estate Investment(1)[INSERT][INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
Stein Roe Small Cap Blend(1) [INSERT] [INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
Bankers Trust Enhanced 500 Index(1)[INSERT] [INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
Marsico Capital Growth(1) [INSERT] [INSERT] [INSERT] [INSERT] [INSERT] [INSERT]
</TABLE>
(1) These Portfolios were first offered as of the date of this Prospectus.
"Other Expenses" shown are based on estimated amounts for the current fiscal
year. (2) These Portfolios commenced operation in January, 1997. "Other
Expenses" shown are based on estimated amounts for the current fiscal year. (3)
Prior to May 1, 1996, the Investment Manager had engaged Scudder, Stevens &
Clark, Inc. as Sub-advisor for the Portfolio, for a total Investment Management
fee payable at the annual rate of 1.00% of the average daily net assets of the
Portfolio. As of May 1, 1996, the Investment Manager engaged Rowe Price-Fleming
International, Inc. as Sub-advisor for the Portfolio, for a total Investment
Management fee payable at the annual rate of .80% of the average daily net
assets of the Portfolio. The Management Fee in the above chart reflects the
current Investment Management fee payable to the Investment Manager. (4) Prior
to October 15, 1996, the Investment Manager had engaged Seligman Henderson Co.
as Sub-advisor for the Portfolio, for a total Investment Management fee payable
at the annual rate of 1.0% of the average daily nets assets of the Portfolio. As
of October 15, 1996, the Investment Manager engaged Founders Asset Management,
Inc. as Sub-advisor for the Portfolio, for a total Investment Management fee
payable at the annual rate of 1.0% of the average daily net assets of the
Portfolio. The Management Fee in the above chart reflects the current Investment
Management fee payable to the Investment Manager. (5) This Portfolio commenced
operation in May, 1996. Expenses shown are annualized. (6) Prior to October 15,
1996, the Investment Manager had engaged Seligman Henderson Co. as Sub-advisor
for the Portfolio, for a total Investment Management fee payable at the annual
rate of 1.0% of the average daily nets assets of the Portfolio. The Investment
Manager had also voluntarily agreed to waive a portion of its fee equal to .15%
on assets in excess of $75 million. As of October 15, 1996, the Investment
Manager engaged Putnam Investment Management, Inc. as Sub-advisor for the
Portfolio, for a total Investment Management fee payable at the annual rate of
1.0% of the average daily net assets of the Portfolio not in excess of $75
million; plus .85% of the Portfolio's average daily net assets over $75 million.
The Management Fee in the above chart reflects the current Investment Management
fee payable to the Investment Manager. (7) Prior to October 15, 1996, the
Investment Manager had engaged Phoenix Investment Counsel, Inc. as Sub-advisor
for the Portfolio, for a total Investment Management fee payable at the annual
rate of .75% of the average daily net assets of the Portfolio not in excess of
$75 million; plus .65% of the Portfolio's average daily net assets in excess of
$75 million. As of October 15, 1996, the Investment Manager engaged Putnam
Investment Management, Inc. as Sub-advisor for the Portfolio, for a total
Investment Management fee payable at the annual rate of .75% of the average
daily net assets of the Portfolio not in excess of $300 million; plus .70% of
the Portfolio's average daily net assets in excess of $300 million. The
Management Fee in the above chart reflects the current Investment Management fee
payable to the Investment Manager.
EXPENSE EXAMPLES:
The examples shown assume that the total annual expenses for the Portfolios
throughout the period specified will be the lower of the total annual expenses
without any applicable reimbursement or expenses after any applicable
reimbursement.
You would pay the following expenses rounded to the nearest dollar on a
$1,000 investment, assuming a 5% hypothetical annual return at the end of each
time period shown below:
<TABLE>
<CAPTION>
After:
<S> <C> <C> <C> <C>
Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
- --------- ------------------------------------------------------------
Lord Abbett Growth and Income 10 31 54 120
Lord Abbett Small Cap Value [INSERT] [INSERT] N/A N/A
JanCap Growth 11 35 61 135
AST Janus Overseas Growth 15 46 N/A N/A
AST Money Market 6 19 33 75
Federated Utility Income 10 30 52 116
Federated High Yield 11 33 57 126
T. Rowe Price Asset Allocation 12 38 66 145
T. Rowe Price International Equity 13 41 71 156
T. Rowe Price Natural Resources 13 41 71 156
T. Rowe Price International Bond 12 37 64 141
T. Rowe Price Small Company 13 40 N/A N/A
Founders Capital Appreciation 12 37 64 141
Founders Passport 14 43 74 163
INVESCO Equity Income 10 31 54 120
PIMCO Total Return Bond 9 28 49 110
PIMCO Limited Maturity Bond 9 28 49 110
Berger Capital Growth 10 32 56 125
Robertson Stephens Value + Growth 13 40 69 151
Robertson Stephens Contrarian [INSERT] [INSERT] N/A N/A
Twentieth Century International Growth 15 46 N/A N/A
Twentieth Century Strategic Balanced 12 38 N/A N/A
AST Putnam Value Growth & Income 11 34 N/A N/A
AST Putnam International Equity 12 37 64 141
AST Putnam Balanced 10 32 55 121
Cohen & Steers Real Estate Investment [INSERT] [INSERT] N/A N/A
Stein Roe Small Cap Blend [INSERT] [INSERT] N/A N/A
Bankers Trust Enhanced 500 Index [INSERT] [INSERT] N/A N/A
Marsico Capital Growth [INSERT] [INSERT] N/A N/A
</TABLE>
The above tables are provided to assist you in understanding the various costs
and expenses that you would bear directly or indirectly as an investor in the
Portfolio(s). THE ABOVE EXPENSE EXAMPLES ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED AS A REPRESENTATION OF THE PORTFOLIOS' PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
<PAGE>
FINANCIAL HIGHLIGHTS (Selected Per Share Data for an Average Share Outstanding
and Ratios Throughout Each Period): The tables below contain unaudited financial
information and financial information which has been audited in conjunction with
the annual audits of the financial statements of American Skandia Trust by
Deloitte & Touche LLP, Independent Auditors. Audited Financial Statements for
the year ended December 31, 1996 and the Independent Auditors' Report thereon,
and unaudited Financial Statements for the period ended June 30, 1997, are
included in the Trust's SAI, which is available without charge upon request to
the Trust at One Corporate Drive, Shelton, Connecticut or by calling (800)
752-6342. Further information about the performance of the Portfolios is
contained in the annual reports of the separate accounts funding the variable
annuity contracts and variable life insurance policies, which also may be
obtained without charge upon request to the Trust at that address or phone
number. The information presented in these financial highlights is historical
and is not intended to indicate future performance of the Portfolios. No
financial information is included for the Lord Abbett Small Cap Value Portfolio,
the Robertson Stephens Contrarian Portfolio, the Cohen & Steers Real Estate
Investment Portfolio, the Stein Roe Small Cap Blend Portfolio, the Bankers Trust
Enhanced 500 Index Portfolio, or the Marsico Capital Growth Portfolio, as these
Portfolios were first offered as of the date of this Prospectus.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam
International
Equity** 06/30/97* $ 19.22 $ 0.17 $ 2.90 $ 3.07 $ (0.30) $ (0.95) $ (1.25) $21.04
12/31/96 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69) 19.22
12/31/95 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
12/31/94 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
12/31/93 12.74 0.14 4.46 4.60 -- -- -- 17.34
12/31/92 13.90 (0.17) (0.99) (1.16) -- -- -- 12.74
12/31/91 12.99 0.01 0.90 0.91 -- -- -- 13.90
12/31/90 13.76 0.22 (0.63) (0.41) (0.23) (0.13) (0.36) 12.99
12/31/89(2) 10.00 0.06 3.70 3.76 -- -- -- 13.76
Lord Abbett
Growth and
Income 06/30/97* $ 17.17 $ 0.13 $ 2.60 $ 2.73 $ (0.23) $ (0.41) $ (0.64) $19.26
12/31/96 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52) 17.17
12/31/95 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
12/31/94 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
12/31/93 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
12/31/92(3) 10.00 0.07 0.63 0.70 -- -- -- 10.70
JanCap Growth 06/30/97* $ 18.79 $ 0.03 $ 3.42 $ 3.45 $ (0.05) $ (0.81) $ (0.86) $21.38
12/31/96 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82) 18.79
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
12/31/93 10.53 0.03 1.22 1.25 -- -- -- 11.78
12/31/92(4) 10.00 (0.01) 0.54 0.53 -- -- -- 10.53
AST Money
Market 06/30/97* $ 1.00 $ 0.0248 $ 0.0002 $ 0.0250 $ (0.0248) $(0.0002) $ (0.0250) $ 1.00
12/31/96 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497) 1.00
12/31/95 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
12/31/94 1.00 0.0367 0.0002 0.0369 (0.0367) (0.0002) (0.0369) 1.00
12/31/93 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
12/31/92(5) 1.00 0.0032 -- 0.0032 (0.0032) -- (0.0032) 1.00
Federated
Utility
Income 06/30/97* $ 12.83 $ 0.21 $ 0.91 $ 1.12 $ (0.36) $ (0.51) $ (0.87) $13.08
12/31/96 11.94 0.36 0.97 1.33 (0.44) -- (0.44) 12.83
12/31/95 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
12/31/94 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
12/31/93(6) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam
Balanced*** 06/30/97* $ 13.19 $ 0.18 $ 1.16 $ 1.34 $ (0.31) $ (1.42) $ (1.73) $12.80
12/31/96 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68) 13.19
12/31/95 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
12/31/94 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
12/31/93(6) 10.00 0.08 0.49 0.57 -- -- -- 10.57
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
* Unaudited.
** Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor to
the AST Putnam International Equity Portfolio (formerly, the Seligman
Henderson International Equity Portfolio). Putnam Investment Management,
Inc. has served as Sub-advisor to the Portfolio since October 15, 1996.
*** Prior to October 15, 1996, Phoenix Investment Counsel, Inc. served as
Sub-advisor to the AST Putnam Balanced Portfolio (formerly, the AST Phoenix
Balanced Asset Portfolio). Putnam Investment Management, Inc. has served as
Sub-advisor to the Portfolio since October 15, 1996.
(1) Annualized.
(2) Commenced operations on April 19, 1989.
(3) Commenced operations on May 1, 1992.
(4) Commenced operations on November 6, 1992.
(5) Commenced operations on November 10, 1992.
(6) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
16.82% $ 405,066 72% $ 0.0317 1.15%(1) 1.15%(1) 1.73%(1) 1.73%(1)
9.65% 346,211 124% 0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
(8.35%) 24,998 55% -- 2.50% 2.50% (1.62%) (1.62%)
7.01% 15,892 59% -- 2.50% 2.82% 0.12% (0.20%)
(2.97%) 6,015 76% -- 2.38% 8.80% 1.67% (4.75%)
37.60% 1,299 55% -- 1.17%(1) 67.51%(1) 3.72%(1) (62.62%)(1)
16.26% $ 725,789 27% $ 0.0632 0.94%(1) 0.94%(1) 1.78%(1) 1.78%(1)
18.56% 530,497 43% 0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
7.00% 10,159 34% -- 0.99%(1) 1.75%(1) 2.49%(1) 1.73%(1)
18.82% $ 1,302,467 48% $ 0.0644 1.08%(1) 1.08%(1) 0.35%(1) 0.35%(1)
28.36% 892,324 79% 0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
2.50% $ 648,702 N/A N/A 0.60%(1) 0.64%(1) 4.99%(1) 4.95%(1)
5.08% 549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
0.32% 4,294 N/A -- 0.65%(1) 1.15%(1) 2.43%(1) 1.93%(1)
9.15% $ 129,904 32% $ 0.0403 0.91%(1) 0.91%(1) 3.55%(1) 3.55%(1)
11.53% 123,138 81% 0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09%(1) 5.09%(1)
11.08% $ 321,020 141% $ 0.0437 1.02%(1) 1.02%(1) 3.04%(1) 3.04%(1)
11.23% 286,479 276% 0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53%(1) 2.53%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- --------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High
Yield 06/30/97* $ 12.13 $ 0.39 $ 0.31 $ 0.70 $(0.54) $(0.06) $ (0.60) $ 12.23
12/31/96 11.14 0.56 0.90 1.46 (0.47) -- (0.47) 12.13
12/31/95 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
12/31/94(2) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price
Asset
Allocation 06/30/97* $ 13.27 $ 0.16 $ 1.28 $ 1.44 $(0.26) $(0.24) $ (0.50) $ 14.21
12/31/96 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29) 13.27
12/31/95 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
12/31/94(2) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total
Return Bond 06/30/97* $ 11.11 $ 0.24 $ 0.09 $ 0.33 $(0.45) $ -- $ (0.45) $ 10.99
12/31/96 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59) 11.11
12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
12/31/94(2) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity
Income 06/30/97* $ 13.99 $ 0.15 $ 1.74 $ 1.89 $(0.26) $(0.37) $ (0.63) $ 15.25
12/31/96 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57) 13.99
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
12/31/94(2) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders
Capital
Appreciation 06/30/97* $ 16.80 $(0.02) $(0.16) $(0.18) $ -- $ -- $ -- $ 16.62
12/31/96 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27) 16.80
12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
12/31/94(2) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price
International
Equity 06/30/97* $ 12.07 $ 0.08 $ 1.25 $ 1.33 $(0.07) $(0.08) $ (0.15) $ 13.25
12/31/96 10.65 0.06 1.44 1.50 (0.08) -- (0.08) 12.07
12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
12/31/94(2) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price
International
Bond** 06/30/97* $ 10.90 $ 0.13 $(0.42) $(0.29) $(0.16) $(0.26) $ (0.42) $ 10.19
12/31/96 10.60 0.23 0.38 0.61 (0.14) (0.17) (0.31) 10.90
12/31/95 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
12/31/94(3) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
* Unaudited.
** Prior to May 1, 1996, Scudder Stevens & Clark served as Sub-advisor to the T.
Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio). Rowe Price-Fleming International, Inc. has
served as Sub-advisor to the Portfolio since May 1, 1996.
(1) Annualized.
(2) Commenced operations on January 4, 1994.
(3) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.97% $ 311,881 14% N/A 1.00%(1) 1.00%(1) 9.86% (1) 9.86%(1)
13.58% 205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06% (1) 8.87%(1)
11.20% $ 166,602 5% $ 0.0349 1.14%(1) 1.14%(1) 3.08% (1) 3.08%(1)
13.14% 120,149 31% 0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64% (1) 3.42%(1)
3.03% $ 462,623 159% N/A 0.88%(1) 0.88%(1) 5.73% (1) 5.73%(1)
3.42% 360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57% (1) 5.57%(1)
13.92% $ 475,969 38% $ 0.0600 0.96%(1) 0.96%(1) 2.69% (1) 2.69%(1)
17.09% 348,680 58% 0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41% (1) 3.41%(1)
(1.13%) $ 240,594 31% $ 0.0523 1.14%(1) 1.14%(1) (0.35%)(1) (0.35%)(1)
20.05% 220,068 69% 0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59% (1) 2.34%(1)
11.09% $ 515,359 8% $ 0.0232 1.26%(1) 1.26%(1) 1.41% (1) 1.41%(1)
14.17% 402,559 11% 0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45% (1) 0.43%(1)
(2.56%) $ 125,263 90% N/A 1.10%(1) 1.10%(1) 4.76% (1) 4.76%(1)
5.98% 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03% (1) 7.03%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ---------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Berger
Capital
Growth 06/30/97* $ 14.39 $ 0.01 $ 0.88 $ 0.89 $(0.02) $(0.13) $ (0.15) $15.13
12/31/96 12.40 0.01 2.01 2.02 (0.03) -- (0.03) 14.39
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
12/31/94(2) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders
Passport** 06/30/97* $ 11.63 $ 0.02 $ 0.81 $ 0.83 $(0.08) $(0.01) $ (0.09) $12.37
12/31/96 10.33 0.09 1.24 1.33 (0.03) -- (0.03) 11.63
12/31/95(3) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe
Price
Natural
Resources 06/30/97* $ 14.47 $ 0.07 $ 0.79 $ 0.86 $(0.07) $(0.32) $ (0.39) $14.94
12/31/96 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04) 14.47
12/31/95(3) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO
Limited
Maturity
Bond 06/30/97* $ 10.81 $ 0.26 $ 0.08 $ 0.34 $(0.56) $ -- $ (0.56) $10.59
12/31/96 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
12/31/95(3) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson
Stephens
Value +
Growth 06/30/97* $ 10.99 $(0.02) $ 1.73 $ 1.71 -- -- -- $12.70
12/31/96(4) 10.00 (0.01) 1.00 0.99 -- -- -- 10.99
AST Janus
Overseas
Growth 06/30/97(5) $ 10.00 $ 0.06 $ 1.56 $ 1.62 -- -- -- $11.62
AST Putnam
Value
Growth &
Income 06/30/97(5) $ 10.00 $ 0.04 $ 1.38 $ 1.42 -- -- -- $11.42
Twentieth
Century
Strategic
Balanced 06/30/97(5) $ 10.00 $ 0.05 $ 0.61 $ 0.66 -- -- -- $10.66
Twentieth
Century
Inter-
national
Growth 06/30/97(5) $ 10.00 $ 0.02 $ 1.55 $ 1.57 -- -- -- $11.57
T. Rowe
Price
Small
Company
Value 06/30/97(5) $ 10.00 $ 0.03 $ 1.35 $ 1.38 -- -- -- $11.38
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
* Unaudited.
** Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor to
the Founders Passport Portfolio (formerly, the Seligman Henderson
International Small Cap Portfolio). Founders Asset Management, Inc. has
served as Sub-advisor to the Portfolio since October 15, 1996.
(1) Annualized.
(2) Commenced operations on October 20, 1994.
(3) Commenced operations on May 2, 1995.
(4) Commenced operations on May 2, 1996.
(5) Commenced operations on January 2, 1997 (unaudited).
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6.29% $ 152,523 158% $ 0.0605 0.99%(1) 0.99%(1) 0.20%(1) 0.20%(1)
16.34% 136,247 156% 0.0614 1.01% 1.01% 0.24% 0.24%
24.42% 45,979 84% -- 1.17% 1.17% 0.70% 0.70%
(0.30%) 3,030 5% -- 1.25%(1) 1.70%(1) 1.41%(1) 0.97%(1)
7.14% $ 133,235 29% $ 0.0108 1.32%(1) 1.32%(1) 0.39%(1) 0.39%(1)
12.91% 117,643 133% 0.0190 1.36% 1.36% 1.25% 1.25%
3.30% 28,455 4% -- 1.46%(1) 1.46%(1) 0.94%(1) 0.94%(1)
6.02% $ 108,557 28% $ 0.0210 1.17%(1) 1.17%(1) 1.07%(1) 1.07%(1)
30.74% 88,534 31% 0.0238 1.30% 1.30% 1.08% 1.08%
11.10% 9,262 2% -- 1.35%(1) 1.80%(1) 1.28%(1) 0.83%(1)
3.26% $ 261,194 21% N/A 0.89%(1) 0.89%(1) 5.77%(1) 5.77%(1)
3.90% 209,013 247% N/A 0.89% 0.89% 5.69% 5.69%
4.70% 161,940 205% -- 0.89%(1) 0.89%(1) 4.87%(1) 4.87%(1)
15.56% $ 140,419 91% $ 0.0565 1.24%(1) 1.24%(1) (0.40%)(1) (0.40%)(1)
9.90% 48,790 77% 0.0529 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
16.20% $ 125,357 22% $ 0.0207 1.29%(1) 1.29%(1) 2.53%(1) 2.53%(1)
14.20% $ 56,396 37% $ 0.0334 1.11%(1) 1.11%(1) 2.03%(1) 2.03%(1)
6.60% $ 12,804 6% $ 0.0289 1.25%(1) 1.42%(1) 2.32%(1) 2.15%(1)
15.70% $ 18,675 54% $ 0.0072 1.66%(1) 1.66%(1) 1.32%(1) 1.32%(1)
13.80% $ 63,805 2% $ 0.0460 1.20%(1) 1.20%(1) 1.20%(1) 1.20%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES: The investment objective and policies for
each of the Portfolios are described below, and should be considered separately.
While certain policies apply to all Portfolios, generally each Portfolio has a
different investment objective and certain policies may vary. As a result, the
risks, opportunities and returns in each Portfolio may differ. Those investment
policies specifically labeled as "fundamental" may not be changed without
approval of the shareholders of the affected Portfolio. Each Portfolio's
investment objective or investment policies, unless otherwise specified, is not
a fundamental policy and may be changed without shareholder approval. There can
be no assurance that any Portfolio's investment objective will be achieved. Risk
factors in relation to various securities and instruments in which the
Portfolios may invest are described in the sections of this Prospectus and the
Trust's SAI entitled "Certain Risk Factors and Investment Methods." Additional
information about the investment objectives and policies of each Portfolio may
be found in the Trust's SAI under "Investment Objectives and Policies."
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Lord, Abbett & Co.: Lord Abbett Growth and
Income Portfolio, Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio; (c)
J.P. Morgan Investment Management, Inc.: AST Money Market Portfolio; (d)
Federated Investment Counseling: Federated Utility Income Portfolio, Federated
High Yield Portfolio; (e) T. Rowe Price Associates, Inc.: T. Rowe Price Asset
Allocation Portfolio, T. Rowe Price Natural Resources Portfolio, T. Rowe Price
Small Company Value Portfolio; (f) Rowe Price-Fleming International, Inc.: T.
Rowe Price International Equity Portfolio, T. Rowe Price International Bond
Portfolio; (g) Founders Asset Management, Inc.: Founders Capital Appreciation
Portfolio, Founders Passport Portfolio; (h) INVESCO Trust Company: INVESCO
Equity Income Portfolio; (i) Pacific Investment Management Company: PIMCO Total
Return Bond Portfolio, PIMCO Limited Maturity Bond Portfolio; (j) Berger
Associates, Inc.: Berger Capital Growth Portfolio; (k) Robertson, Stephens &
Company Investment Management, L.P.: Robertson Stephens Value + Growth
Portfolio, Robertson Stephens Contrarian Portfolio; (l) American Century
Investment Management, Inc. (formerly, Investors Research Corporation):
Twentieth Century International Growth Portfolio, Twentieth Century Strategic
Balanced Portfolio; (m) Putnam Investment Management, Inc.: AST Putnam Value
Growth & Income Portfolio, AST Putnam International Equity Portfolio, AST Putnam
Balanced Portfolio; (n) Cohen & Steers Capital Management, Inc.: Cohen & Steers
Real Estate Investment Portfolio; (o) Stein Roe & Farnham Incorporated: Stein
Roe Small Cap Blend Portfolio; (p) Bankers Trust Global Investment Management:
Bankers Trust Enhanced 500 Index Portfolio; (q) Marsico Capital Management, LLC:
Marsico Capital Growth Portfolio.
Subject to approval of the Board of Trustees of the Trust, the Trust
may add one or more portfolios and may cease to offer one or more portfolios,
any such cessation to be subject to obtaining required regulatory approvals.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Portfolio is
long-term growth of capital and income while attempting to avoid excessive
fluctuations in market value. This is a fundamental objective of the Portfolio.
Investment Policies:
The Sub-advisor will try to keep the Portfolio's assets invested in
those securities which are selling at reasonable prices in relation to value. To
do so, the Portfolio may forgo some opportunities for gains when, in the
judgment of the Sub-advisor, they carry excessive risk. The Sub-advisor will try
to anticipate major changes in the economy and select stocks for the Portfolio
which it believes will benefit most from these changes.
The Portfolio normally will invest in common stocks (including
securities convertible into common stocks) of seasoned companies which are
expected to show above-average growth and which the Sub-advisor believes to be
in sound financial condition. Although the prices of common stocks fluctuate and
their dividends vary, historically, common stocks held over long periods of time
have appreciated in value and their dividends have increased when the companies
they represent have prospered and grown.
The Sub-advisor will be constantly balancing the opportunity for profit
against the risk of loss for the Portfolio. In the past, very few industries
have continuously provided the best investment opportunities. The Sub-advisor
will take a flexible approach and adjust the Portfolio to reflect changes in the
opportunity for sound investments relative to the risks assumed. Therefore, the
Portfolio will sell securities that the Sub-advisor judges to be overpriced and
reinvest the proceeds in other securities which the Sub-advisor believes offer
better values.
At such times that the Sub-advisor deems appropriate and consistent
with this Portfolio's investment objective, the Portfolio may: (a) write covered
call options which are traded on a national securities exchange with respect to
securities in the Portfolio; (b) invest up to 10% of the Portfolio's net assets
(at the time of investment) in foreign securities; and (c) invest in straight
bonds and other debt securities, including lower-rated high-yield bonds. It is
not intended for the Portfolio to write covered call options with respect to
securities with an aggregate market value of more than 10% of the Portfolio's
gross assets at the time an option is written. For a discussion of the risks
involved in options transactions and in investing in lower-rated high-yield debt
securities or foreign securities, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods." For an additional description of
covered options, see the Trust's SAI under "Investment Objectives and Policies."
The Portfolio will not purchase securities for trading purposes. To
create reserve purchasing power and also for temporary defensive purposes, the
Portfolio may invest in short-term debt and other high quality fixed-income
securities.
Lending Portfolio Securities. The Portfolio may engage in the lending of
its securities. It is expected that no more that 5% of the Portfolio's gross
assets may be committed to securities lending. For a discussion of the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated (BB/Ba or lower)
high-yield bonds. For a description of these instruments and the risks involved
therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in securities eligible for
resale pursuant to Rule 144A of the Securities Act of 1933. For a discussion of
these instruments and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio
and risks involved in borrowing, see this Prospectus under "Certain Risk Factors
and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Lord Abbett Small Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term capital appreciation. This is a fundamental objective of the
Portfolio.
Investment Policies:
The Portfolio will seek its objective through investments primarily in
equity securities which are believed to be undervalued in the marketplace. In
its search for value, the Portfolio seeks companies which are primarily
small-sized, based on the value of their outstanding stock. As a result, under
normal circumstances, at least 65% of the Portfolio's total assets will be
invested in common stocks issued by smaller, less well-known companies (with
market capitalizations of less than $1 billion) selected on the basis of
fundamental investment analysis. The Portfolio may invest up to 35% of its total
assets in the securities of issuers without regard to their size or the market
capitalization of their common stock.
The stocks in which the Portfolio generally invests are those which, in
the Sub-advisor's judgment, are selling below intrinsic value and at prices that
do not adequately reflect their long-term business potential. Selected smaller
stocks may be undervalued because they are often overlooked by many investors,
or because the public is overly pessimistic about a company's prospects.
Accordingly, their prices can rise either as a result of improved business
fundamentals, particularly when earnings grow faster than general expectations,
or as more investors come to recognize the full extent of a company's underlying
potential. The price of shares in relation to book value, sales, asset value,
earnings, dividends and cash flow, both historical and prospective, are key
determinants in the security selection process. These criteria are not rigid,
and other stocks may be included in the Portfolio's portfolio if they are
expected to help it attain its objective.
Dividend and investment income is of incidental importance, and the
Portfolio may invest in securities which do not produce any income. Although the
Portfolio typically will hold a large, diversified number of securities
identified through a quantitative, value-driven investment strategy, it does
entail above-average investment risk in comparison to the overall U.S. stock
market. Shares of the Portfolio should be purchased with a long-term view in
mind.
The Portfolio also may invest in preferred stocks and bonds, which have
either attached warrants or a conversion privilege into common stocks. In
addition, the Portfolio may: purchase options on stocks that it holds as
protection against a significant price decline; purchase and sell stock index
options and futures to hedge overall market risk and the investment of cash
flows; and write listed put and listed covered call options. See "Hedging and
Income Enhancement Strategies" below.
Risks of Small Cap Investing. Although the Portfolio may invest, from
time to time, in stocks of large-sized and small-sized companies guided by the
policies mentioned above, the small capitalized companies in which it primarily
invests may offer significant appreciation potential. However, smaller companies
may carry more risk than larger companies. Generally, small companies rely on
limited product lines and markets, financial resources, or other factors, and
this may make them more susceptible to setbacks or economic downturns. Small
capitalized companies may be more volatile in price, normally have fewer shares
outstanding and trade less frequently than large companies. Therefore, the
securities of smaller companies may be subject to wider price fluctuations. In
many instances, the securities of smaller companies are traded over the counter
and may not be traded in the volume typical of securities traded on a national
securities exchange.
Hedging and Income Enhancement Strategies. The Portfolio may engage in
various portfolio strategies to reduce certain risks of its investments and to
attempt to enhance income, but not for speculation. These strategies include the
purchase and sale of put and call options, the purchase and sale of stock index
futures, and combinations of these investment practices. The Sub-advisor will
use such techniques as market conditions warrant. The Portfolio's ability to use
these strategies may be limited by market conditions, regulatory limitations and
tax considerations and there can be no assurance that any of these strategies
will succeed. New financial products and risk management techniques continue to
be developed and the Portfolio may use these new investments and techniques to
the extent consistent with its investment objective and policies.
Options Transactions. The Portfolio may purchase and write
(i.e., sell) put and call options on equity securities or stock indices that are
traded on national securities exchanges. The Portfolio will write only "covered"
options. An option is covered if, so long as the Portfolio is obligated under
the option, it owns an offsetting position in the underlying securities or
maintains cash or other liquid assets with a value sufficient at all times to
cover its obligations in a segregated account. For an additional discussion of
options transactions and certain risks involved therein, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Apart from the requirement that call options be covered, there
is no limitation on the amount of such options the Portfolio may write. The
Portfolio does not currently intend to write covered call options with respect
to securities with an aggregate market value of more than 5% of its gross assets
at the time an option is written. The Portfolio may only write covered put
options to the extent that cover for such options does not exceed 25% of the
Portfolio's net assets. The Portfolio will not purchase an option if, as a
result of such purchase, more than 20% of its total assets would be invested in
premiums for such options. For an additional discussion of the Portfolio's
limitations with respect to options transactions, see the Trust's SAI under
"Investment Objectives and Policies."
Stock Index Futures. The Portfolio may purchase and sell stock
index futures, which are traded on a commodities exchange or board of trade for
certain hedging and risk management purposes, in accordance with regulations of
the Commodities Futures Trading Commission. The Portfolio may not purchase or
sell stock index futures if, immediately thereafter, more than one-third of its
net assets would be hedged. In addition, except in the case of a call written
and held on the same index, the Portfolio will write call options on indices or
sell stock index futures only if the amount resulting from the multiplication of
the then current level of the index (or indices) upon which the options or
futures contract(s) is based, the applicable multiplier(s), and the number of
futures or options contracts which would be outstanding would not exceed
one-third of the value of the Portfolio's net assets. For a discussion of
futures contracts and related options and certain risks involved therein, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
The Portfolio's ability to enter into stock index futures and
listed options is limited by the requirements of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company ("RIC"). For a discussion of the requirements for qualification as a RIC
under the Code, see this Prospectus under "Tax Matters."
Foreign Investments. The Portfolio may invest up to 35% of its net
assets (at the time of investment) in securities (of the type described above)
that are primarily traded in foreign countries. For a discussion of the risks
involved in foreign investing, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Foreign Currency Hedging Techniques. The Portfolio may enter into
forward foreign currency contracts. The Portfolio also may purchase foreign
currency put options and write foreign currency call options on U.S. exchanges
or U.S. over-the-counter markets (OTC options are generally less liquid and
involve issuer credit risk). A foreign currency put option gives the Portfolio,
upon payment of a premium, the right to sell a currency at the exercise price
until the expiration of the option and serves to insure against adverse currency
price movements in the underlying portfolio assets denominated in that currency.
The premiums paid for such foreign currency put options will not exceed 5% of
the net assets of the Portfolio. A foreign currency call option written by the
Portfolio gives the purchaser, upon payment of a premium, the right to purchase
from the Portfolio a currency at the exercise price until the expiration of the
option. The Portfolio may write a call option on a foreign currency only in
conjunction with a purchase of a put option on that currency. Such a strategy is
designed to reduce the cost of downside currency protection by limiting currency
appreciation potential. The face value of such writing or cross-hedging
(described above) may not exceed 90% of the value of the securities denominated
in such currency (a) invested in by the Portfolio to cover such call writing or
(b) to be crossed. Unlisted options, together with other illiquid securities,
may comprise no more than 15% of the Portfolio's net assets. For an additional
discussion of foreign currency transactions and certain risks involved therein,
see this Prospectus and the Trust's SAI under "Certain Risks Factors and
Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may, on occasion, enter into repurchase
agreements whereby the seller of a security agrees to repurchase that security
at a mutually agreed-upon time and price. The Portfolio's repurchase agreements
will at all times be fully collateralized in an amount at least equal to the
purchase price, including accrued interest earned on the underlying securities.
The instruments held as collateral are valued daily, and if the value of the
instruments declines, the Portfolio will require additional collateral. For an
additional discussion of repurchase agreements and certain risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued Securities. The Portfolio may purchase or sell securities
on a when-issued or delayed delivery basis. At the time of delivery of
securities so purchased, the value may be more or less than the purchase price
and an increase in the percentage of the Portfolio's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may increase
the volatility of the Portfolio's net asset value. For an additional discussion
of when-issued securities and certain risks involved therein, see the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may make short sales of securities or
maintain a short position, provided that at all times when a short position is
open the Portfolio owns an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further consideration,
for an equal amount of the securities of the same issuer as the securities sold
short (a "short sale against-the-box"), and that not more than 25% of the
Portfolio's net assets (determined at the time of the short sale) may be subject
to such sales. Notwithstanding this 25% limitation, the Portfolio does not
currently intend to have more than 5% of its net assets (determined at the time
of the short sale) subject to short sales against-the-box.
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. Securities determined by the Trustees to be liquid pursuant
to Rule 144A under the Securities Act of 1933 (the "Rule") will not be subject
to this limit. Investments in Rule 144A securities initially determined to be
liquid could have the effect of diminishing the level of the Portfolio's
liquidity during periods of decreased market interest in such securities. Under
the Rule, a qualifying unregistered security may be resold to a qualified
institutional buyer without registration and without regard to whether the
seller originally purchased the security for investment.
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Temporary Investments. For temporary defensive purposes or to create
reserve purchasing power pending other investments, the Portfolio may invest in
high-quality, short-term debt obligations of banks, corporations or the U.S.
Government of the type normally owned by a money market fund. Neither an
issuer's ceasing to be rated investment grade nor a rating reduction below that
grade will require elimination of a bond from the Portfolio's portfolio.
Other Investment Policies. The Portfolio may invest in (a) other
investment companies to the extent permitted under applicable law, and (b)
straight bonds or other debt securities, including lower rated, high-yield
bonds. The Portfolio has no present intention to commit more than 5% of gross
assets to any one of these identified practices. The Portfolio will not invest
more than 5% of its assets (at the time of investment) in lower rated (BB/Ba or
lower), high-yield bonds. For a discussion of certain risks involved in
investing in lower rated securities, see this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods." For a description of
securities ratings, see the Appendix to the Trust's SAI.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the 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 SAI under "Certain Risk Factors and Investment Methods."
Although it is the general policy of the Portfolio to purchase and hold
securities for capital growth, changes in the Portfolio will be made as the
Sub-advisor deems advisable. For example, portfolio changes may result from
liquidity needs, securities having reached a price objective, or by reason of
developments not foreseen at the time of the original investment decision.
Portfolio changes may be effected for other reasons. In such circumstances,
investment income will increase and may constitute a large portion of the return
on the Portfolio and the Portfolio will not participate in the market advances
or declines to the extent that it would if it were fully invested.
The Portfolio may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and depositary
receipts. Foreign securities are selected on a stock-by-stock basis without
regard to any defined allocation among countries or geographic regions. However,
certain factors such as expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships, and
prospects for economic growth among countries, regions or geographic areas may
warrant greater consideration in selecting foreign stocks. No more than 25% of
the Portfolio's assets may be invested in foreign securities denominated in
foreign currency and not publicly traded in the United States. For a discussion
of depositary receipts and the risks involved in investing in foreign
securities, including the risk of currency fluctuations, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. Subject to certain
limitations, the Portfolio may purchase and write options on securities,
financial indices, and foreign currencies, and may invest in futures contracts
on securities, financial indices, and foreign currencies ("futures contracts"),
options on futures contracts, forward contracts and swaps and swap-related
products. These instruments will be used primarily to hedge the Portfolio's
positions against potential adverse movements in securities prices, foreign
currency markets or interest rates. To a limited extent, the Portfolio may also
use derivative instruments for non-hedging purposes such as increasing the
Portfolio's income or otherwise enhancing return. The Portfolio will not use
futures contracts and options for leveraging purposes. There can be no
assurance, however, that the use of these instruments by the Portfolio will
assist it in achieving its investment objective. The use of futures, options,
forward contracts and swaps involves investment risks and transaction costs to
which the Portfolio would not be subject absent the use of these strategies. The
Sub-advisor may, from time to time, at its own expense, call upon the experience
of experts to assist it in implementing these strategies. The Portfolio may also
use a variety of currency hedging techniques, including forward currency
contracts, to manage exchange rate risk with respect to investments exposed to
foreign currency fluctuations. For an additional discussion of futures and
options transactions and the risks involved therein, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements,
which involve the purchase of a security by the Portfolio and a simultaneous
agreement (generally with a bank or dealer) to repurchase the security from the
Portfolio at a specified date or upon demand. The Portfolio's repurchase
agreements will at all times be fully collateralized. Pursuant to an exemptive
order granted by the Securities and Exchange Commission, the Portfolio and other
funds advised by the Sub-advisor may invest in repurchase agreements and other
money market instruments through a joint trading account. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price. For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio
may purchase securities on a when-issued or delayed delivery basis, which
generally involves the purchase of a security with payment and delivery due at
some time in the future. The Portfolio does not earn interest on such securities
until settlement and bears the risk of market value fluctuations between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may also invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
For a discussion of these instruments and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the
Portfolio may also borrow money from banks. For a discussion of the Portfolio's
limitations on borrowing and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Objectives and Policies."
Portfolio Turnover. Because investment changes usually will be made without
reference to the length of time a security has been held, a significant number
of short-term transactions may result. To a limited extent, the Portfolio may
also purchase individual securities in anticipation of relatively short-term
price gains, and the rate of portfolio turnover will not be a determining factor
in the sale of such securities. For a discussion of portfolio turnover and its
effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio pursues its objective primarily through investments in
common stocks of issuers located outside the United States. The Portfolio has
the flexibility to invest on a worldwide basis in companies and organizations of
any size, regardless of country of organization or place of principal business
activity.
The Portfolio normally invests at least 65% of its total assets in
securities of issuers from at least five different countries, excluding the
United States. Although the Portfolio intends to invest substantially all of its
assets in issuers located outside the United States, it may at times invest in
U.S. issuers and it may at times invest all of its assets in fewer than five
countries or even a single country.
The Portfolio invests primarily in common stocks of foreign issuers
selected for their growth potential. The Portfolio may invest to a lesser degree
in other types of securities, including preferred stocks, warrants, convertible
securities and debt securities. Debt securities that the Portfolio may purchase
include corporate bonds and debentures (not to exceed 35% of net assets in
high-yield/high-risk securities); government securities; mortgage- and
asset-backed securities (not to exceed 25% of assets); zero coupon bonds (not to
exceed 10% of assets); indexed/structured securities; high-grade commercial
paper; certificates of deposit; and repurchase agreements. Such securities may
offer growth potential because of anticipated changes in interest rates, credit
standing, currency relationships or other factors. The Portfolio may also invest
in short-term debt securities, including money market funds managed by the
Sub-advisor, as a means of receiving a return on idle cash.
When the Sub-advisor believes that market conditions are not favorable
for profitable investing or when the Sub-advisor is otherwise unable to locate
favorable investment opportunities, the Portfolio's investments may be hedged to
a greater degree and/or its cash or similar investments may increase. In other
words, the Portfolio does not always stay fully invested in stocks and bonds.
Cash or similar investments are a residual - they represent the assets that
remain after the Sub-advisor has committed available assets to desirable
investment opportunities. When the Portfolio's cash position increases, it may
not participate in stock market advances or declines to the extent that it would
if it remained more fully invested in common stocks.
The fundamental risk associated with any common stock fund is the risk
that the value of the stocks it holds might decrease. Stock values may fluctuate
in response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater short-term risks than other
investment choices. Smaller or newer issuers are more likely to realize more
substantial growth as well as suffer more significant losses than larger or more
established issuers. Investments in such companies can be both more volatile and
more speculative.
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 issuer will be recognized and appreciate in value due to a
specific development with respect to that issuer. Developments creating a
special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary corporate
event, or differences in market supply of and demand for the security.
Investment in special situations may carry 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 invest without limit in foreign
securities. The Portfolio may invest substantially all of its assets in common
stocks of foreign issuers to the extent the Sub-advisor believes that the
relevant market environment favors profitable investing in those securities. The
Sub-advisor generally takes a "bottom up" approach to building the Portfolio. In
other words, the Sub-advisor seeks to identify individual companies with
earnings growth potential that may not be recognized by the market at large
regardless of country of organization or place of principal business activity.
Although themes may emerge in the Portfolio, securities are generally selected
without regard to any defined allocation among countries, geographic regions or
industry sectors, or other similarly defined selection procedure. Realization of
income is not a significant investment consideration. Any income realized on the
Portfolio's investments will be incidental to its objective. For a discussion of
the risks involved in investing in foreign securities, including the risk of
currency fluctuations, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. The Portfolio may
use options, futures and other types of derivatives for hedging purposes or as a
means of enhancing return. The Portfolio may enter into futures contracts on
securities, financial indices and foreign currencies and options on such
contracts ("futures contracts") and may invest in options on securities,
financial indices and foreign currencies ("options"), forward contracts and
interest rate swaps and swap-related products (collectively "derivative
instruments"). The Portfolio intends to use most derivative instruments
primarily to hedge the value of its portfolio 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 seeking to increase the Portfolio's income or
otherwise seeking to enhance return.
Although the Sub-advisor believes the use of derivative instruments
will benefit the Portfolio, the Portfolio's performance could be worse than if
the Portfolio had not used such instruments if the Sub-advisor's judgment proves
incorrect.
When the Portfolio invests in a derivative instrument, it may be
required to segregate cash or other liquid assets with its custodian to "cover"
the Portfolio's position. Assets segregated or set aside generally may not be
disposed of so long as the Portfolio maintains the positions requiring
segregation or cover. Segregating assets could diminish the Portfolio's return
due to the opportunity losses of foregoing other potential investments with the
segregated assets.
The Portfolio may also use futures, options and other derivative
instruments to protect the portfolio from movements in securities prices and
interest rates. The Portfolio may also use a variety of currency hedging
techniques, including forward currency contracts, to manage exchange rate risk
with respect to investments exposed to foreign currency fluctuations. For an
additional discussion of futures and options transactions and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment Methods"
and the Trust's SAI under "Investment Objectives and Policies" and "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 SAI under
"Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may engage in a repurchase agreement
with respect to any security in which it is authorized to invest. Repurchase
agreements that mature in more than seven days will be subject to the 15% limit
on illiquid investments. While it is not possible to eliminate all risks from
these transactions, it is the policy of the Portfolio to limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Sub-advisor. 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 may use reverse repurchase
agreements to provide cash to satisfy unusually heavy redemption requests or for
other temporary or emergency purposes without the necessity of selling portfolio
securities, or to earn additional income on portfolio securities, such as
Treasury bills or notes. In a reverse repurchase agreement, the Portfolio sells
a security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Portfolio will maintain cash
and appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolio will enter into reverse repurchase
agreements only with parties that the Sub-advisor deems creditworthy. For a
discussion of reverse 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 investments, including restricted securities or private placements that
are not deemed to be liquid by the Sub-advisor. An illiquid investment is a
security or other position that is deemed as such because of the absence of a
readily available market or due to legal or contractual restrictions. Some
securities cannot be sold to the U.S. public because of their terms or because
of SEC regulations. The Sub-advisor may determine that securities that cannot be
sold to the U.S. public but that can be sold to institutional investors (for
example, Rule 144A securities) are liquid. The Sub-advisor will follow
guidelines established by the Trustees of the Trust in making liquidity
determinations for Rule 144A securities and other securities, including
privately placed commercial paper. For a discussion of illiquid securities and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowing and Lending. Subject to the Portfolio's restrictions on
lending and borrowing, the Portfolio may borrow money and lend securities or
other assets, as follows. The Portfolio may borrow money for temporary or
emergency purposes in amounts up to 33 1/3% of its total assets. The Portfolio
may mortgage or pledge securities as security for borrowings in amounts up to
15% of its net assets. The Portfolio may lend securities or other assets if, as
a result, no more than 25% of its total assets would be lent to other parties.
Lower-Rated High-Yield Bonds. The Portfolio may invest up to 35% of its
net assets in corporate debt securities that are rated below investment grade
(securities rated BB or lower by Standard & Poor's Ratings Services ("Standard &
Poor's") or Ba or lower by Moody's Investors Services, Inc. ("Moody's")
(commonly referred to as "junk bonds")).
The Portfolio may also invest in unrated debt securities of foreign and
domestic issuers. Unrated debt, while not necessarily of lower quality than
rated securities, may not have as broad a market. Unrated debt securities will
be included in the 35% limit of the Portfolio unless the Sub-advisor deems such
securities to be the equivalent of investment grade securities. For a discussion
of these instruments and the risks involved therein, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio generally intends to purchase
securities for long-term investment rather than short-term gains. However,
short-term transactions may result from liquidity needs, securities having
reached a price or yield objective, anticipated changes in interest rates or the
credit standing of an issuer, or by reason of economic or other developments not
foreseen at the time of the investment decision. Changes are made in the
Portfolio whenever the Sub-advisor believes such changes are desirable, and
portfolio turnover rates are generally not a factor in making buy and sell
decisions.
To a limited extent, the Portfolio may purchase securities in
anticipation of relatively short-term price gains. The Portfolio may also sell
one security and simultaneously purchase the same or a comparable security to
take advantage of short-term differentials in bond yields or securities prices.
For a discussion of portfolio turnover and its effects, see this Prospectus and
the Trust's SAI under "Portfolio Turnover."
AST Money Market Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
high current income and maintain high levels of liquidity. This is a fundamental
objective of the Portfolio.
Investment Policies:
The Portfolio attempts to accomplish its objectives by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in the types of high quality U.S. dollar-denominated securities
described below which have effective maturities of not more than 397 days. The
Portfolio will invest in one or more of the types of investments described
below.
United States Government Obligations. The Portfolio may invest in
obligations of the U.S. Government and its agencies ("U.S. Government
Obligations") and instrumentalities ("U.S. Government Instrumentalities")
maturing 397 days or less from the date of acquisition or purchased pursuant to
repurchase agreements that provide for repurchase by the seller within 397 days
from the date of acquisition. U.S. Government Obligations, for purposes of this
Portfolio, include: (i) direct obligations issued by the United States Treasury
such as Treasury bills, notes and bonds; and (ii) instruments issued or
guaranteed by government-sponsored agencies acting under authority of Congress,
such as, but not limited to, obligations of the Bank for Cooperatives, Federal
Financing Bank, Federal Intermediate Credit Banks, Federal Land Banks, and
Tennessee Valley Authority, Federal Home Loan Bank and Federal Farm Credit
Bureau. U.S. Government Instrumentalities are government agencies organized by
Congress under a Federal Charter and supervised and regulated by the U.S.
Government, such as the Federal National Mortgage Association and the Student
Loan Mortgage Association. Some of these U.S. Government Obligations are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Mortgage
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to the U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Bank Obligations. The Portfolio may invest in high quality United
States dollar-denominated negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
United States federal or state law, (ii) foreign branches of these banks or
foreign banks of equivalent size (Euros), and (iii) United States branches of
foreign banks of equivalent size (Yankees). The Portfolio may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank). These obligations may be supported by
appropriated but unpaid commitments of their member countries, and there is no
assurance these commitments will be undertaken or met in the future.
Commercial Paper; Bonds. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by United States corporations. The
Portfolio may also invest in bonds and commercial paper of foreign issuers if
the obligation is United States dollar-denominated and is not subject to foreign
withholding tax. For a discussion of the risks involved in foreign investing,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Asset-Backed Securities. As may be permitted by current laws and
regulations and if expressly permitted by the Board of Trustees, the Portfolio
may invest in securities generally referred to as asset-backed securities, which
directly or indirectly represent a participation interest in, or are secured by
and payable from, a stream of payments generated by particular assets such as
motor vehicle or credit card receivables. Asset-backed securities provide
periodic payments that generally consist of both interest and principal
payments. Consequently, the life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. For more information
about these instruments and the risks involved therein, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Trustees of the Trust, the
Portfolio may invest in certain synthetic instruments. Such instruments
generally involve the deposit of asset-backed securities in a trust arrangement
and the issuance of certificates evidencing interests in the trust. The
certificates are generally sold in private placements in reliance on Rule 144A
of the Securities Act of 1933. The Sub-advisor will review the structure of
synthetic instruments to identify credit and liquidity risks and will monitor
such risks.
Quality Information. The Portfolio will limit its investments to those
securities which, in accordance with guidelines adopted by the Trustees, present
minimal credit risks. In addition, the Portfolio will not purchase any security
(other than a United States Government security) unless: (i) if rated by only
one nationally recognized rating organization (such as Moody's and Standard &
Poor's), then such organization has rated it with the highest rating assigned to
short-term debt securities; (ii) if rated by more than one nationally recognized
rating organization, then at least two such rating organizations have rated it
with the highest rating assigned to short-term debt securities; or (iii) it is
not rated and is determined to be of comparable quality. Determinations of
comparable quality shall be made in accordance with procedures established by
the Trustees. These standards must be satisfied at the time an investment is
made. If the quality of the investment later declines, the Portfolio may
continue to hold the investment, subject in certain circumstances to a finding
by the Trustees that disposing of the investment would not be in the Portfolio's
best interest. For a description of securities ratings, see the Appendix to the
Trust's SAI.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income accrues to the
Portfolio until settlement. The Portfolio maintains with the custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. When entering into a when-issued or delayed delivery
transaction, the Portfolio will rely on the other party to consummate the
transaction; if the other party fails to do so, the Portfolio may be
disadvantaged. It is the current policy of the Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets less liabilities other than the obligations created
by these commitments. For an additional discussion of when-issued securities and
certain risks involved therein, see the Trust's SAI under "Certain Risk Factors
and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio is permitted to enter into repurchase
agreements. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. It
may also be viewed as the borrowing of money by the Portfolio. If interest rates
rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on the Portfolio's
ability to maintain a net asset value of $1.00 per share. For a discussion of
reverse repurchase agreements and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Portfolio's restriction on
lending, the Portfolio is permitted to lend its securities. These loans must be
secured continuously by cash or equivalent collateral or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. For an additional discussion of the Portfolio's limitations
on lending and certain risks involved in lending, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Restrictions."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Federated Utility Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to achieve
high current income and moderate capital appreciation by investing primarily in
equity and debt securities of utility companies. This is a fundamental objective
of the Portfolio.
Investment Policies:
The Portfolio will pursue its investment objective by investing in
equity and debt securities of utility companies that produce, transmit, or
distribute gas and electric energy as well as those companies that provide
communications facilities, such as telephone and telegraph companies. The
Portfolio will invest at least 65% of its total assets in securities of utility
companies. The Portfolio invests primarily in the common stocks of utility
companies. The Sub-advisor will select common stocks on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and the risk and volatility of the company's industry as well as other
factors such as product position, market share or profitability. The Portfolio
may also invest in preferred stocks, convertible securities, corporate bonds,
notes and warrants of these companies and in cash, U.S. government securities
and money market instruments in proportions determined by the Sub-advisor. The
Portfolio may also invest in one or more of the types of investments described
below.
Special Risks. There are certain risks associated with the utility
industry. These include difficulty in earning adequate returns on investment
despite frequent rate increases, restrictions on operations and increased costs
and delays due to governmental regulations, building or construction delays,
environmental regulations, difficulty of the capital markets in absorbing
utility debt and equity securities, and difficulties in obtaining fuel at
reasonable prices. The Investment Manager and Sub-advisor believe that the risks
of investing in utility securities can be reduced. The professional portfolio
management techniques used by the Portfolio to attempt to reduce these risks
include credit research. The Sub-advisor will perform its own credit analysis in
addition to using recognized ratings agencies and other sources, including
discussions with the issuer's management, the judgment of other investment
analysts, and its own informed judgment. The Sub-advisor's credit analysis will
consider the issuer's financial soundness, its responsiveness to changes in
interest rates and business conditions, and its anticipated cash flow, interest
or dividend coverage, and earnings. In evaluating an issuer, the Sub-advisor
places special emphasis on the estimated current value of the issuer's assets
rather than historical costs.
Foreign Securities. The Portfolio may invest in securities of foreign
issuers, whether traded on United States or foreign securities exchanges, in
United States or foreign over-the-counter markets, or in the form of depositary
receipts. The Portfolio will not invest more than 15% of total assets in
securities of foreign issuers not listed on recognized exchanges. Securities of
a foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability or other national or international
restrictions. As a matter of practice, the Portfolio will not invest in the
securities of a foreign issuer if any such risk appears to the Sub-advisor to be
substantial. The Portfolio will seek opportunities for higher returns by
investing in developing countries, which may involve greater risk than investing
in foreign securities generally. In order to reduce some of the risks involved
in foreign investing, the Portfolio diversifies its investments broadly among
foreign countries. For a discussion of depositary receipts, the risks involved
in foreign investments generally, and the risks involved in investing in
developing countries, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Convertible Securities. Convertible securities include a spectrum of
securities which can be exchanged for or converted into common stock of the
issuer or a related financial entity (for example, a merged or acquired company
or partner). Convertible securities may include but are not limited to:
convertible bonds or debentures; convertible preferred stock; units consisting
of usable bonds and warrants; or securities which cap or otherwise limit returns
to the convertible security holder, such as DECS (Dividend Enhanced Convertible
Stock or Debt Exchangeable for Common Stock when issued as a debt security. DECS
convert to common stock at maturity. The amount received is dependent on the
price of common at the time of maturity.), LYONS (Liquid Yield Option Notes. A
corporate bond which is purchased at a price below par with no coupon, and is
convertible into stock.), PERCS (Preferred Equity Redeemable Preferred Stock. An
equity issue that pays a high cash dividend, has a cap price and mandatory
conversion to common stock at maturity.), PRIDES (Preferred Redeemable Increased
Dividend Securities. Essentially the same as DECS: the difference is little more
than who initially underwrites the issue).
Convertible securities are often rated below investment grade or not
rated because they fall below debt obligations and just above common equity in
order of preference or priority on the issuer's balance sheet. Hence, an issuer
with investment grade senior debt may issue convertible securities with ratings
less than investment grade or not rated. The Fund does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held in the Fund.
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may invest up to 15% of its
net assets in securities that are considered to be illiquid because of the
absence of a readily available market or due to legal or contractual
restrictions. Illiquid securities include non-negotiable time deposits,
repurchase agreements providing for settlement more than seven days after notice
and restricted securities which are determined by the Board of Trustees to be
illiquid.
The Portfolio may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended ("Section 4(2)"). Section 4(2) commercial paper is restricted
as to disposition under federal securities law and is generally sold to
institutional investors, such as the Portfolio, who agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) commercial paper is normally resold to other institutional
investors like the Portfolio through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. While section 4(2) commercial paper could be deemed
"liquid" for purposes of the 15% limitation on illiquid securities when such
securities are saleable in a readily available market, the Portfolio will invest
no more than 10% of its total assets in restricted securities whether or not
such securities are deemed liquid . For a discussion of illiquid and restricted
securities and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Temporary Investments. When the Sub-advisor believes that market
conditions warrant a temporary defensive position, the Portfolio may also invest
all or a part of its assets in cash, cash items and short-term instruments, such
as commercial paper, notes, certificates of deposit, obligations issued or
guaranteed as to principal and interest by the U.S. government or any of its
agencies or instrumentalities and repurchase agreements. The Portfolio's
investment in repurchase agreements will be limited to those with banks and
other financial institutions, such as broker-dealers, which are determined by
the Sub-advisor to be creditworthy pursuant to guidelines promulgated by the
Board of Trustees. Repurchase agreements are arrangements in which banks,
broker-dealers, and other financial institutions sell U.S. government securities
or other securities to the Portfolio and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. The Portfolio's custodian will
take possession of the securities subject to repurchase agreements and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Portfolio, the Portfolio
could receive less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Portfolio might be delayed
pending court action.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements. For a discussion of reverse repurchase agreements and the
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to
brokers, dealers, banks or other institutional borrowers of securities in an
amount not to exceed 33% of the Portfolio's total assets. The Portfolio will
only enter into loan arrangements with brokers, dealers, banks and other
institutions which the Sub-advisor has determined to be creditworthy pursuant to
guidelines promulgated by the Board of Trustees. The Portfolio will receive
collateral at least equal to 100% of the value of the securities loaned. For an
additional discussion of the Portfolio's limitations on lending and certain
risks involved in lending, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Restrictions."
When-Issued and Delayed Delivery Transactions. These transactions are
made to secure what is considered to be an advantageous price or yield for the
Portfolio. No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment for
the securities to be purchased are segregated on the Portfolio's records at the
trade date. These assets are marked to market daily and are maintained until the
transaction has been settled. The Portfolio does not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of its assets. For more
information, see the Trust's SAI under "Investment Objectives and Policies" and
"Certain Risk Factors and Investment Methods."
Put and Call Options. The Portfolio may purchase put options on all or
a portion of the Portfolio's securities for the purpose of hedging against
decreases in the value of the Portfolio's securities. The Portfolio will only
purchase puts on Portfolio securities which are traded on a recognized exchange.
The Portfolio may also write call options on all or a portion of the Portfolio's
securities to generate income. The Portfolio will write call options on either
Portfolio securities or securities which the Portfolio has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Portfolio
writes must be listed on a recognized options exchange. Although the Portfolio
reserves the right to write covered call options on its entire portfolio, it
will not write such options on more than 25% of its total assets unless a higher
limit is authorized by the Board of Trustees. For a discussion of put and call
options and the risks involved therein, see this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods."
Futures Transactions and Related Options. The Portfolio may purchase and
sell financial futures contracts for the purpose of hedging all or a portion of
its long-term debt securities against changes in interest rates. The Portfolio
may also write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect Portfolio securities against
decreases in value. The Portfolio will not purchase or sell futures contracts if
immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Portfolio's total assets. When the
Portfolio purchases futures contracts, an amount of cash or cash equivalents
equal to the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
Portfolio's custodian (or broker if legally permitted) to collateralize the
position and thereby insure that the use of such futures contracts is
unleveraged. Futures transactions and related options may not be used for
leveraging purposes. For a discussion of futures transactions and related
options and the risks involved therein, see this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Federated High Yield Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income by investing primarily in a diversified portfolio of fixed income
securities. The fixed income securities in which the Portfolio intends to invest
are lower-rated corporate debt obligations. This is a fundamental objective of
the Portfolio. Lower-rated debt obligations are generally considered to be high
risk investments.
Investment Policies:
The Portfolio will invest at least 65% of its assets in lower-rated
(BBB or lower) corporate debt obligations. Under normal circumstances, the
Portfolio will not invest more than 10% of the value of its total assets in
equity securities. The fixed income securities in which the Portfolio may invest
include, but are not limited to: preferred stocks, convertible securities,
bonds, debentures, notes, equipment lease certificates and equipment trust
certificates.
Other permitted investments for the Portfolio currently include, but
are not limited to, the following: commercial paper; obligations of the United
States; notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United
States, Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or National
Credit Union Administration; time and savings deposits (including certificates
of deposit) in commercial or savings banks whose deposits are insured by the
Bank Insurance Fund ("BIF"), or the Savings Association Insurance Fund ("SAIF"),
including certificates of deposit issued by and other time deposits in foreign
branches of BIF-insured banks; bankers' acceptances issued by a BIF-insured
bank, or issued by the bank's Edge Act subsidiary and guaranteed by the bank,
with remaining maturities of nine months or less. The total acceptances of any
bank held by the Portfolio cannot exceed 0.25 of 1% of such bank's total
deposits according to the bank's last published statement of condition preceding
the date of acceptance; and general obligations of any state, territory, or
possession of the United States, or their political subdivisions, so long as
they are either (1) rated in one of the four highest grades by nationally
recognized statistical rating organizations or (2) issued by a public housing
agency and backed by the full faith and credit of the United States.
The corporate debt obligations in which the Portfolio may invest are
generally rated BBB or lower by Standard & Poor's Corporation ("Standard &
Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are
not rated but are determined by the Sub-advisor to be of comparable quality. For
a description of securities ratings, see the Appendix to the Trust's SAI. There
is no lower limit with respect to rating categories for securities in which the
Portfolio may invest.
Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." The
corporate debt obligations in which the Portfolio invests are usually not in the
three highest rating categories of a nationally recognized rating organization
(AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are in
the lower rating categories or are unrated but are of comparable quality and
have speculative characteristics or are speculative. Lower-rated or unrated
bonds are commonly referred to as "junk bonds." There is no minimal acceptable
rating for a security to be purchased or held in the Portfolio, and the
Portfolio may, from time to time, purchase or hold securities rated in the
lowest rating category or securities in default.
Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk of loss of principal and
interest associated with these investments. This is because of reduced
creditworthiness and increased risk of default. Lower-rated securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher-rated securities which react primarily to fluctuations in the
general level of interest rates. Short-term corporate and market developments
affecting the prices or liquidity of lower-rated securities could include
adverse news affecting major issuers, underwriters, or dealers in lower-rated
securities. In addition, since there are fewer investors in lower-rated
securities, it may be harder to sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more
price volatility and carry more risk to principal and income than higher-rated
securities. An economic downturn may adversely affect the value of some
lower-rated bonds. Such a downturn may especially affect highly leveraged
companies or companies in cyclically sensitive industries, where deterioration
in a company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to time, as
a result of changing conditions, issuers of lower-rated bonds may seek or may be
required to restructure the terms and conditions of the securities they have
issued. As a result of these restructurings, holders of lower-rated securities
may receive less principal and interest than they had bargained for at the time
such bonds were purchased. In the event of a restructuring, the Portfolio may
bear additional legal or administrative expenses in order to maximize recovery
from an issuer.
The secondary trading market for lower-rated bonds is generally less
liquid than the secondary trading market for higher-rated bonds. Certain
institutions, including federally insured savings and loan associations, may not
legally purchase and hold lower-rated bonds, which could have an adverse impact
on the overall liquidity of the market. Adverse publicity and the perception of
investors relating to issuers, underwriters, dealers or underlying business
conditions, whether or not warranted by fundamental analysis, may also affect
the price or liquidity of lower-rated bonds. On occasion, therefore, it may
become difficult to price or dispose of a particular security in the Portfolio.
For an additional discussion of the risks involved in lower-rated securities,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may acquire securities
which are subject to legal or contractual delays, restrictions and costs on
resale. As a matter of investment policy which can be changed without
shareholder approval, the Portfolio will not invest more than 15% of its net
assets in illiquid securities, which include certain private placements not
determined to be liquid under criteria established by the Board of Trustees and
repurchase agreements providing for settlement in more than seven days after
notice. Securities eligible for resale under Rule 144A of the Securities Act of
1933, and commercial paper issued under Section 4(2) of the Securities Act of
1933, could be deemed "liquid" when saleable in a readily available market. For
an additional discussion of illiquid and restricted securities, and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's SAI under "Investment Objectives and Policies."
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. In when-issued
and delayed delivery transactions, the Portfolio relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Portfolio to miss a price or yield considered to be advantageous. For
an additional discussion of these transactions and the risks involved therein,
see the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk
Factors and Investment Methods."
Temporary Investments. The Portfolio may also invest all or a part of
its assets temporarily in cash or cash items during time of unusual market
conditions for defensive purposes or to maintain liquidity. Cash items may
include, but are not limited to: certificates of deposit; commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities; and repurchase agreements.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements and
certain securities in which the Portfolio invests may be purchased pursuant to
repurchase agreements. For an additional discussion of repurchase agreements and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Objectives and
Policies."
Lending Portfolio Securities. In order to generate additional income,
the Portfolio may lend portfolio securities on a short-term or long-term basis
to broker/dealers, banks, or other institutional borrowers of securities. The
Portfolio will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Sub-advisor has determined are creditworthy under
guidelines established by the Board of Trustees and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. For an additional discussion of the Portfolio's
limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Restrictions."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Zero Coupon Bonds. The Portfolio may, from time to time, own zero
coupon bonds or pay-in-kind securities. A zero coupon bond makes no periodic
interest payments and the entire obligation becomes due only upon maturity.
Pay-in-kind securities make periodic payments in the form of additional
securities (as opposed to cash). The price of zero coupon bonds and pay-in-kind
securities are generally more sensitive to fluctuations in interest rates than
are conventional bonds. Additionally, federal tax law requires that interest on
zero coupon bonds and pay-in-kind securities be reported as income to the
Portfolio even though the Portfolio received no cash interest until the maturity
or payment date of such securities.
Many corporate debt obligations, including many lower-rated bonds,
permit the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call bonds
during periods of declining interest rates. In these cases, if the Portfolio
owns a bond which is called, the Portfolio will receive its return of principal
earlier than expected and would likely be required to reinvest the proceeds at
lower interest rates, thus reducing income to the Portfolio. For an additional
discussion of zero coupon bonds, see the Trust's SAI under "Certain Risk Factors
and Investment Methods."
Foreign Securities. The Portfolio may invest up to 5% of its total
assets in foreign securities which are not publicly traded in the United States.
For a discussion of the risks involved in investing in foreign securities, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Reducing Risks of Lower-Rated Securities. The Sub-advisor believes that
the risks of investing in lower-rated securities may be reduced. There can,
however, be no assurances that such risks will actually be reduced by the
following methods. The professional portfolio management techniques used by the
Sub-advisor to attempt to reduce these risks include:
Credit Research. The Sub-advisor will perform its own credit
analysis in addition to using nationally recognized rating organizations and
other sources, including discussions with the issuer's management, the judgment
of other investment analysts, and its own informed judgment. The Sub-advisor's
credit analysis will consider the issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest, or dividend coverage and earnings. In
evaluating an issuer, the Sub-advisor places special emphasis on the estimated
current value of the issuer's assets rather than historical cost.
Diversification. The Sub-advisor invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.
Economic Analysis. The Sub-advisor will analyze current
developments and trends in the economy and in the financial markets. When
investing in lower-rated securities, timing and selection are critical, and
analysis of the business cycle can be important.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a
high level of total return by investing primarily in a diversified group of
fixed income and equity securities. This is a fundamental objective of the
Portfolio.
Investment Policies:
The Portfolio is designed to balance the potential appreciation of
common stocks with the income and principal stability of bonds over the long
term. Under normal market conditions over the long-term, the Portfolio expects
to allocate its assets so that approximately 40% of such assets will be in fixed
income securities and approximately 60% in equity securities. This mix may vary
over shorter time periods within the ranges set forth below:
Range
Fixed Income Securities 30-50%
Equity Securities 50-70%
The primary consideration in varying from the 60-40 allocation will be
the Sub-advisor's outlook for the different markets in which the Portfolio
invests. Shifts between bonds and stocks will normally be done gradually and the
Sub-advisor will not attempt to precisely "time" the market. There is, of
course, no guarantee that even the Sub-advisor's gradual approach to allocating
the Portfolio's assets will be successful in achieving the Portfolio's
objective. The Portfolio will also maintain cash reserves to facilitate the
Portfolio's cash flow needs (redemptions, expenses and purchases of Portfolio
securities) and it may invest in cash reserves without limitation for temporary
defensive purposes.
Assets allocated to the fixed income portion of the Portfolio primarily
will be invested in U.S. and foreign investment grade bonds and high-yield
bonds, and cash reserves.
Assets allocated to the equity portion of the Portfolio primarily will
be invested in the common stocks of a diversified group of U.S. and foreign
large and small companies.
The Portfolio's share price will fluctuate with changing market
conditions and interest rate levels and your investment may be worth more or
less when redeemed than when purchased. The Portfolio should not be relied upon
for short-term financial needs, nor used to play short-term swings in the stock
or bond markets. The Portfolio cannot guarantee that it will achieve its
investment objectives.
Fixed Income Securities. The Portfolio's fixed income securities will
be allocated among investment grade, high-yield and non-dollar debt securities
generally within the ranges indicated below:
Range
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%
Investment Grade. Long, intermediate and short-term investment
grade debt securities (e.g., those rated AAA, AA, A or BBB by Standard & Poor's
Corporation ("S&P"), or if not rated, of equivalent investment quality as
determined by Sub-advisor). The weighted average maturity for this portion of
the Portfolio is generally expected to be intermediate, although it may vary
significantly.
High-Yield, Lower-Rated Securities. High-yielding,
income-producing debt securities (commonly referred to as "junk bonds") and
preferred stocks including convertible securities. Bonds may be purchased
without regard to maturity. However, the average maturity of the bonds is
expected to be approximately 10 years, although it may vary if market conditions
warrant. Quality will generally range from lower-medium to low and the Portfolio
may also purchase bonds in default if, in the opinion of the Sub-advisor, there
is significant potential for capital appreciation. Lower-rated debt obligations
are generally considered to be high risk investments. See this Prospectus and
the Trust's SAI for a discussion of the risks involved in investing in
high-yield, lower-rated debt securities.
Non-Dollar. Non-dollar denominated, high-quality (e.g., AAA
and AA by S&P, or if not rated, of equivalent investment quality as determined
by the Sub-advisor) government and corporate debt securities of at least three
countries. See this Prospectus and the Trust's SAI for a discussion of the risks
involved in foreign investing.
Cash Reserves. Liquid short-term investments of one year or
less having the highest ratings by at least one established rating organization,
or if not rated, of equivalent investment quality as determined by the
Sub-advisor.
Equity Securities. The Portfolio's equity securities will be allocated
among large and small-cap U.S. and non-dollar equity securities within the
ranges indicated below:
Range
Large Cap 45-100%
Non-dollar 0-35%
Small Cap 0-30%
Large-Cap. Generally, stocks of well-established companies with
capitalization over $1 billion which can produce increasing dividend income.
Non-Dollar. Common stocks of established non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
The Sub-advisor intends to diversify this portion of the Portfolio broadly among
countries and to normally have at least three different countries represented.
The countries of the Far East and Western Europe as well as South Africa,
Australia, Canada, and other areas (including developing countries) may be
included. Under unusual circumstances, however, investment may be substantially
in one or two countries. See this Prospectus and the Trust's SAI for a
discussion of the risks in international investing under "Certain Risk Factors
and Investment Methods."
Small-Cap Investing and Associated Risks. Common stocks of small
companies or companies which offer the possibility of accelerated earnings
growth because of rejuvenated management, new products or structural changes in
the economy. Current income is not a factor in the selection of these stocks.
Higher risks are often associated with small companies. These companies may have
limited product lines, markets and financial resources, or they may be dependent
on a small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often overlooked
or undervalued by investors.
The Portfolio's investments include, but are not limited to, equity and
fixed income securities of any type, as well as the investments described below.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities. There are risks involved in asset-backed securities. For a
discussion of asset-backed securities and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Cash Reserves. While the Portfolio will remain invested in primarily
common stocks and bonds, it may, for temporary defensive purposes, invest in
reserves without limitation. The Portfolio may establish and maintain reserves
as Sub-advisor believes is advisable to facilitate the Portfolio's cash flow
needs (e.g., redemptions, expenses and purchases of portfolio securities ) or
for temporary, defensive purposes. The Portfolio's reserves will be invested in
domestic and foreign money market instruments rated within the top two credit
categories by a national rating organization, or if unrated, of equivalent
investment quality as determined by the Sub-advisor.
Collateralized Mortgage Obligations (CMOs). There are risks involved in
CMOs. The Portfolio may also invest in CMOs. For a discussion of CMOs and the
risks involved therein, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Stripped Mortgage Securities. Stripped mortgage securities are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IO's) and the other class receives principal
only payments (PO's).
IO's and PO's are acutely sensitive to interest rate changes and to the
rate of principal prepayments. They are very volatile in price and may have
lower liquidity than most mortgage-backed securities. Certain CMO's may also
exhibit these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest rates.
There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be
successful, and the Portfolio's total return could be adversely affected as a
result. For an additional discussion of stripped mortgage securities and the
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio
may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with claims
on the company's earnings and assets before common stock owners, but after bond
owners. Warrants are options to buy a stated number of shares of common stock at
a specified price any time during the life of the warrants (generally, two or
more years).
Foreign Securities. The Portfolio may invest up to 35% of its total assets
in U.S. dollar-denominated and non U.S. dollar-denominated securities issued by
foreign issuers. Some of the countries in which the Portfolio may invest may be
considered to be developing and may involve special risks. For a discussion of
these risks as well as the risks involved in investing in foreign securities in
general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. Foreign securities of the Portfolio are
subject to currency risk, that is, the risk that the U.S. dollar value of these
securities may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. To manage this risk
and facilitate the purchase and sale of foreign securities, the Portfolio will
engage in foreign currency transactions involving the purchase and sale of
forward foreign currency exchange contracts. For a discussion of foreign
currency transactions, certain risks involved therein, and the risks of currency
fluctuations generally, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures
contracts (or options thereon) to hedge all or a portion of its portfolio,
against changes in prevailing levels of interest rates or currency exchange
rates, or as an efficient means of adjusting its exposure to the bond, stock,
and currency markets. The Portfolio will not use futures contracts for
leveraging purposes. The Portfolio may also write call and put options and
purchase put and call options on securities, financial indices, and currencies.
The aggregate market value of the Portfolio's portfolio securities or currencies
covering call or put options will not exceed 25% of the Portfolio's net assets.
For an additional discussion of futures contracts and options and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment Objectives
and Policies."
Hybrid Instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, securities index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid securities and the
risks involved therein, see the Trust's SAI under "Investment Objectives and
Policies" and "Certain Risk Factors and Investment Methods."
Lending of Portfolio Securities. As a fundamental policy, for the
purpose of realizing additional income, the Portfolio may lend securities with a
value of up to 33 1/3% of its total assets to broker-dealers, institutional
investors, or other persons. Any such loan will be continuously secured by
collateral at least equal to the value of the security loaned. For an additional
discussion on limitations on lending and risks of lending, see this Prospectus
under "Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies" and Investment Restrictions."
Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or institutions such as banks, insurance companies and savings
and loans. Some of these securities, such as GNMA certificates, are backed by
the full faith and credit of the U.S. Treasury while others, such as Freddie Mac
certificates, are not. There are risks involved in mortgage-backed securities.
For an additional discussion of mortgage-backed securities, see the Trust's SAI
under "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). Because an active trading market does not exist for
such securities, the sale of such securities may be subject to delay and
additional costs. The Portfolio will not invest more than 10% of its total
assets in restricted securities (other than securities eligible for resale under
Rule 144A of the Securities Act of 1933). For a discussion of illiquid and
restricted securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
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 SAI under "Investment Objectives and Policies."
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" and the Trust's SAI under "Investment
Restrictions."
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a
total return on its assets from long-term growth of capital and income,
principally through investments in common stocks of established, non-U.S.
companies. Investments may be made solely for capital appreciation or solely for
income or any combination of both for the purpose of achieving a higher overall
return. Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses. This is a fundamental objective of the
Portfolio.
Investment Policies:
The Portfolio intends to diversify investments broadly among countries
and to normally have at least three different countries represented in the
Portfolio. The Portfolio may invest in countries of the Far East and Western
Europe as well as South Africa, Australia, Canada and other areas (including
developing countries). Under unusual circumstances, the Portfolio may invest
substantially all of its assets in one or two countries.
In seeking its objective, the Portfolio will invest primarily in common
stocks of established foreign companies which have the potential for growth of
capital or income or both. However, the Portfolio may also invest in a variety
of other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as corporate and governmental debt securities,
when considered consistent with the Portfolio's investment objectives and
program. Under normal market conditions, the Portfolio's investment in
securities other than common stocks is limited to no more than 35% of total
assets. Under exceptional economic or market conditions abroad, the Portfolio
may temporarily invest all or a major portion of its assets in U.S. government
obligations or debt obligations of U.S. companies. The Portfolio will not
purchase any debt security which at the time of purchase is rated below
investment grade. This would not prevent the Portfolio from retaining a security
downgraded to below investment grade after purchase.
The Portfolio may also invest its reserves in domestic as well as
foreign money market instruments. Also, the Portfolio may enter into forward
foreign currency exchange contracts in order to protect against uncertainty in
the level of future foreign exchange rates.
In addition to the investments described below, the Portfolio's
investments may include, but are not limited to, American Depositary Receipts
(ADRs), bonds, notes, other debt securities of foreign issuers, and the
securities of foreign investment funds or trusts (including passive foreign
investment companies).
Cash Reserves. While the Portfolio will remain primarily invested in
common stocks, it may, for temporary defensive measures, invest in cash reserves
without limitation. The Portfolio may establish and maintain reserves as
Sub-advisor believes is advisable to facilitate the Portfolio's cash flow needs
(e.g., redemptions, expenses and purchases of portfolio securities) or for
temporary, defensive purposes. The Portfolio's reserves may be invested in
domestic and foreign money market instruments rated within the top two credit
categories by a national rating organization, or if unrated, of equivalent
investment quality as determined by the Sub-advisor.
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio
may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with claims
on the company's earnings and assets before common stock owners, but after bond
owners. Warrants are options to buy a stated number of shares of common stock at
a specified price any time during the life of the warrants (generally, two or
more years).
Foreign Currency Transactions. The Portfolio will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when the Sub-advisor believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Under certain circumstances, the Portfolio may commit
a substantial portion or the entire value of its portfolio to the consummation
of these contracts. The Sub-advisor will consider the effect such a commitment
of its portfolio to forward contracts would have on the investment program of
the Portfolio and the flexibility of the Portfolio to purchase additional
securities. For a discussion of foreign currency contracts and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into stock index
or currency futures contracts (or options thereon) to hedge a portion of the
Portfolio, to provide an efficient means of regulating the Portfolio's exposure
to the equity markets, or as a hedge against changes in prevailing levels of
currency exchange rates. The Portfolio will not use futures contracts for
leveraging purposes. Such contracts may be traded on U.S. or foreign exchanges.
The Portfolio may write covered call options and purchase put and call options
on foreign currencies, securities, and stock indices. The aggregate market value
of the Portfolio's currencies or portfolio securities covering call or put
options will not exceed 25% of the Portfolio's total assets. The Portfolio will
not commit more than 5% of its total assets to premiums when purchasing call or
put options. For an additional discussion of futures contracts and options and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Hybrid Investments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in these instruments, which have
the characteristics of futures, options and securities. Such instruments may
take a variety of forms, such as debt instruments with interest or principal
payments determined by reference to the value of a currency, security index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options, currencies, and securities,
including volatility and illiquidity. Under certain conditions, the redemption
value of a hybrid instrument could be zero. For a discussion of hybrid
investments and the risks involved therein, see the Trust's SAI under
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods."
Passive Foreign Investment Companies. The Portfolio may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
Portfolio's expenses (management fees and operating expenses), shareholders will
also indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). The Portfolio will not invest more than 10% of its
total assets in restricted securities (other than securities eligible for resale
under Rule 144A of the Securities Act of 1933). For a discussion of illiquid and
restricted securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the purpose
of realizing additional income, the Portfolio may lend securities with a value
of up to 33 1/3% of its total assets to broker-dealers, institutional investors,
or other persons. Any such loan will be continuously secured by collateral at
least equal to the value of the security loaned. For an additional discussion of
the Portfolio's limitations on lending and certain risks involved in lending,
see this Prospectus under "Certain Risk Factors and Investment Methods" and the
Trust's SAI under "Investment Objectives and Policies" and "Investment
Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and certain
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Objectives and
Policies."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
T. Rowe Price Natural Resources Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital through investment primarily in common stocks of
companies which own or develop natural resources and other basic commodities.
Current income is not a factor in the selection of stocks for investment by the
Portfolio. Total return will consist primarily of capital appreciation (or
depreciation).
Investment Policies:
The Portfolio will invest primarily (at least 65% of its total assets)
in common stocks of companies which own or develop natural resources and other
basic commodities. However, it may also purchase other types of securities, such
as selected, non-resource growth companies, foreign securities, convertible
securities and warrants, when considered consistent with the Portfolio's
investment objective and policies. The Portfolio may also engage in a variety of
investment management practices, such as buying and selling futures and options.
Some of the most important factors evaluated by the Sub-advisor in
selecting natural resource companies are the capability for expanded production,
superior exploration programs and production facilities, and the potential to
accumulate new resources. The Portfolio expects to invest in those natural
resource companies which own or develop energy sources (such as oil, gas, coal
and uranium), precious metals, forest products, real estate, nonferrous metals,
diversified resources, and other basic commodities which, in the opinion of the
Sub-advisor, can be produced and marketed profitably during periods of rising
labor costs and prices. However, the percentage of the Portfolio's assets
invested in natural resource and related businesses versus the percentage
invested in non-resource companies may vary greatly depending upon economic
monetary conditions and the outlook for inflation. The earnings of natural
resource companies may be expected to follow irregular patterns, because these
companies are particularly influenced by the forces of nature and international
politics. Companies which own or develop real estate might also be subject to
irregular fluctuations of earnings, because these companies are affected by
changes in the availability of money, interest rates, and other factors.
In the opinion of the Sub-advisor, inflation represents one of the
major economic problems investors will face over the long term. From the early
1970's through the late 1980's, the inflation rate was considerably above the
average historic levels. Although inflation has slowed in recent years, the
Sub-advisor believes the strenuous efforts required on the part of government,
business, labor, and consumers to control inflation are difficult to maintain
for extended periods - particularly during recessions. Political pressure to
counteract these economic slowdowns often leads to governmental policies which
in turn renew inflationary forces. The investment policies of the Portfolio have
been developed in light of these considerations.
The Portfolio invests in a diversified group of companies whose
earnings and/or value of tangible assets the Sub-advisor expects to grow faster
than the rate of inflation over the long term. The Sub-advisor believes the most
attractive opportunities which satisfy the Portfolio's objective are in
companies which own or develop natural resources and in companies where
management has the flexibility to adjust prices or the ability to control
operating costs.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments and
on assets should the company be liquidated. After other claims are satisfied,
common stockholders participate in company profits on a pro rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred stocks
pay a dividend, the Portfolio may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend. Such investments
would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants. The Portfolio may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. For a discussion of these instruments, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 50% of its total assets
in foreign securities. These include non-dollar denominated securities traded
outside of the U.S. and dollar denominated securities traded in the U.S. (such
as ADRs). Some of the countries in which the Portfolio may invest may be
considered to be developing and may involve special risks. For a discussion of
these risks as well as the risks involved in investing in foreign securities in
general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. The Portfolio will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when the Sub-advisor believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Under certain circumstances, the Portfolio may commit
a substantial portion or the entire value of its portfolio to the consummation
of these contracts. The Sub-advisor will consider the effect such a commitment
of its portfolio to forward contracts would have on the investment program of
the Portfolio and the flexibility of the Portfolio to purchase additional
securities. For a discussion of foreign currency contracts, the risks involved
therein, and the risks of currency fluctuations generally, see this Prospectus
and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest in debt securities of
any type without regard to quality or rating. Such securities would be purchased
in companies which meet the investment criteria for the Portfolio. The price of
a bond fluctuates with changes in interest rates, rising when interest fall and
falling when interest rise.
Stripped Mortgage Securities. Stripped mortgage securities are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IO's) and the other class receives principal
only payments (PO's). The Portfolio will treat IOs and POs, other than
government-issued IOs or POs backed by fixed rate mortgages, as illiquid
securities and, accordingly, limit its investments in such securities, together
with all other illiquid securities, to 15% of the Portfolio's net assets.
IO's and PO's are acutely sensitive to interest rate changes and to the
rate of principal prepayments. They are very volatile in price and may have
lower liquidity than most mortgage-backed securities. Certain CMO's may also
exhibit these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest rates.
There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be
successful, and the Portfolio's total return could be adversely affected as a
result. For an additional discussion of stripped mortgage securities and the
risks involved therein, see this Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
High-Yield/High-Risk Investing. The Portfolio will not purchase a
non-investment grade debt security (or junk bond) if immediately after such
purchase the Portfolio would have more than 10% of its total assets invested in
such securities. The total return and yield of lower quality (high-yield/high
risk) bonds, commonly referred to as "junk bonds," can be expected to fluctuate
more than the total return and yield of higher quality, shorter-term bonds, but
not as much as common stocks. Junk bonds are regarded as predominantly
speculative and high risk with respect to the issuer's continuing ability to
meet principal and interest payments. See this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods" for a discussion of the
risks involved in investing in high-yield lower-rated debt securities.
Hybrid Instruments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in these instruments, which have
the characteristics of futures, options and securities. Such instruments may
take a variety of forms, such as debt instruments with interest or principal
payments determined by reference to the value of a currency, security index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options, currencies, and securities,
including volatility and illiquidity. Under certain conditions, the redemption
value of a hybrid instrument could be zero. For a discussion of hybrid
investments, see the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). For a discussion of illiquid securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's SAI under "Investment Objectives and Policies."
Private Placements (Restricted Securities). These securities are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered with the SEC. Although certain of
these securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio will
not invest more than 15% of its net assets in illiquid securities, but not more
than 10% of its total assets in restricted securities (other than Rule 144A
securities). For a discussion of illiquid and restricted securities and the
risks involved therein, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Cash Position. The Portfolio will hold a certain portion of its assets
in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the Portfolio may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions and expenses, and in the timing of new
investments, and serves as a short-term defense during periods of unusual market
volatility.
Borrowing. The Portfolio can borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Portfolio's investment objectives and policies.
Such borrowings may be collateralized with Portfolio assets, subject to
restrictions. For a discussion of limitations on borrowing by the Portfolio and
certain risks involved therein, see this Prospectus under "Certain Risk Factors
and Investment Methods" and the Trust's SAI under "Investment Restrictions."
Futures and Options. The Portfolio may buy and sell futures contracts
(and options on such contracts) to manage its exposure to certain markets. The
Portfolio may purchase, sell or write call and put options on securities,
financial indices, and foreign currencies. The Portfolio may enter into stock
index or currency futures contracts (or options thereon) to hedge a portion of
the portfolio, to provide an efficient means of regulating the Portfolio's
exposure to the equity markets, or as a hedge against changes in prevailing
levels of currency exchange rates. The Portfolio will not use futures contracts
for leveraging purposes. Such contracts may be traded on U.S. or foreign
exchanges. The Portfolio may write covered call options and purchase put and
call options on foreign currencies, securities, and stock indices. The total
market value of the Portfolio's currencies or portfolio securities covering call
or put options will not exceed 25% of the Portfolio's total assets. The
Portfolio will not commit more than 5% of its total assets to premiums when
purchasing call or put options. For an additional discussion of futures
contracts and options and the risks involved therein, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending of Portfolio Securities. As a fundamental policy, for the purpose
of realizing additional income, the Portfolio may lend securities with a value
of up to 33 1/3% of its total assets to broker-dealers, institutional investors,
or other persons. Any such loan will be continuously secured by collateral at
least equal to the value of the security loaned. For an additional discussion of
the Portfolio's limitations on lending and certain risks of lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Objectives and Policies" and "Investment Restrictions."
T. Rowe Price International Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide
high current income and capital appreciation by investing in high-quality, non
dollar-denominated government and corporate bonds outside the United States.
This is a fundamental objective of the Portfolio.
Special Risk Considerations. The Portfolio is intended for long-term
investors who can accept the risks associated with investing in international
bonds. Total return consists of income after expenses, bond price gains (or
losses) in terms of the local currency and currency gains (or losses). The value
of the Portfolio will fluctuate in response to various economic factors, the
most important of which are fluctuations in foreign currency exchange rates and
interest rates.
Because the Portfolio's investments are primarily denominated in
foreign currencies, exchange rates are likely to have a significant impact on
total Portfolio performance. For example, a fall in the U.S. dollar's value
relative to the Japanese yen will increase the U.S. dollar value of a Japanese
bond held in the Portfolio, even though the price of that bond in yen terms
remains unchanged. Conversely, if the U.S. dollar rises in value relative to the
yen, the U.S. dollar value of a Japanese bond will fall. Investors should be
aware that exchange rate movements can be significant and endure for long
periods of time.
The Sub-advisor's techniques include management of currency, bond
market and maturity exposure and security selection which will vary based on
available yields and the Sub-advisor's outlook for the interest rate cycle in
various countries and changes in foreign currency exchange rates. In any of the
markets in which the Portfolio invests, longer maturity bonds tend to fluctuate
more in price as interest rates change than shorter-term instruments -- again
providing both opportunity and risk.
Because of the Portfolio's long-term investment objectives, investors
should not rely on an investment in the Portfolio for their short-term financial
needs and should not view the Portfolio as a vehicle for playing short-term
swings in the international bond and foreign exchange markets. Shares of the
Portfolio alone should not be regarded as a complete investment program. Also,
investors should be aware that investing in international bonds may involve a
higher degree of risk than investing in U.S. bonds.
Investments in foreign securities involve special considerations. For a
discussion of the risks involved in investing in foreign securities, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Investment Policies:
To achieve its objectives, the Portfolio will invest at least 65% of
its assets in high-quality, non dollar-denominated government and corporate
bonds outside the United States. The Portfolio also seeks to moderate price
fluctuation by actively managing its maturity structure and currency exposure.
The Sub-advisor bases its investment decisions on fundamental market factors,
currency trends, and credit quality. The Portfolio generally invests in
countries where the combination of fixed-income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
currency risk can be minimized through hedging.
Although the Portfolio expects to maintain an intermediate to long
weighted average maturity, it has no maturity restrictions on the overall
portfolio or on individual securities. Normally, the Portfolio does not hedge
its foreign currency exposure back to the dollar, nor involve more than 50% of
total assets in cross hedging transactions. Therefore, changes in foreign
interest rates and currency exchange rates are likely to have a significant
impact on total return and the market value of portfolio securities. Such
changes provide greater opportunities for capital gains and greater risks of
capital loss. The Sub-advisor attempts to reduce these risks through
diversification among foreign securities and active management of maturities and
currency exposures.
The Portfolio may also invest up to 20% of its assets in below
investment-grade, high-risk bonds, including bonds in default or those with the
lowest rating. Defaulted bonds are acquired only if the Sub-advisor foresees the
potential for significant capital appreciation. Securities rated below
investment-grade are commonly referred to as "junk bonds" and involve greater
price volatility and higher degrees of speculation with respect to the payment
of principal and interest than higher quality fixed-income securities. The
market prices of such lower-rated debt securities may decline significantly in
periods of general economic difficulty. In addition, the trading market for
these securities is generally less liquid than for higher rated securities and
the Portfolio may have difficulty disposing of these securities at the time it
wishes to do so. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. For a discussion of the risks involved in lower-rated debt securities,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
The Portfolio's investments may also include: debt securities issued or
guaranteed by a foreign national government, its agencies, instrumentalities or
political subdivisions; debt securities issued or guaranteed by supranational
organizations (e.g., European Investment Bank, InterAmerican Development Bank or
the World Bank); bank or bank holding company debt securities; debt securities
convertible into common stock.
The Portfolio may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value at maturity. When
held to maturity, their entire income, which consists of accretion of discount,
comes from the difference between the issue price and their value at maturity.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current cash distribution of interest. For a discussion of zero coupon
securities, see the Trust's SAI under "Certain Risk Factors and Investment
Methods."
The Portfolio may purchase securities which are not publicly offered.
If such securities are purchased, they may be subject to restrictions applicable
to restricted securities. The Portfolio may invest up to 15% of its net assets
in illiquid securities. For a discussion of the risks involved with illiquid and
restricted securities, see this Prospectus under "Certain Risk Factors and
Investment Methods."
The Portfolio intends to select its investments from a number of
country and market sectors. It may substantially invest in the issuers in one or
more countries and intends to have investments in securities of issuers from a
minimum of three different countries. For temporary defensive or emergency
purposes, however, the Portfolio may invest without limit in U.S. debt
securities, including short-term money market securities. It is impossible to
predict for how long such alternative strategies will be utilized.
Short-Term Investments. To protect against adverse movements of
interest rates and for liquidity, the Portfolio may also purchase short-term
obligations denominated in U.S. and foreign currencies (including the ECU) such
as, but not limited to, bank deposits, bankers' acceptances, certificates of
deposit, commercial paper, short-term government, government agency,
supranational agency and corporate obligations, and repurchase agreements.
Nondiversified Investment Company. The Portfolio may invest more than
5% of its assets in the fixed-income securities of individual foreign
governments. The Portfolio generally will not invest more than 5% of its assets
in any individual corporate issuer, provided that (1) the Portfolio may place
assets in bank deposits or other short-term bank instruments with a maturity of
up to 30 days provided that (i) the bank has a short-term credit rating of A1+
(or, if unrated, the equivalent as determined by the Sub-advisor) and (ii) the
Portfolio may not maintain more than 10% of its total assets with any single
bank; and (2) the Portfolio may maintain more than 5% of its total assets,
including cash and currencies, in custodial accounts or deposits of the Trust's
custodian or sub-custodians. In addition, the Portfolio intends to qualify as a
regulated investment company for purposes of the Internal Revenue Code. Such
qualification requires the Portfolio to limit its investments so that, at the
end of each calendar quarter, with respect to at least 50% of its total assets,
not more than 5% of such assets are invested in the securities of a single
issuer, and with respect to the remaining 50%, no more than 25% is invested in a
single issuer. Since, as a nondiversified investment company, the Portfolio is
permitted to invest a greater proportion of its assets in the securities of a
smaller number of issuers, the Portfolio may be subject to greater credit risk
with respect to its portfolio securities than an investment company that is more
broadly diversified.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady bonds,
named after former U.S. Secretary of the Treasury Nicholas Brady, are used as a
means of restructuring the external debt burden of a government in certain
emerging markets. A Brady bond is created when an outstanding commercial bank
loan to a government or private entity is exchanged for a new bond in connection
with a debt restructuring plan. Brady bonds may be collateralized or
uncollateralized and issued in various currencies (although typically in the
U.S. dollar). They are often fully collateralized as to principal in U.S.
Treasury zero coupon bonds. However, even with this collateralization feature,
Brady Bonds are often considered speculative, below investment grade investments
because the timely payment of interest is the responsibility of the issuing
party (for example, a Latin American country) and the value of the bonds can
fluctuate significantly based on the issuer's ability or perceived ability to
make these payments. Finally, some Brady Bonds may be structured with floating
rate or low fixed rate coupons. The Portfolio does not expect to have more than
10% of its total assets invested in Brady Bonds.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with well-established securities dealers or a bank that is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued or Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or forward delivery basis, for payment and delivery
at a later date. The price and yield are generally fixed on the date of
commitment to purchase. During the period between purchase and settlement, no
interest accrues to the Portfolio. At the time of settlement, the market value
of the security may be more or less than the purchase price. For an additional
discussion of when-issued securities and the risks involved therein, see the
Trust's SAI under "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.
Hybrid Instruments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in these instruments, which have
the characteristics of futures, options and securities. Such instruments may
take a variety of forms, such as debt instruments with interest or principal
payments determined by reference to the value of a currency, securities index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid securities and the
risks involved therein, see the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in foreign
currency transactions either on a spot (cash) basis at the rate prevailing in
the currency exchange market at the time or through forward currency contracts
("forwards") with terms generally of less than one year. Forwards will be used
primarily to adjust the foreign exchange exposure of the Portfolio with a view
to protecting the Portfolio from adverse currency movements, based on the
Sub-advisor's outlook, and the Portfolio might be expected to enter into such
contracts under the following circumstances:
Lock In. When management desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease
against another currency, the Portfolio may sell the currency expected to
decrease and purchase a currency which is expected to increase against the
currency sold in an amount approximately equal to some or all of the Portfolio's
holdings denominated in the currency sold.
Proxy Hedge. The Sub-advisor might choose to use a proxy
hedge, where the Portfolio, having purchased a bond, will sell a currency whose
value is believed to be closely linked to the currency in which the bond is
denominated. Interest rates prevailing in the country whose currency was sold
would be expected to be closer to those in the U.S. and lower than those of
bonds denominated in the currency of the original holding. This type of hedging
entails greater risk than a direct hedge because it is dependent on a stable
relationship between the two currencies paired as proxies and the relationships
can be very unstable at times.
For an additional discussion of foreign currency exchange contracts and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Costs of Hedging. When the Portfolio purchases a foreign bond with a
higher interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially lost if the
Portfolio were to enter into a direct hedge by selling the foreign currency and
purchasing the U.S. dollar. This is what is known as the "cost" of hedging.
Proxy hedging attempts to reduce this cost through an indirect hedge back to the
U.S. dollar. It is important to note that hedging costs are treated as capital
transactions and are not, therefore, deducted from the Portfolio's dividend
distribution and are not reflected in its yield. Instead such costs will, over
time, be reflected in the Portfolio's net asset value per share.
Futures and Options. The Portfolio may buy and sell futures and options
contracts for any number of reasons including: to manage their exposure to
changes in interest rates, securities prices and foreign currencies; as an
efficient means of adjusting overall exposure to certain markets; to enhance
income; to protect the value of portfolio securities; and to adjust the
portfolio's duration. The Portfolio may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies. The total
market value of securities against which the Portfolio has written call or put
options may not exceed 25% of its total assets. The Portfolio will not commit
more than 5% of its total assets to premiums when purchasing call or put
options. For an additional discussion of futures and options and certain risks
involved therein, see this Prospectus and the Trust's SAI 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" and the Trust's SAI under "Investment
Restrictions."
Portfolio Turnover. The Portfolio may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Trust's SAI
under "Portfolio Turnover."
T. Rowe Price Small Company Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to
provide long-term capital appreciation by investing primarily in
small-capitalization stocks that appear to be undervalued. This is a fundamental
objective of the Portfolio.
Investment Policies:
Reflecting a value approach to investing, the Portfolio will seek the
stocks of companies whose current stock prices do not appear to adequately
reflect their underlying value as measured by assets, earnings, cash flow, or
business franchises. The Portfolio will invest at least 65% of its total assets
in companies with a market capitalization of $1 billion or less that appear
undervalued by various measures, such as price/earnings or price/book value
ratios.
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants when considered consistent with the
Portfolio's investment objective and policies. The Portfolio may also engage in
a variety of investment management practices, such as buying and selling futures
and options.
In managing the Portfolio, the Sub-advisor will apply a value
investment approach. Value investors seek to buy a stock (or other security)
when its price is low relative to its perceived worth. They hope to identify
companies whose stocks are currently out of favor or are not followed closely by
stock analysts. Often these stocks have above-average yields and offer the
potential for capital appreciation as other investors recognize their intrinsic
value and drive up their prices. Some of the principal measures used to identify
such stocks are:
(i) Price/Earnings Ratio. Dividing a stock's price by its
earnings per share generates a price/earnings or P/E ratio. A stock with a P/E
that is significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
(ii) Price/Book Value Ratio. This ratio, calculated by
dividing a stock's price by its book value per share, indicates how a stock is
priced relative to the accounting (i.e., book) value of the company's assets. A
ratio below the market, that of its competitors, or its own historic norm could
indicate an undervalued situation.
(iii) Dividend Yield. Value investors look for undervalued
assets. A stock's dividend yield is found by dividing its annual dividend by its
share price. A yield significantly above a stock's own historic norm or that of
its peers may suggest an investment opportunity.
(iv) Price/Cash Flow. Dividing a stock's price by the
company's cash flow per share, rather than its earnings or book value, provides
a more useful measure of value in some cases. A ratio below that of the market
or of its peers suggests the market may be incorrectly valuing the company's
cash flow for reasons that may be temporary.
(v) Undervalued Assets. This analysis compares a company's
stock price with its underlying asset values, its projected value in the private
(as opposed to public) market, or its expected value if the company or parts of
it were sold or liquidated.
(vi) Restructuring Opportunities. The market can react
favorably to the announcement or the successful implementation of a corporate
restructuring, financial reengineering, or asset redeployment. Such events can
result in an increase in a company's stock price. A value investor may try to
anticipate these actions and invest before the market places an appropriate
value on any actual or expected changes.
Risks of a Value Approach to Small-Cap Investing. Small
companies--those with a capitalization (market value) of $1 billion or less--may
offer greater potential for capital appreciation since they are often overlooked
or undervalued by investors. Small-capitalization stocks are less actively
followed by stock analysts than are larger-capitalization stocks, and less
information is available to evaluate small-cap stock prices. As a result,
compared with larger-capitalization stocks, there may be greater variations
between the current stock price and the estimated underlying value, which could
represent greater opportunity for appreciation.
Investing in small companies involves greater risk as well as greater
opportunity than is customarily associated with more established companies.
Stocks of small companies may be subject to more abrupt or erratic price
movements than larger company securities. Small companies often have limited
product lines, markets, or financial resources, and their management may lack
depth and experience. In addition, a value approach to investing includes the
risks that 1) the market will not recognize a security's intrinsic value for an
unexpectedly long time, and 2) a stock that is judged to be undervalued is
actually appropriately priced due to intractable or fundamental problems that
are not yet apparent.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments and
on assets should the company be liquidated. After other claims are satisfied,
common stockholders participate in company profits on a pro rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred stocks
pay a dividend, the Portfolio may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend. Such investments
would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants. The Portfolio may invest in debt
or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price anytime during the
life of the warrants (generally, two or more years).
Foreign Securities. The Portfolio may invest up to 20% of its total
assets (excluding reserves) in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Some of the countries in which the Portfolio may invest may be considered
to be developing and may involve special risks. For a discussion of these risks
as well as the risks involved in investing in foreign securities in general, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. Investors in foreign securities may
"hedge" their exposure to potentially unfavorable currency changes by purchasing
a contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a strategy
known as "proxy hedging." For a discussion of foreign currency contracts,
certain risks involved therein, and the risks of currency fluctuations
generally, see this Prospectus and the Trust's SAI under "Certain Risks Factors
and Investment Methods."
Fixed Income Securities. The Portfolio may invest in debt securities of
any type without regard to quality or rating. Such securities would be purchased
in companies that meet the investment criteria for the Portfolio. The price of a
bond fluctuates with changes in interest rates, rising when interest rates fall
and falling when interest rates rise.
High-Yield/High-Risk Investing. The Portfolio will not purchase a
noninvestment-grade debt security (or junk bond) if immediately after such
purchase the Portfolio would have more than 5% of its total assets invested in
such securities. For a discussion of the risks involved in investing in
high-yield lower-rated debt securities, see this Prospectus and the Trust's SAI
under "Certain Risk Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. Hybrids can have volatile prices and limited
liquidity and their use by the Portfolio may not be successful. These
instruments (a type of potentially high-risk derivative) can combine the
characteristics of securities, futures, and options. For example, the principal
amount, redemption, or conversion terms of a security could be related to the
market price of some commodity, currency, or securities index. Such securities
may bear interest or pay dividends at below market (or even relatively nominal)
rates. Under certain conditions, the redemption value of such an investment
could be zero. For a discussion of hybrid investments, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). For a discussion of illiquid securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's SAI under "Investment Objectives and Policies."
Private Placements (Restricted Securities). These securities are sold
directly to a small number of investors usually institutions. Unlike public
offerings, such securities are not registered with the SEC. Although certain of
these securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio will
not invest more than 15% of its net assets in illiquid securities, but not more
than 10% of its total assets in restricted securities (other than Rule 144A
securities). For a discussion of illiquid and restricted securities and the
risks involved therein, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Cash Position. The Portfolio will hold a certain portion of its assets
in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the Portfolio may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments
and serves as a short-term defense during periods of unusual market volatility.
Borrowing. The Portfolio can borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Portfolio's investment objective and program. Such
borrowings may be collateralized with Portfolio assets, subject to restrictions.
For an additional discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Futures and Options. The Portfolio may enter into futures contracts (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Portfolio will not use futures contracts for leveraging purposes.
The Portfolio may also write call and put options and purchase put and call
options on securities, financial indices, and currencies. The aggregate market
value of the Portfolio's securities or currencies covering call or put options
will not exceed 25% of the Portfolio's net assets. For an additional discussion
of futures contracts and options and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods" and the Trust's SAI under "Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the purpose
of realizing additional income, the Portfolio may lend securities with a value
of up to 33 1/3% of its total assets to broker-dealers, institutional investors,
or other persons. Any such loan will be continuously secured by collateral at
least equal to the value of the security loaned. For an additional discussion of
the Portfolio's limitations on lending and certain risks involved in lending,
see this Prospectus under "Certain Risk Factors and Investment Methods" and the
Trust's SAI under "Investment Objectives and Policies" and "Investment
Restrictions."
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio normally will invest at least
65% of its total assets in common stocks of U.S. companies with market
capitalizations or annual revenues of $1.5 billion or less. Market
capitalization is a measure of the size of a company and is based upon the total
market value of a company's outstanding equity securities. Ordinarily, the
common stocks of the U.S. companies selected for this Portfolio will not be
listed on a national securities exchange but will be traded in the
over-the-counter market.
Risks of Investments in Small and Medium-Sized Companies. The Portfolio
normally will invest a significant proportion of its assets in the securities of
small and medium-sized companies. As used with respect to this Portfolio, small
and medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting to achieve rapid growth in both sales and
earnings. Capable management and fertile operating areas are two of the most
important characteristics of such companies. In addition, these companies should
employ sound financial and accounting policies; demonstrate effective research
and successful product development and marketing; provide efficient service; and
possess pricing flexibility. The Portfolio tries to avoid investing in companies
where operating results may be affected adversely by excessive competition,
severe governmental regulation, or unsatisfactory productivity.
Investments in small and medium-sized companies involve greater risk
than is customarily associated with more established companies. These companies
often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Portfolio's shares may fluctuate more
widely than the popular market averages.
Fixed Income Securities. The Portfolio may invest in convertible
securities, preferred stocks, bonds, debentures, and other corporate obligations
when the Sub-advisor believes that these investments offer opportunities for
capital appreciation. Current income will not be a substantial factor in the
selection of these securities. Bonds, debentures, and corporate obligations
(other than convertible securities and preferred stock) purchased by the
Portfolio will be rated investment grade at the time of purchase (Baa or higher
by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard &
Poor's ("S&P")). Bonds in the lowest investment grade category (Baa or BBB) may
have speculative characteristics, with changes in the economy or other
circumstances more likely to lead to a weakened capacity of the bonds to make
principal and interest payments than would occur with bonds rated in higher
categories. Convertible securities and preferred stocks purchased by the
Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba or
lower by Moody's and BB or lower by S&P), but will not be rated lower than B.
The Portfolio may also invest in unrated convertible securities and preferred
stocks in instances in which the Sub-advisor believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Portfolio rated in categories no lower than B. Securities rated
B are referred to as "high risk" securities, generally lack characteristics of a
desirable investment, and are deemed speculative with respect to the issuer's
capacity to pay interest and repay principal over a long period of time. At no
time will the Portfolio have more than 5% of its assets invested in any
fixed-income securities (not including convertible securities and preferred
stock) which are 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 securities ratings, see the Appendix to the Trust's SAI. For a
discussion of the special risks involved in lower-rated debt securities, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
The fixed-income securities in which the Portfolio may invest are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest or principal payments, or
both, as they come due. The ratings given a security by Moody's and S&P provide
a generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of
Portfolio assets invested in unrated or lower-grade securities, while intended
to increase the yield produced by those assets, also will increase the credit
risk to which those assets are subject. Market risk relates to the fact that the
market values of securities in which the Portfolio may invest generally will be
affected by changes in the level of interest rates. An increase in interest
rates will tend to reduce the market values of such securities, whereas a
decline in interest rates will tend to increase their values. Medium- and
lower-rated securities (Baa or BBB and lower) and non-rated securities of
comparable quality tend to be subject to wider fluctuations in yields and market
values than higher-rated securities. Medium-rated securities (those rated Baa or
BBB) have speculative characteristics while lower-rated securities are
predominantly speculative. The Portfolio is not required to dispose of straight
debt securities whose ratings are downgraded below Baa or BBB subsequent to the
Portfolio's purchase of the securities, unless such a disposition is necessary
to reduce the Portfolio's holdings of such securities to less than 5% of its
total assets. Relying in part on ratings assigned by credit agencies in making
investments will not protect the Portfolio from the risk that fixed-income
securities in which it invests will decline in value, since credit ratings
represent evaluations of the safety of principal, dividend and interest payments
on preferred stocks and debt securities, not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Portfolio through diversification and consideration of
relevant factors affecting the value of securities. No assurance can be given,
however, regarding the degree of success that will be achieved in this regard or
in the Portfolio achieving its investment objective.
Foreign Securities. The Portfolio may invest in dollar-denominated
American Depositary Receipts ("ADRs") which are traded on exchanges or
over-the-counter in the United States without limit, and in foreign securities.
The term "foreign securities" refers to securities of issuers, wherever
organized, which, in the judgment of the Sub-advisor, have their principal
business activities outside of the United States. The determination of whether
an issuer's principal activities are outside of the United States will be based
on the location of the issuer's assets, personnel, sales, and earnings, and
specifically on whether more than 50% of the issuer's assets are located, or
more than 50% of the issuer's gross income is earned, outside of the United
States, or on whether the issuer's sole or principal stock exchange listing is
outside of the United States. Foreign securities typically will be traded on the
applicable country's principal stock exchange but may also be traded on regional
exchanges or over-the-counter. For a discussion of ADRs, see this Prospectus
under "Certain Risk Factors and Investment Methods."
Foreign investments of the Portfolio may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries
include (but are not limited to): Argentina, Australia, Austria, Belgium,
Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,
Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,
Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,
Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, Sri
Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and the countries of the former Soviet Union. Investments may include
securities created through the Brady Plan, a program under which heavily
indebted countries have restructured their bank debt into bonds. Since the
Portfolio will pay dividends in dollars, it may incur currency conversion costs.
The Portfolio will not invest more than 25% of its total assets in any one
foreign country.
Investments in foreign securities involve certain risks which are not
typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Portfolio may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Portfolio attempts to
protect itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Portfolio may enter into forward
contracts to sell, for a fixed dollar or other currency amount, foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in that currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible. The future
value of such securities in foreign currencies changes as a consequence of
market movements in the value of those securities between the date on which the
contract is entered into and the date it expires.
The Portfolio generally will not enter into forward contracts with a
term greater than one year. In addition, the Portfolio generally will not enter
into forward contracts or maintain a net exposure to such contracts where the
fulfillment of the contracts would require the Portfolio to deliver an amount of
foreign currency in excess of the value of the Portfolio's securities or other
assets denominated in that currency. Under normal circumstances, consideration
of the possibility of changes in currency exchange rates will be incorporated
into the Portfolio's long-term investment strategies. In the event that forward
contracts are considered to be illiquid, the securities would be subject to the
Portfolio's limitation on investing in illiquid securities. For an additional
discussion of foreign currency contracts and the risks involved therein, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of the market value of
its net assets, measured at the time of purchase, in securities that are not
readily marketable, including repurchase agreements maturing in more than seven
days. Securities that are not readily marketable are those that, for whatever
reason, cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Portfolio has valued the
investment.
The Portfolio may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A, and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest,
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Options and Policies."
Borrowing. The Portfolio may borrow money from banks for extraordinary
or emergency purposes in amounts up to 10% of its net assets. While any
borrowings are outstanding, no purchases of securities will be made. For a
discussion of certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Portfolio held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Portfolio may also enter
into interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Portfolio may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Portfolio's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Portfolio may purchase options on securities and stock indices.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. The purpose of these transactions is not
to generate gain, but to "hedge" against possible loss. Therefore, successful
hedging activity will not produce net gain to the Portfolio. The Portfolio may
also purchase put and call options on futures contracts. An option on a futures
contract provides the holder with the right to enter into a "long" position in
the underlying futures contract, in the case of a call option, or a "short"
position in the underlying futures contract, in the case of a put option, at a
fixed exercise price to a stated expiration date. Upon exercise of the option by
the holder, a contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option.
The Portfolio will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Portfolio may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods" and the Trust's SAI
under "Investment Objectives and Policies."
Temporary Investments. Up to 100% of the assets of the Portfolio may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, cash, or in other cash equivalents, if the Sub-advisor determines
it to be appropriate for purposes of enhancing liquidity or preserving capital
in light of prevailing market or economic conditions. While the Portfolio is in
a defensive position, the opportunity to achieve capital growth will be limited,
and, to the extent that this assessment of market conditions is incorrect, the
Portfolio will be foregoing the opportunity to benefit from capital growth
resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Portfolio also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank").
The Portfolio may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Trustees of the
Trust, if any. A certificate of deposit is a short-term obligation of a bank. A
bankers' acceptance is a time draft drawn by a borrower on a bank, usually
relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, also may be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Portfolio
will be subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with banks or well-established securities dealers. All repurchase agreements
entered into by the Portfolio will be fully collateralized and marked to market
daily. The Portfolio has not adopted any limits on the amount of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Portfolio. The Portfolio may
engage in short-term trading and therefore normally will have annual portfolio
turnover rates which are considered to be high and may be greater than those of
other investment companies seeking capital appreciation. Portfolio turnover
rates may also increase as a result of the need for the Portfolio to effect
significant amounts of purchases or redemptions of portfolio securities due to
economic, market, or other factors that are not within the Sub-advisor's
control. For a discussion of portfolio turnover and its effects, see this
Prospectus and the Trust's SAI under "Portfolio Turnover."
Founders Passport Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio normally invests primarily in
securities issued by foreign companies which have market capitalizations or
annual revenues of $1 billion or less. These securities may represent companies
in both established and emerging economies throughout the world.
At least 65% of the Portfolio's total assets normally will be invested
in foreign securities representing a minimum of three countries. The Portfolio
may invest in larger foreign companies or in U.S.-based companies if, in the
Sub-advisor's opinion, they represent better prospects for capital appreciation.
Risks of Investments in Small and Medium-Sized Companies. The Portfolio
normally will invest a significant proportion of its assets in the securities of
small and medium-sized companies. As used with respect to this Portfolio, small
and medium-sized companies are those which are still in the developing stages of
their life cycles and are attempting to achieve rapid growth in both sales and
earnings. Capable management and fertile operating areas are two of the most
important characteristics of such companies. In addition, these companies should
employ sound financial and accounting policies; demonstrate effective research
and successful product development and marketing; provide efficient service; and
possess pricing flexibility.
Investments in small and medium-sized companies involve greater risk
than is customarily associated with more established companies. These companies
often have sales and earnings growth rates which exceed those of large
companies. Such growth rates may in turn be reflected in more rapid share price
appreciation. However, smaller companies often have limited operating histories,
product lines, markets, or financial resources, and they may be dependent upon
one-person management. These companies may be subject to intense competition
from larger entities, and the securities of such companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
Therefore, the net asset value of the Portfolio's shares may fluctuate more
widely than the popular market averages.
Foreign Securities. The Portfolio may invest without limit in American
Depositary Receipts ("ADRs") and foreign securities. The term "foreign
securities" refers to securities of issuers, wherever organized, which, in the
judgment of the Sub-advisor, have their principal business activities outside of
the United States. The determination of whether an issuer's principal activities
are outside of the United States will be based on the location of the issuer's
assets, personnel, sales, and earnings, and specifically on whether more than
50% of the issuer's assets are located, or more than 50% of the issuer's gross
income is earned, outside of the United States, or on whether the issuer's sole
or principal stock exchange listing is outside of the United States. Foreign
securities typically will be traded on the applicable country's principal stock
exchange but may also be traded on regional exchanges or over-the-counter. For a
discussion of ADRs, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign investments of the Portfolio may include securities issued by
companies located in countries not considered to be major industrialized
nations. Such countries are subject to more economic, political and business
risk than major industrialized nations, and the securities they issue are
expected to be more volatile and more uncertain as to payment of interest and
principal. The secondary market for such securities is expected to be less
liquid than for securities of major industrialized nations. Such countries may
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.
Investments in foreign securities involve certain risks which are not
typically associated with U.S. investments. For a discussion of the special
risks involved in investing in developing countries and certain risks involved
in investing in foreign securities, in general, including the risk of currency
fluctuations, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. The Portfolio may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transactions, the Portfolio attempts to
protect itself against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold and the
date on which such payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Portfolio may enter into forward
contracts to sell, for a fixed-dollar or other currency amount, foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in that currency. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible. The future
value of such securities in foreign currencies changes as a consequence of
market movements in the value of those securities between the date on which the
contract is entered into and the date it expires.
The Portfolio generally will not enter into forward contracts with a
term greater than one year. In addition, the Portfolio generally will not enter
into forward contracts or maintain a net exposure to such contracts where the
fulfillment of the contracts would require the Portfolio to deliver an amount of
foreign currency in excess of the value of the Portfolio's securities or other
assets denominated in that currency. Under normal circumstances, consideration
of the possibility of changes in currency exchange rates will be incorporated
into the Portfolio's long-term investment strategies. In the event that forward
contracts are considered to be illiquid, the securities would be subject to the
Portfolio's limitation on investing in illiquid securities. For an additional
discussion of foreign currency contracts and the risks involved therein, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
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.
The Portfolio will only invest in bonds, debentures, and corporate
obligations (other than convertible securities and preferred stock) rated
investment grade (BBB or higher) at the time of purchase. Bonds in the lowest
investment grade category (BBB) 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 total
assets invested in any fixed-income securities (not including convertible
securities and preferred stock) 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 securities ratings, see the Appendix to the
Trust's SAI. For a discussion of the special risks involved in investing in
lower-rated debt securities, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
The fixed-income securities in which the Portfolio may invest are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest or principal payments, or
both, as they come due. The ratings given a security by Moody's and S&P provide
a generally useful guide as to such credit risk. The lower the rating given a
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of
Portfolio assets invested in unrated or lower-grade securities, while intended
to increase the yield produced by those assets, also will increase the credit
risk to which those assets are subject. Market risk relates to the fact that the
market values of securities in which the Portfolio may invest generally will be
affected by changes in the level of interest rates. An increase in interest
rates will tend to reduce the market values of such securities, whereas a
decline in interest rates will tend to increase their values. Medium and
lower-rated securities (Baa or BBB and lower) and non-rated securities of
comparable quality tend to be subject to wider fluctuations in yields and market
values than higher-rated securities. Medium-rated securities (those rated Baa or
BBB) have speculative characteristics while lower-rated securities are
predominantly speculative. The Portfolio is not required to dispose of straight
debt securities whose ratings are downgraded below Baa or BBB subsequent to the
Portfolio's purchase of the securities, unless such a disposition is necessary
to reduce the Portfolio's holdings of such securities to less than 5% of its
total assets. Relying in part on ratings assigned by credit agencies in making
investments will not protect the Portfolio from the risk that fixed-income
securities in which it invests will decline in value, since credit ratings
represent evaluations of the safety of principal, dividend and interest payments
on preferred stocks and debt securities, not the market values of such
securities, and such ratings may not be changed on a timely basis to reflect
subsequent events.
The Sub-advisor seeks to reduce overall risk associated with the
investments of the Portfolio through diversification and consideration of
relevant factors affecting the value of securities. No assurance can be given,
however, regarding the degree of success that will be achieved in this regard or
in the Portfolio achieving its investment objective.
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of the market value of
its net assets, measured at the time of purchase, in securities that are not
readily marketable, including repurchase agreements maturing in more than seven
days. Securities that are not readily marketable are those that, for whatever
reason, cannot be disposed of within seven days in the ordinary course of
business at approximately the amount at which the Portfolio has valued the
investment.
The Portfolio may invest in Rule 144A securities (securities issued in
offerings made pursuant to Rule 144A under the Securities Act of 1933). Rule
144A securities may be resold to qualified institutional buyers as defined under
Rule 144A and may or may not be deemed to be readily marketable. Factors
considered in evaluating whether such a security is readily marketable include
eligibility for trading, trading activity, dealer interest, purchase interest,
and ownership transfer requirements. The Sub-advisor is required to monitor the
readily marketable nature of each Rule 144A security no less frequently than
quarterly. For an additional discussion of Rule 144A securities and illiquid and
restricted securities, and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Borrowing. The Portfolio may borrow money from banks in amounts up to
33 1/3% of the Portfolio's total assets. If the Portfolio borrows money, its
share price may be subject to greater fluctuation until the borrowing is repaid.
The Portfolio will attempt to minimize such fluctuations by not purchasing
securities when borrowings are greater than 5% of the value of the Portfolio's
total assets. For an additional discussion of the Portfolio's limitations on
borrowing and certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Restrictions."
Futures Contracts and Options. The Portfolio may enter into futures
contracts (or options thereon) for hedging purposes. The acquisition or sale of
a futures contract could occur, for example, if the Portfolio held or considered
purchasing equity securities and sought to protect itself from fluctuations in
prices without buying or selling those securities. The Portfolio may also enter
into interest rate and foreign currency futures contracts. Interest rate futures
contracts currently are traded on a variety of fixed-income securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.
An option is a right to buy or sell a security at a specified price
within a limited period of time. The Portfolio may write ("sell") covered call
options on any or all of its portfolio securities from time to time as the
Sub-advisor shall deem appropriate. The extent of the Portfolio's option writing
activities will vary from time to time depending upon the Sub-advisor's
evaluation of market, economic and monetary conditions.
The Portfolio may purchase options on securities and stock indices.
Options on stock indices are similar to options on securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. The purpose of these transactions is not
to generate gain, but to "hedge" against possible loss. Therefore, successful
hedging activity will not produce net gain to the Portfolio. The Portfolio may
also purchase put and call options on futures contracts. An option on a futures
contract provides the holder with the right to enter into a "long" position in
the underlying futures contract, in the case of a call option, or a "short"
position in the underlying futures contract, in the case of a put option, at a
fixed exercise price to a stated expiration date. Upon exercise of the option by
the holder, a contract market clearing house establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position, in the case of a put option.
The Portfolio will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
total assets after taking into account unrealized profits and losses on options
entered into. The Portfolio may buy and sell options on foreign currencies for
hedging purposes in a manner similar to that in which futures on foreign
currencies would be utilized. For an additional discussion of futures contracts
and options and the risks involved therein, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Temporary Investments. Up to 100% of the assets of the Portfolio may be
invested temporarily in U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions, in cash, or in other cash equivalents, if the Sub-advisor
determines it to be appropriate for purposes of enhancing liquidity or
preserving capital in light of prevailing market or economic conditions. While
the Portfolio is in a defensive position, the opportunity to achieve capital
growth will be limited, and, to the extent that this assessment of market
conditions is incorrect, the Portfolio will be foregoing the opportunity to
benefit from capital growth resulting from increases in the value of equity
investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality. The Portfolio also may invest in
obligations issued by the International Bank for Reconstruction and Development
(IBRD or "World Bank").
The Portfolio may also acquire certificates of deposit and bankers'
acceptances of banks which meet criteria established by the Board of Trustees of
the Trust, if any. A certificate of deposit is a short-term obligation of a
bank. A bankers' acceptance is a time draft drawn by a borrower on a bank,
usually relating to an international commercial transaction.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, also may be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Portfolio
will be subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with banks or well-established securities dealers. All repurchase agreements
entered into by the Portfolio will be fully collateralized and marked to market
daily. The Portfolio has not adopted any limits on the amount of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. For a discussion of repurchase agreements and certain risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Portfolio. The Portfolio may
engage in short-term trading and therefore normally will have annual portfolio
turnover rates which are considered to be high and may be greater than those of
other investment companies seeking capital appreciation. Portfolio turnover
rates may also increase as a result of the need for the Portfolio to effect
significant amounts of purchases or redemptions of portfolio securities due to
economic, market, or other factors that are not within the Sub-advisor's
control. For a discussion of portfolio turnover and its effects, see this
Prospectus and the Trust's SAI under "Portfolio Turnover."
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income while following sound investment practices. This is a fundamental
objective of the Portfolio. Capital growth potential is an additional, but
secondary, consideration in the selection of portfolio securities.
Investment Policies:
The Portfolio seeks to achieve its objective by investing in securities
which will provide a relatively high yield and stable return and which, over a
period of years, may also provide capital appreciation. The Portfolio normally
will invest at least 65% of its assets in dividend-paying, marketable common
stocks of domestic and foreign issuers. Up to 10% of the Portfolio's assets may
be invested in equity securities that do not pay regular dividends. The
Portfolio also will invest in convertible bonds, preferred stocks and debt
securities. In periods of uncertain market and economic conditions, as
determined by the Board of Trustees, the Portfolio may depart from the basic
investment objective and assume a defensive position with up to 50% of its
assets temporarily invested in high quality corporate bonds, or notes and
government issues, or held in cash.
The Portfolio's investments in common stocks may, of course, decline in
value. To minimize the risk this presents, the Sub-advisor only invests in
common stocks and equity securities of domestic and foreign issuers which are
marketable; and will not invest more than 5% of the Portfolio's assets in the
securities of any one company or more than 25% of the Portfolio's assets in any
one industry.
Debt Securities. The Portfolio's investments in debt securities will
generally be subject to both credit risk and market risk. Credit risk relates to
the ability of the issuer to meet interest or principal payments, or both, as
they come due. Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of debt securities, whereas a decline in interest rates
will tend to increase their values. Although the Sub-advisor will limit the
Portfolio's debt security investments to securities it believes are not highly
speculative, both kinds of risk are increased by investing in debt securities
rated below the top four grades by Standard & Poor's Corporation ("Standard &
Poor's) or Moody's Investors Services, Inc. ("Moody's") and unrated debt
securities, other than Government National Mortgage Association modified
pass-through certificates.
In order to decrease its risk in investing in debt securities, the
Portfolio will invest no more than 15% of its assets in debt securities rated
below AAA, AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's,
and in no event will the Portfolio ever invest in a debt security rated below
Caa by Moody's or CCC by Standard & Poor's. Lower rated bonds by Moody's
(categories Ba, B, Caa) are of poorer quality and may have speculative
characteristics. Bonds rated Caa may be in default or there may be present
elements of danger with respect to principal or interest. Lower rated bonds by
Standard & Poor's (categories BB, B, CCC) include those which are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with their terms; BB indicates
the lowest degree of speculation and CCC a high degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. For a description of securities ratings, see the Appendix to the
Trust's SAI.
While the Sub-advisor will monitor all of the debt securities in the
Portfolio for the issuers' ability to make required principal and interest
payments and other quality factors, the Sub-advisor may retain in the Portfolio
a debt security whose rating is changed to one below the minimum rating required
for purchase of such a security. For a discussion of the special risks involved
in lower-rated bonds, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover. The rate of portfolio turnover may fluctuate as a result of constantly
changing economic conditions and market circumstances. Securities initially
satisfying the Portfolio's basic objectives and policies may be disposed of when
they are no longer suitable. As a result, the Portfolio's annual portfolio
turnover rate may be higher than that of other investment companies seeking
current income with capital growth as a secondary consideration. For a
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio. These
agreements are entered into with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers which
are deemed creditworthy. A repurchase agreement is a means of investing moneys
for a short period. In a repurchase agreement, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
In the event that the original seller defaults on its obligation to repurchase
the security, the Portfolio could incur costs or delays in seeking to sell such
security. To minimize risk, the securities underlying each repurchase agreement
will be maintained with the Portfolio's custodian in an amount at least equal to
the repurchase price under the agreement (including accrued interest), and such
agreements will be effected only with parties that meet certain creditworthiness
standards established by the Trust's Board of Trustees. The Portfolio will not
enter into a repurchase agreement maturing in more than seven days if as a
result more than 15% of the Portfolio's net assets would be invested in such
repurchase agreements and other illiquid securities. The Portfolio has not
adopted any limit on the amount of its total assets that may be invested in
repurchase agreements maturing in seven days or less.
Lending Portfolio Securities. The Portfolio also may lend its
securities to qualified brokers, dealers, banks, or other financial
institutions. This practice permits the Portfolio to earn income, which, in
turn, can be invested in additional securities to pursue the Portfolio's
investment objective. Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies, equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. The Sub-advisor
monitors the creditworthiness of borrowers in order to minimize such risks. The
Portfolio will not lend any security if, as a result of such loan, the aggregate
value of securities then on loan would exceed 33-1/3% of the Portfolio's total
net assets (taken at market value). For an additional discussion of the
Portfolio's limitations on lending and certain risks involved in lending, see
this Prospectus under "Certain Risk Factors and Investment Methods" and the
Trust's SAI under "Investment Restrictions."
Foreign Securities. The Portfolio may invest up to 25% of its total
assets in foreign securities. Investments in securities of foreign companies and
in foreign markets involve certain additional risks not associated with
investments in domestic companies and markets. The Portfolio may invest in
countries considered to be developing which may involve special risks. For a
discussion of these risks and the risks of investing in foreign securities in
general, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market. The Board of Trustees, or
the Investment Manager or the Sub-advisor acting pursuant to authority delegated
by the Board of Trustees, may determine that a readily available market exists
for securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, or any successor to that rule, and therefore that such securities
are not subject to the foregoing limitation. For a discussion of restricted
securities and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to maximize
total return, consistent with preservation of capital. The Sub-advisor will seek
to employ prudent investment management techniques, especially in light of the
broad range of investment instruments in which the Portfolio may invest.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Portfolio will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
variable and floating rate debt securities; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase agreements and reverse
repurchase agreements; obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies or supranational
entities; and foreign currency exchange-related securities, including foreign
currency warrants.
The Portfolio will invest in a diversified portfolio of fixed-income
securities of varying maturities. The average portfolio duration of the
Portfolio normally will vary within a three- to six-year time frame based on the
Sub-advisor's forecast for interest rates. The Portfolio may invest up to 10% of
its assets in fixed income securities that are rated below investment grade but
rated B or higher by Moody's Investors Services, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") (or, if unrated, determined by the Sub-advisor to be
of comparable quality). The Portfolio will maintain an overall dollar-weighted
average quality of at least A (as rated by Moody's or S&P). In the event that
ratings services assign different ratings to the same security, the Sub-advisor
will determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
Securities rated B are judged to be predominantly speculative with respect to
their capacity to pay interest and repay principal in accordance with the terms
of the obligations. The Sub-advisor will seek to reduce the risks associated
with investing in such securities by limiting the Portfolio's holdings in such
securities and by the depth of its own credit analysis. For a discussion of the
risks involved in lower-rated high-yield bonds, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods." See the
Appendix to the Trust's SAI for a description of Moody's and S&P's ratings
applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may engage in foreign currency transactions. Foreign
currency exchange transactions may be entered into the purpose of hedging
against foreign currency exchange risk arising from the Portfolio's investment
or anticipated investment in securities denominated in foreign currencies.
The Portfolio may enter into swap agreements for the purposes of
attempting to obtain a particular investment return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
provided that desired return. In addition, the Portfolio may purchase and sell
securities on a when-issued and delayed delivery basis and enter into forward
commitments to purchase securities; lend its securities to brokers, dealers and
other financial institutions to earn income; and borrow money for investment
purposes.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return obtained by a portfolio investing primarily in fixed
income securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to the composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the potential for total return, with, however, greater
attendant market risk and price volatility than for a portfolio with a shorter
duration. The market value of securities denominated in currencies other than
U.S. dollars also may be affected by movements in foreign currency exchange
rates.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as the Student Loan Marketing Association, are supported only by the credit of
the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investment in corporate debt
securities that are below investment grade (rated below Baa (Moody's) or BBB
(S&P)) are described as "speculative" both by Moody's and S&P. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities,
which may offer higher income than the common stocks into which they are
convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable investments,
pure fixed income opportunities may be unattractive or limited due to
insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. For a description of these securities and the special risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment Objectives
and Policies."
Repurchase Agreements. For the purpose of achieving income, the
Portfolio may enter into repurchase agreements, subject to guidelines
promulgated by the Board of Trustees of the Trust. The Portfolio will not invest
more than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value
of any increase or decrease in the value of the Portfolio and may cause the
Portfolio to liquidate portfolio positions when it would not be advantageous to
do so. The Portfolio will maintain a segregated account consisting of cash or
other liquid assets to cover its obligations under reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls will be subject
to the Portfolio's limitations on borrowing as discussed in the Trust's SAI
under "Investment Restrictions." Apart from transactions involving reverse
repurchase agreements and dollar rolls, the Portfolio will not borrow money,
except for temporary administrative purposes. For an additional discussion of
the risks of borrowing and of reverse repurchase agreements and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned, (2) the Portfolio may at any time call the loan and
obtain the return of securities loaned, (3) the Portfolio will receive any
interest or dividends received on the loaned securities, and (4) the aggregate
value of the securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For an additional discussion of the Portfolio's
limitations on lending and certain risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The
Portfolio may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis. These transactions involve a commitment by the
Portfolio to purchase or sell securities for a predetermined price or yield,
with payment and delivery taking place more than seven days in the future, or
after a period longer than the customary settlement period for that type of
security. When such purchases are outstanding, the Portfolio will set aside and
maintain until the settlement date, in a segregated account, cash or other
liquid assets in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities the Portfolio has committed to purchase prior to
the time delivery of the securities is made, although the Portfolio may earn
income on securities it has deposited in a segregated account. When purchasing a
security on a when-issued, delayed delivery, or forward commitment basis, the
Portfolio assumes the rights and risks of ownership of the security, including
the risk of price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because the Portfolio is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio remains substantially fully invested at a time when when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a transaction fails to deliver or pay for the securities, the
Portfolio could miss a favorable price or yield opportunity or could suffer a
loss. The Portfolio may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Portfolio may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Portfolio may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale "against the box") is a transaction in which the Portfolio sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Portfolio engages in
short sales, it must (except in the case of short sales against the box)
maintain asset coverage in the form of cash or other liquid assets in a
segregated account. A short sale is "against the box" to the extent that the
Portfolio contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed income
securities of non-U.S. issuers. The Portfolio will concentrate its foreign
investments to securities of issuers based in developed countries. The Portfolio
may invest up to 10% of its assets in securities of issuers based in countries
with emerging securities markets. The Sub-advisor has broad discretion to
identify and invest in countries that it considers to qualify as emerging
securities markets. Investing in the securities of issuers in any foreign
country involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of the risks involved in investing
in foreign securities, in general, and the special risks of investing in
developing countries, as well as the risks of currency fluctuations, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Portfolio will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
Foreign Currency Transactions. The Portfolio may buy and sell foreign
currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Options on Securities, Securities Indexes and Currencies. The Portfolio
may purchase and write call and put options on securities, securities indexes
and on foreign currencies, and enter into futures contracts and use options on
futures contracts as further described below. The Portfolio may also enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency, exchange rates or securities prices
or as part of its overall investment strategy.
The Portfolio may purchase options on securities to protect holdings in
an underlying or related security against a substantial decline in market value.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. The
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. The Portfolio may write a call or put option
only if it is "covered" by the Portfolio holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Portfolio's obligation as writer of the option. Prior to exercise or expiration,
an option may be closed out by an offsetting purchase or sale of an option of
the same series.
The Portfolio may also invest in foreign-denominated securities and may
buy or sell put and call options on foreign currencies. Currency options traded
on U.S. or other exchanges may be subject to position limits which may limit the
ability of the Portfolio to reduce foreign currency risk using such options. For
a discussion of options and the risks involved therein, as well as the risks
involved in investing in foreign currency, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for the purposes of attempting to obtain
a particular desired return at a lower cost to the Portfolio than if the
Portfolio had invested directly in an instrument that yielded the desired
return. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. Commonly used swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate or "cap"; interest floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of a swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement ("net amount"). The Portfolio's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Portfolio) and any
accrued unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or other liquid assets to
avoid any potential leveraging of the Portfolio. The Portfolio will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Portfolio's total assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the Portfolio's
ability to predict correctly whether certain types of investment are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they have terms of 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. For an
additional discussion of futures contracts and related options, and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Trustees). Illiquid securities
may include privately placed securities, which are sold directly to a small
number of investors, usually institutions. Unlike public offerings, such
securities are not registered under the federal securities laws. Although
certain of these securities may be readily sold, for example, under Rule 144A,
others may be illiquid, and their sale may involve substantial delays and
additional costs.
Portfolio Turnover. The Portfolio may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Trust's SAI
under "Portfolio Turnover."
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
to maximize total return, consistent with preservation of capital and prudent
investment management. This is a fundamental objective of the Portfolio.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor utilizes
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of each Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets, and other factors.
The Portfolio will invest at least 65% of its total assets in the
following types of securities, which may be issued by domestic or foreign
entities and denominated in U.S. dollars or foreign currencies: securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government securities"); corporate debt securities, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
variable and floating rate debt securities; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase agreements and reverse
repurchase agreements; obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies or supranational
entities; and foreign currency exchange-related securities, including foreign
currency warrants.
The Portfolio may hold different percentages of its assets in these
various types of securities, and may invest all of its assets in derivative
instruments or in mortgage- or asset-backed securities. There are special risks
involved in these instruments.
The Portfolio will invest in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration of the
Portfolio will normally vary within a one- to three-year time frame based on the
Sub-advisor's forecast for interest rates. The Portfolio may invest up to 10% of
its assets in corporate debt securities that are rated below investment grade
but rated B or higher by Moody's or S&P (or, if unrated, determined by the
Sub-advisor to be of comparable quality). The Portfolio may also invest up to
20% of its assets in securities denominated in foreign currencies. The Portfolio
will make use of use of average portfolio credit quality standards to assist
institutional investors whose own investment guidelines limit its investments
accordingly. In determining the Portfolio's overall dollar-weighted average
quality, unrated securities are treated as if rated, based on the Sub-advisor's
view of their comparability to rated securities. In the event that ratings
services assign different ratings to the same security, the Sub-advisor will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings. The
Portfolio's investments may range in quality from securities rated in the lowest
category in which the Portfolio is permitted to invest to securities rated in
the highest category (as rated by Moody's or S&P or, if unrated, determined by
the Sub-advisor to be of comparable quality). The percentage of a the
Portfolio's assets invested in securities in a particular rating category will
vary. See the Appendix to the Trust's SAI for a description of Moody's and S&P
ratings applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may invest in securities denominated in foreign currencies,
and also may engage in foreign currency exchange transactions by means of buying
or selling foreign currencies on a spot basis, entering into foreign currency
forward contracts, and buying and selling foreign currency options, foreign
currency futures, and options on foreign currency futures. Foreign currency
exchange transactions may be entered into for the purpose of hedging against
foreign currency exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. The
Portfolio also may enter into foreign currency forward contracts and buy or sell
foreign currencies or foreign currency options for purposes of increasing
exposure to a particular foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may enter into swap agreements for purposes of attempting
to obtain a particular investment return at a lower cost to the Portfolio than
if the Portfolio had invested directly in an instrument that provided that
desired return. In addition, the Portfolio may purchase and sell securities on a
when-issued or delayed-delivery basis, sell securities short, and enter into
forward commitments to purchase securities; lend their securities to brokers,
dealers and other financial institutions to earn income; and borrow money for
investment purposes.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in market value of fixed income securities
(and therefore their capital appreciation or depreciation) is largely a function
of changes in the current level of interest rates. When interest rates are
falling, a portfolio with a shorter duration generally will not generate as high
a level of total return as a portfolio with a longer duration. Conversely, when
interest rates are rising, a portfolio with a shorter duration will generally
outperform longer duration portfolios. When interest rates are flat, shorter
duration portfolios generally will not generate as high a level of total return
as longer duration portfolios (assuming that long-term interest rates are higher
than short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the anticipated potential for total return, with,
however, greater attendant market risk and price volatility than for a portfolio
with a shorter duration. The market value of securities denominated in
currencies other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investments in corporate debt
securities that are below investment grade (rated below Baa (Moody's) or BBB
(S&P)) are described as "speculative" both by Moody's and S&P. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible securities,
which may offer higher income than the common stocks into which they are
convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable investments,
pure fixed income opportunities may be unattractive or limited due to
insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months was 1%, the mid-year par
value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage- or asset-backed securities. The value of
some mortgage- or asset-backed securities in which the Portfolio invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Portfolio, the ability of the Portfolio to successfully
utilize these instruments may depend in part upon the ability of the Sub-advisor
to forecast interest rates and other economic factors correctly.
Mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, such as CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be structured
in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. In addition, the Portfolio may invest in
other asset-backed securities that have been offered to investors. For an
additional discussion of mortgage-related and other asset-backed securities and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, for the purpose of achieving income, the Portfolio may
enter into repurchase agreements, which entail the purchase of a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time (normally
one day). The Portfolio will not invest more than 15% of its net assets (taken
at current market value) in repurchase agreements maturing in more than seven
days. For a discussion of repurchase agreements and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value
of any increase or decrease in the value of the Portfolio's portfolio and may
cause the Portfolio to liquidate portfolio positions when it would not be
advantageous to do so. The Portfolio will maintain a segregated account
consisting of cash or other liquid assets to cover its obligations under reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls will be subject to the Portfolio's limitations on borrowings as discussed
in the Trust's SAI under "Investment Restrictions." Apart from transactions
involving reverse repurchase agreements and dollar rolls, the Portfolio will not
borrow money, except for temporary administrative purposes. For an additional
discussion of the risks of borrowing, and of reverse repurchase agreements and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided: (i) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (ii) the Portfolio may at any time call the loan and
obtain the return of the securities loaned; (iii) the Portfolio will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For an additional discussion of certain risks
involved in lending, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's SAI under "Investment Restrictions."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The
Portfolio may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis. These transactions involve a commitment by the
Portfolio to purchase or sell securities for a predetermined price or yield,
with payment and delivery taking place more than seven days in the future, or
after a period longer than the customary settlement period for that type of
security. When such purchases are outstanding, the Portfolio will set aside and
maintain until the settlement date, in a segregated account, cash or other
liquid assets in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities the Portfolio has committed to purchase prior to
the time delivery of the securities is made, although the Portfolio may earn
income on securities it has deposited in a segregated account. When purchasing a
security on a when-issued, delayed delivery, or forward commitment basis, the
Portfolio assumes the rights and risks of ownership of the security, including
the risk of price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because the Portfolio is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio remains substantially fully invested at a time when when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a transaction fails to deliver or pay for the securities, the
Portfolio could miss a favorable price or yield opportunity or could suffer a
loss. The Portfolio may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Portfolio may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Portfolio may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale "against the box") is a transaction in which the Portfolio sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Portfolio engages in
short sales, it must (except in the case of short sales against the box)
maintain asset coverage in the form of cash or other liquid assets in a
segregated account. A short sale is "against the box" to the extent that the
Portfolio contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed income
securities of non-U.S. issuers. The Portfolio will concentrate its foreign
investments to securities of issuers based in developed countries. The Portfolio
may invest up to 5% of its assets in securities of issuers based in countries
with emerging securities markets. The Sub-advisor has broad discretion to
identify and invest in countries that it considers to qualify as emerging
securities markets. Investing in the securities of issuers in any foreign
country involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of the risks involved in investing
in foreign securities, in general, and the special risks of investing in
developing countries, as well as the risks of currency fluctuations, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Portfolio will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
Foreign Currency Transactions. The Portfolio may buy and sell foreign
currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Options on Securities, Securities Indexes, and Currencies. The
Portfolio may purchase put options on securities. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. The Portfolio may also purchase call
options on securities. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly manner.
The Portfolio may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. The Portfolio may write a call or put
option only if the option is "covered" by the Portfolio holding a position in
the underlying securities or by other means which would permit immediate
satisfaction of the Portfolio's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
The Portfolio may buy or sell put and call options on foreign
currencies. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of the Portfolio to reduce foreign
currency risk using such options. For a discussion of options and the risks
involved therein, as well as the risks involved in investing in foreign
currency, see this Prospectus and the Trust's SAI under "Certain Risk Factors
and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Portfolio's obligations under a swap
agreement will be accrued daily (offset against amounts owed to the Portfolio)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of segregated assets consisting of cash or other
liquid assets to avoid any potential leveraging of the Portfolio. A Portfolio
will not enter into a swap agreement with any single party if the net amount
owed or to be received under existing contracts with that party would exceed 5%
of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective will depend on the Sub-advisor's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Sub-advisor will
cause the Portfolio to enter into swap agreements only with counterparties that
would be eligible for consideration as repurchase agreement counterparties under
the Portfolio's repurchase agreement guidelines. Certain restrictions imposed on
the Portfolio by the Internal Revenue Code may limit the Portfolio's ability to
use swap agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Portfolio's ability
to terminate existing swap agreements or to realize amounts to be received under
such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon ("futures options") that
are traded on a U.S. or foreign exchange or board of trade. The Portfolio will
only enter into futures contracts or futures options which are standardized and
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system. Each Portfolio will use financial
futures contracts and related options only for "bona fide hedging" purposes, as
such term is defined in applicable regulations of the CFTC, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total net assets. For an
additional discussion of futures contracts and related options, and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Trustees). Illiquid securities
may include privately placed securities, which are sold directly to a small
number of investors, usually institutions. Unlike public offerings, such
securities are not registered under the federal securities laws. Although
certain of these securities may be readily sold, for example, under Rule 144A,
others may be illiquid, and their sale may involve substantial delays and
additional costs.
Portfolio Turnover. The Portfolio may have portfolio turnover higher than
other mutual funds with similar investment objectives. For an additional
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
Berger Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in common stocks of established companies which the
Sub-advisor believes offer favorable growth prospects. Current income is not an
investment objective of the Portfolio, and any income produced will be a
by-product of the effort to achieve the Portfolio's objective.
Investment Policies:
In general, investment decisions for the Portfolio are based on an
approach which seeks out successful companies because they are believed to be
more apt to become profitable investments. To evaluate a prospective investment,
the Sub-advisor analyzes information from various sources, including industry
economic trends, earnings expectations and fundamental securities valuation
factors to identify companies which in the Sub-advisor's opinion are more likely
to have predictable, above average earnings growth, regardless of the company's
size and geographic location. The Sub-advisor also takes into account a
company's management and its innovations in products and services in evaluating
its prospects for continued or future earnings growth.
In selecting its portfolio securities, the Portfolio places primary
emphasis on established companies which it believes to have favorable growth
prospects. Common stocks usually constitute all or most of the Portfolio's
investment holdings, but the Portfolio remains free to invest in securities
other than common stocks, and may do so when deemed appropriate by the
Sub-advisor to achieve the objective of the Portfolio. The Portfolio may, from
time to time, take substantial positions in securities convertible into common
stocks, and it may also purchase government securities, preferred stocks and
other senior securities if its Sub-advisor believes these are likely to be the
best suited at that time to achieve the Portfolio's objective. The Portfolio's
policy of investing in securities believed to have a potential for capital
growth means that a Portfolio share may be subject to greater fluctuations in
value than if the Portfolio invested in other securities.
Short-Term Investments. The Portfolio may increase its investment in
government securities and other short-term interest-bearing securities without
limit when the Sub-advisor believes market conditions warrant a temporary
defensive position, during which period it may be more difficult for the
Portfolio to achieve its investment objective.
Put and Call Options. The Portfolio may purchase put and call options
on stock indices for the purpose of hedging, which includes establishing a
position in an equity equivalent as a temporary substitute for the purchase of
individual stocks. To hedge the Portfolio to cushion against a decline in value,
the Portfolio may buy puts on stock indices; to hedge against increases in
prices of equities, pending investments in equities, the Portfolio may buy calls
on stock indices. No more than 1% of the market value of the Portfolio's net
assets at the time of purchase may be invested in put and call options. For a
discussion of the risks associated with options, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in both domestic and
foreign securities. Investments in foreign securities involve some risks that
are different from the risks of investing in securities of U.S. issuers. For a
discussion of risks involved in investing in foreign securities, including the
risk of currency fluctuations, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Convertible Securities. The Portfolio may purchase securities which are
convertible into common stock when the Sub-advisor believes they offer the
potential for a higher total return than nonconvertible securities. While fixed
income securities generally have a priority claim on a corporation's assets over
that of common stock, some of the convertible securities which the Portfolio may
hold are high-yield/high-risk securities that are subject to special risks,
including the risk of default in interest or principal payments which could
result in a loss of income to the Portfolio or a decline in the market value of
the securities. Convertible securities often display a degree of market price
volatility that is comparable to common stocks. The credit risk associated with
convertible securities generally is reflected by their being rated below
investment grade by organizations such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation. The Portfolio has no pre-established minimum
quality standards for convertible securities and may invest in convertible
securities of any quality, including lower rated or unrated securities. However,
the Portfolio will not invest in any security in default at the time of purchase
or in any nonconvertible debt securities rated below investment grade, and the
Portfolio will invest less than 20% of the market value of its assets at the
time of purchase in convertible securities rated below investment grade. For a
more detailed discussion of the risks associated with these securities and their
ratings, see the Appendix to the Trust's SAI.
Zero Coupon Bonds. The Portfolio may invest in zero coupon bonds or in
"strips." Zero coupon bonds do not make regular interest payments; rather, they
are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. "Strips" are
debt securities that are stripped of their interest coupons after the securities
are issued, but otherwise are comparable to zero coupon bonds. The market values
of "strips" and zero coupon bonds generally fluctuate in response to changes in
interest rates to a greater degree than do interest-paying securities of
comparable term and quality. The Portfolio will not invest in mortgage-backed or
other asset-backed securities.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities, including repurchase agreements maturing in more than seven
days. Securities eligible for resale under Rule 144A of the Securities Act of
1933 could be deemed "liquid" when saleable in a readily available market. For a
discussion of illiquid and restricted securities and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may have portfolio turnover higher than
other mutual funds with similar investment objectives. For an additional
discussion of portfolio turnover and its effects, see this Prospectus and the
Trust's SAI under "Portfolio Turnover."
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will invest primarily in growth companies believed by the
Sub-advisor to have favorable relationships between price/earnings ratios and
growth rates in sectors offering the potential for above-average returns.
In selecting investments for the Portfolio, the Sub-advisor's primary
emphasis is typically on evaluating a company's management, growth prospects,
business operations, revenues, earnings, cash flows, and balance sheet in
relationship to its share price. The Sub-advisor may select stocks which it
believes are undervalued relative to the current stock price. Undervaluation of
a stock can result from a variety of factors, such as a lack of investor
recognition of (1) the value of a business franchise and continuing growth
potential, (2) a new, improved or upgraded product, service or business
operation, (3) a positive change in either the economic or business condition
for a company, (4) expanding or changing markets that provide a company with
either new earnings direction or acceleration, or (5) a catalyst, such as an
impending or potential asset sale or change in management, that could draw
increased investor attention to a company. The Sub-advisor also may use similar
factors to identify stocks which it believes to be overvalued, and may engage in
short sales of such securities.
The Portfolio may also engage in the following investment practices,
each of which involves certain special risks.
Investments in Smaller Companies. The Portfolio may invest a
substantial portion of its assets in securities issued by small companies. Such
companies may offer greater opportunities for capital appreciation than larger
companies, but investments in such companies may involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. While the markets in
securities of such companies have grown rapidly in recent years, such securities
may trade less frequently and in smaller volume than more widely held
securities. The values of these securities may fluctuate more sharply than those
of other securities, and the Portfolio may experience some difficulty in
establishing or closing out positions in these securities at prevailing market
prices. There may be less publicly available information about the issuers of
these securities or less market interest in such securities than in the case of
larger companies, and it may take a longer period of time for the prices of such
securities to reflect the full value of their issuers' underlying earnings
potential or assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when the Sub-advisor would otherwise have
sold the security. It is possible that the Sub-advisor or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio. The Portfolio will not invest, in the
aggregate, more than 15% of its net assets in illiquid securities. Securities
eligible for resale under Rule 144A of the Securities Act of 1933 could be
deemed "liquid" when saleable in a readily available market. For a discussion of
illiquid and restricted securities and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales. When the Sub-advisor anticipates that the price of a
security will decline, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. The Portfolio
may make a profit or incur a loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Portfolio must replace the borrowed security. All short sales must
be fully collateralized, and the Portfolio will not sell securities short if,
immediately after and as a result of the sale, the value of all securities sold
short by the Portfolio exceeds 25% of its total assets. The Portfolio limits
short sales of any one issuer's securities to 2% of the Portfolio's total assets
and to 2% of any one class of the issuer's securities.
Foreign Securities. The Portfolio may invest up to 35% of its net
assets in securities principally traded in foreign markets. The Portfolio may
buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments.
The Portfolio may also at times invest a substantial portion of its
assets in securities of issuers in developing countries. Although many of the
securities in which the Portfolio may invest are traded on securities exchanges,
the Portfolio may trade in limited volume, and the exchanges may not provide all
of the conveniences or protections provided by securities exchanges in more
developed markets. The Portfolio may also invest a substantial portion of its
assets in securities traded in the over-the-counter markets in such countries
and not on any exchange, which may affect the liquidity of the investment and
expose the Portfolio to the credit risk of their counterparties in trading those
investments. For a discussion of the risks involved in investing in developing
countries and investing in foreign securities in general, including the risk of
currency fluctuations, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Debt Securities. The Portfolio may invest in debt securities from time
to time, if the Sub-advisor believes that such investments might help achieve
the Portfolio's investment objective. The Sub-advisor expects that under normal
circumstances the Portfolio will not likely invest a substantial portion of its
assets in debt securities.
The Portfolio will invest only in securities rated "investment grade"
or considered by the Sub-advisor to be of comparable quality. Investment grade
securities are rated Baa or higher by Moody's Investors Service, Inc. ("Moody's)
or BBB or higher by Standard & Poor's Corporation ("S&P"). Securities rated Baa
or BBB lack outstanding investment characteristics, have speculative
characteristics, and are subject to greater credit and market risks than
higher-rated securities. For a description of Moody's and S&P's rating
categories, see the Appendix to the Trust's SAI.
The Portfolio will not necessarily dispose of a security when its debt
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Zero-Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may also
invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon
bonds are issued at a significant discount from face value and pay interest only
at maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The values of
zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest
currently, and may involve greater credit risk than such bonds.
Options and Futures. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to attempt to realize a
greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and to attempt to increase its investment
return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above.
The Portfolio expects that its options and futures transactions
generally will be conducted on recognized exchanges. The Portfolio may in
certain instances purchase and sell options in the over-the-counter markets. The
Portfolio's ability to terminate options in the over-the-counter markets may be
more limited than for exchange-traded options, and such transactions also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if, as a result, the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of the Portfolio's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
Index Futures and Options. The Portfolio may buy and sell
index futures contracts ("index futures") and options on index futures and on
indices for hedging purposes (or may purchase warrants whose value is based on
the value from time to time of one or more foreign securities indices). An index
future is a contract to buy or sell units of a particular bond or stock index at
an agreed price on a specified future date. Depending on the change in value of
the index between the time when the Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also buy and sell index futures and options to increase its
investment return.
LEAPs and BOUNDs. The Portfolio may purchase long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity
to retain dividends on the underlying securities while potentially participating
in the underlying securities' capital appreciation up to a fixed dollar amount.
The Portfolio will not purchase these options with respect to more than 25% of
the value of its net assets.
For a discussion of options and futures and the risks involved therein,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Sector Concentration. At times, the Portfolio may invest more than 25%
of its assets in securities of issuers in one or more market sectors such as,
for example, the technology sector. A market sector may be made up of companies
in a number of related industries. The Portfolio would only concentrate its
investments in a particular market sector if the Sub-advisor were to believe the
investment return available from concentration in that sector justifies any
additional risk associated with concentration in that sector. When the Portfolio
concentrates its investments in a market sector, financial, economic, business,
and other developments affecting issuers in that sector will have a greater
effect on the Portfolio than if it had not concentrated its assets in that
sector.
Lending Portfolio Securities. The Portfolio may lend it securities to
broker-dealers. These transactions must be fully collateralized at all times,
but involve some risk to the Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering the
collateral. For an additional discussion of the Portfolio's limitations on
lending and certain risks involved in lending, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
These transactions must be fully collateralized at all times, but involve some
risk to the Portfolio if the other party should default on its obligations and
the Portfolio is delayed or prevented from recovering the collateral. For a
discussion of repurchase agreements and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Defensive Strategies. At times, the Sub-advisor may judge that market
conditions make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, the Sub-advisor may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government securities,
other high-quality debt instruments, and other securities the Sub-advisor
believes to be consistent with the Portfolio's best interests.
Portfolio Turnover. The Portfolio may have higher portfolio turnover
than other mutual funds with similar objectives. For a discussion of portfolio
turnover and its effects, see this Prospectus and the Trust's SAI under
"Portfolio Turnover."
Robertson Stephens Contrarian Portfolio:
Investment Objective: The investment objective of the Robertson Stephens
Contrarian Portfolio (the "Portfolio") is maximum long-term growth.
Investment Policies:
The Portfolio seeks growth by aggressive yet flexible investing
worldwide in growing companies that are attractively priced. The Portfolio
focuses its investments primarily on equity securities of domestic,
multinational, and foreign companies whose potential values generally have been
overlooked by other investors. Such companies include attractively priced
businesses that have not yet been discovered or become popular, previously
unpopular companies with growth potential due to changed circumstances,
companies that have declined in value and no longer command an investor
following, and previously popular companies temporarily out of favor due to
short-term factors.
In implementing its "contrarian" investment strategy, the Portfolio may
take positions that are different from those taken by other mutual funds. For
example, the Portfolio may sell the stocks of some issuers short, and may take
positions in options and futures contracts in anticipation of a market decline.
The Portfolio may also borrow money to purchase additional portfolio securities.
The Portfolio is a non-diversified mutual fund.
The Portfolio may also engage in the following investment practices,
each of which involves certain special risks. More detailed information about
these practices (some of which, including, for example, options and futures
contracts, and certain debt securities, may be considered "derivative"
investments), including limitations designed to reduce these risks, is included
in this Prospectus under "Certain Risk Factors and Investment Methods" and in
the Trust's SAI under "Investment Objectives and Policies" and "Certain Risk
Factors and Investment Methods."
Investments in Smaller Companies. The Portfolio may invest a
substantial portion of its assets in securities issued by small companies. Such
companies may offer greater opportunities for capital appreciation than larger
companies, but investments in such companies may involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. While the markets in
securities of such companies have grown rapidly in recent years, such securities
may trade less frequently and in smaller volume than more widely held
securities. The values of these securities may fluctuate more sharply than those
of other securities, and the Portfolio may experience some difficulty in
establishing or closing out positions in these securities at prevailing market
prices. There may be less publicly available information about the issuers of
these securities or less market interest in such securities than in the case of
larger companies, and it may take a longer period of time for the prices of such
securities to reflect the full value of their issuers' underlying earnings
potential or assets.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when the Sub-advisor would otherwise have
sold the security. It is possible that the Sub-advisor or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio. The Portfolio will not invest, in the
aggregate, more than 15% of its net assets in illiquid securities. Securities
eligible for resale under Rule 144A of the Securities Act of 1933 could be
deemed "liquid" when saleable in a readily available market. For a discussion of
illiquid and restricted securities and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales. When the Sub-advisor anticipates that the price of a
security will decline, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. The Portfolio
may make a profit or incur a loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Portfolio must replace the borrowed security. An increase in the
value of a security sold short by the Portfolio over the price at which it was
sold short will result in a loss to the Portfolio, and there can be no assurance
that the Portfolio will be able to close out the position at any particular time
or at an acceptable price.
All short sales must be fully collateralized. The Portfolio may enter
into short sales on securities with a value of up to 40% of the Portfolio's
total assets, and its positions in short sales may have the effect of providing
the Portfolio with investment leverage. To the extent the Portfolio enters into
short sales on a substantial portion of its assets, the Portfolio will to that
extent be exposed to the risks of short sales described above. For a description
of the effects and the risks of investment leverage, see below under "Borrowing
and Leverage."
Foreign Securities. The Portfolio may invest in securities principally
traded in foreign markets. Because foreign securities are normally denominated
and traded in foreign currencies, the value of the Portfolio's assets may be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations. Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect to investments
in the United States or in other foreign countries. In the case of securities
issued by a foreign governmental entity, the issuer may in certain circumstances
be unable or unwilling to meet its obligations on the securities in accordance
with their terms, and the Portfolio may have limited recourse available to it in
the event of default. The laws of some foreign countries may limit the
Portfolio's ability to invest in securities of certain issuers located in those
foreign countries. Special tax considerations apply to foreign securities. The
Portfolio may buy or sell foreign currencies and options and futures contracts
on foreign currencies for hedging purposes in connection with its foreign
investments. There is no limit on the amount of the Portfolio's assets that may
be invested in foreign securities.
The Portfolio may invest in securities of issuers in developing
countries. The Portfolio may at times invest a substantial portion of its assets
in such securities. Investments in developing countries are subject to the same
risks applicable to foreign investments generally, although those risks may be
increased due to conditions in such countries. For example, the securities
markets and legal systems in developing countries may only be in a developmental
stage and may provide few, or none, of the advantages or protections of markets
or legal systems available in more developed countries.
For an additional discussion of the risks involved in investing in
developing countries and investing in foreign securities in general, including
the risk of currency fluctuations, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Debt Securities. The Portfolio may invest in debt securities from time
to time, if the Sub-advisor believes investing in such securities might help
achieve the Portfolio's objective. The Sub-advisor expects that under normal
circumstances the Portfolio would not likely invest a substantial portion of its
assets in debt securities.
The Portfolio may invest in lower-quality, high-yielding debt
securities. Lower-rated debt securities (commonly called "junk bonds") are
considered to be of poor standing and predominantly speculative. Securities in
the lowest rating categories may have extremely poor prospects of attaining any
real investment standing, and some of those securities in which the Portfolio
may invest may be in default. The rating services' descriptions of securities in
the lower rating categories, including their speculative characteristics, are
set forth in the Appendix to the Trust's SAI.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. In addition, the
lower ratings of such securities reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. Changes by
recognized rating services in their ratings of any fixed-income security and in
the ability or perceived inability of an issuer to make payments of interest and
principal may also affect the value of these investments. For a discussion of
the special risks involved in lower-rated bonds, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are
subject to greater fluctuation in response to changes in market interest rates
than bonds which pay interest currently, and may involve greater credit risk
than such bonds.
The Portfolio will not necessarily dispose of a security when its debt
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective. If a security's rating is reduced below investment grade, an
investment in that security may entail the risks of lower-rated securities
described below.
Borrowing and Leverage. The Portfolio may borrow money to invest in
additional portfolio securities. This practice, known as "leverage," increases
the Portfolio's market exposure and its risk. When the Portfolio has borrowed
money for leverage and its investments increase or decrease in value, the
Portfolio's net asset value will normally increase or decrease more than if it
had not borrowed money. The interest the Portfolio must pay on borrowed money
will reduce the amount of any potential gains or further increase any losses.
The extent to which the Portfolio will borrow money, and the amount it may
borrow, depend on market conditions and interest rates. Successful use of
leverage depends on the Sub-advisor's ability to predict market movements
correctly. The Portfolio may at times borrow money by means of reverse
repurchase agreements. Reverse repurchase agreements generally involve the sale
by a fund of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. Reverse repurchase
agreements will increase the Portfolio's overall investment exposure and may
result in losses. The amount of money borrowed by the Portfolio for leverage may
generally not exceed one-third of the Portfolio's assets (including the amount
borrowed).
Options and Futures. The Portfolio may buy and sell call and put
options to hedge against changes in net asset value or to attempt to realize a
greater current return. In addition, through the purchase and sale of futures
contracts and related options, the Portfolio may at times seek to hedge against
fluctuations in net asset value and to attempt to increase its investment
return.
The Portfolio's ability to engage in options and futures strategies
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures contracts. Therefore, there is no assurance that the
Portfolio will be able to utilize these instruments effectively for the purposes
stated above.
Transactions in options and futures contracts involve brokerage costs
and may require the Portfolio to segregate assets to cover its outstanding
positions.
Index Futures and Options. The Portfolio may buy and sell
index futures contracts ("index futures") and options on index futures and on
indices (or may purchase investments whose values are based on the value from
time to time of one or more securities indices) for hedging purposes. An index
future is a contract to buy or sell units of a particular bond or stock index at
an agreed price on a specified future date. Depending on the change in value of
the index between the time the Portfolio enters into an index futures or option
transaction and the time it terminates it, the Portfolio realizes a gain or
loss. The Portfolio may also buy and sell index futures and options to increase
its investment return.
Risks Related to Options and Futures Strategies. Options and
futures transactions involve costs and may result in losses. For instance, the
Portfolio may be unable to close out futures or options positions. Although the
Portfolio will enter into options or futures transactions only if the
Sub-advisor believes that a liquid secondary market exists for such option or
futures contract, there can be no assurance that a Fund will be able to effect
closing transactions at any particular time or at an acceptable price. Certain
provisions of the Internal Revenue Code may limit the Portfolio's ability to
engage in options and futures transactions.
The Portfolio expects that its options and futures transactions
generally will be conducted on recognized exchanges. However, the Portfolio may
in certain instances purchase and sell options in the over-the-counter markets.
The Portfolio's ability to terminate options in the over-the-counter markets may
be more limited than for exchange-traded options, and such transactions also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their obligations.
For an additional discussion of options and futures and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Non-diversification and Sector Concentration. The Portfolio may invest
its assets in a more limited number of issuers than may other mutual funds.
Under the Internal Revenue Code, an investment company, including an investment
company such as the Portfolio that is not "diversified" under the 1940 Act,
generally may not invest more than 25% of its assets in obligations of any one
issuer other than U.S. Government obligations and, with respect to 50% of its
total assets, the Portfolio may not invest more than 5% of its total assets in
the securities of any one issuer (except U.S. Government securities). Thus, the
Portfolio may invest up to 25% of its total assets in the securities of each of
any two issuers. This practice involves an increased risk of loss to the
Portfolio if the market value of a security should decline or its issuer were
otherwise not to meet its obligations.
At times the Portfolio may invest more than 25% of its assets in
securities of issuers in one or more market sectors such as, for example, the
technology sector. A market sector may be made up of companies in a number of
related industries. The Portfolio would only concentrate its investments in a
particular market sector if the Sub-advisor were to believe the investment
return available from concentration in that sector justifies any additional risk
associated with concentration in that sector. When the Portfolio concentrates
its investments in a market sector, financial, economic, business, and other
developments affecting issuers in that sector will have a greater effect on the
Portfolio than if it had not concentrated its assets in that sector. The
Portfolio may not concentrate its assets in securities of issuers having their
principal business activities in a single industry.
The Portfolio may invest a significant portion of its assets in
companies within a number of industries involving base metals, precious metals,
and oil/energy. Accordingly, the performance of the Portfolio may be subject to
a greater risk of market fluctuation than that of a fund invested in a wider
spectrum of market or industrial sectors.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. These transactions must be fully collateralized at all times, but
involve some risk to the Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering the
collateral.
Defensive Strategies. At times, the Sub-advisor may judge that market
conditions make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, the Sub-advisor may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government securities,
other high-quality debt instruments, and other securities the Sub-advisor
believes to be consistent with the Portfolio's best interests.
Twentieth Century International Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will seek to achieve its investment objective by
investing primarily in securities of foreign issuers that meet certain
fundamental and technical standards of selection (relating primarily to
acceleration of earnings and revenues) and have, in the opinion of the
Sub-advisor, potential for appreciation. The Portfolio will invest primarily in
issuers in developed markets. The Portfolio will invest primarily in equity
securities (defined to include equity equivalents) of such issuers. The
Portfolio will attempt to stay fully invested in such securities, regardless of
the movement of stock prices generally.
Although the primary investment of the Portfolio will be equity
securities, the Portfolio may also invest in other types of securities
consistent with the accomplishment of the Portfolio's objectives. When the
Sub-advisor believes that the total return potential of other securities equals
or exceeds the potential return of equity securities, the Portfolio may invest
up to 35% in such other securities.
The other securities the Portfolio may invest in are bonds, notes and
debt securities of companies and obligations of domestic or foreign governments
and their agencies. The Portfolio will limit its purchases of debt securities to
investment grade obligations. For long-term debt obligations this includes
securities that are rated Baa or better by Moody's Investors Service, Inc.
("Moody's") or BBB or better by Standard & Poor's Corporation ("S&P"), or that
are not rated but considered by the Sub-advisor to be of equivalent quality.
According to Moody's, bonds rated Baa are medium-grade and possess some
speculative characteristics. A BBB rating by S&P indicates S&P's belief that a
security exhibits a satisfactory degree of safety and capacity for repayment,
but is more vulnerable to adverse economic conditions or changing circumstances
than is the case with higher quality debt securities. The rating services'
descriptions of securities in the various rating categories, including the
speculative characteristics of securities in the lower rating categories, are
set forth in the Appendix to the Trust's SAI. For an additional discussion of
lower-rated securities and certain risks involved therein, see this Prospectus
and the Trust's SAI under "Certain Risk Factors and Investment Methods."
The Portfolio may make foreign investments either directly in foreign
securities, or indirectly by purchasing depositary receipts or depositary shares
or similar instruments ("DRs") for foreign securities. DRs are securities that
are listed on exchanges or quoted in over-the-counter markets in one country but
represent shares of issuers domiciled in another country. The Portfolio may also
purchase securities of such issuers in foreign markets, either on foreign
securities exchanges or in the over-the-counter markets.
The Portfolio may also invest in other equity securities and equity
equivalents. Other equity securities and equity equivalents include securities
that permit the Portfolio to receive an equity interest in an issuer, the
opportunity to acquire an equity interest in an issuer, or the opportunity to
receive a return on its investment that permits the Portfolio to benefit from
the growth over time in the equity of an issuer. Examples of other equity
securities and equity equivalents are preferred stock, convertible preferred
stock and convertible debt securities. Equity equivalents may also include
securities whose value or return is derived from the value or return of a
different security. An example of one type of derivative security in which the
Portfolio might invest is a depositary receipt.
In addition to other factors that will affect their value, the value of
the Portfolio's investments in fixed income securities will change as prevailing
interest rates change. In general, the prices of such securities vary inversely
with interest rates. As prevailing interest rates fall, the prices of bonds and
other securities that trade on a yield basis rise. When prevailing interest
rates rise, bond prices generally fall. These changes in value may, depending
upon the particular amount and type of fixed income securities holdings of the
Portfolio, impact the net asset value of the Portfolio's shares.
Under normal conditions, the Portfolio will invest at least 65% of its
assets in equity and equity equivalent securities of issuers from at least three
countries outside of the United States. While securities of U.S. issuers may be
included in the Portfolio from time to time, it is the primary intent of the
Sub-advisor to diversify investments across a broad range of foreign issuers.
The Sub-advisor defines "foreign issuer" as an issuer of securities that is
domiciled outside the United States, derives at least 50% of its total revenue
from production or sales outside the United States, and/or whose principal
trading market is outside the United States.
In order to achieve maximum investment flexibility, the Portfolio has
not established geographic limits on asset distribution, on either a
country-by-country or region-by-region basis. The Sub-advisor expects to invest
both in issuers in developed markets (such as Germany, the United Kingdom and
Japan) and in issuers in emerging market countries. The Sub-advisor considers
"emerging market countries" to include all countries that are generally
considered to be developing or emerging countries by the International Bank for
Reconstruction and Development (commonly referred to as the World Bank) and the
International Finance Corporation (IFC), as well as countries that are
classified by the United Nations as developing. Currently, the countries not
included in this category are the United States, Canada, Japan, the United
Kingdom, Germany, Austria, France, Italy, Ireland, Spain, Belgium, the
Netherlands, Switzerland, Sweden, Finland, Norway, Denmark, Australia, and New
Zealand. In addition, as used with respect to this Portfolio, "securities of
issuers in emerging market countries" means (i) securities of issuers the
principal securities trading market for which is an emerging market country,
(ii) securities, regardless of where traded, of issuers that derive 50% or more
of their total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries, or (iii) securities of
issuers having their principal place of business or principal office in emerging
market countries.
The principal criteria for inclusion of a security in the Portfolio is
its ability to meet the fundamental and technical standards of selection and, in
the opinion of the Sub-advisor, to achieve better-than-average appreciation. If,
in the opinion of the Sub-advisor, a particular security satisfies these
principal criteria, the security may be included in the Portfolio, regardless of
the location of the issuer or the percentage of the Portfolio's investments in
the issuer's country or region. At the same time, however, the Sub-advisor
recognizes that both the selection of the Portfolio's individual securities and
the allocation of the Portfolio's assets across different countries and regions
are important factors in managing an international portfolio. For this reason,
the Sub-advisor will also consider a number of other factors in making
investment selections including: the prospects for relative economic growth
among countries or regions, economic and political conditions, expected
inflation rates, currency exchange fluctuations and tax considerations.
Investing in securities of foreign issuers generally involves greater
risks than investing in the securities of domestic companies. As with any
investment in securities, the value of an investment in the Portfolio can
decrease as well as increase, depending upon a variety of factors which may
affect the values and income generated by the portfolio securities. Foreign
securities markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in clearance and settlement could result in
temporary periods when assets of the Portfolio are uninvested and no return is
earned thereon. The inability of the Portfolio to make intended security
purchases due to clearance and settlement problems could cause the Portfolio to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to clearance and settlement problems could result either in
losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Portfolio has entered into a contract to sell the security,
liability to the purchaser.
Investments in the Portfolio should not be considered a complete
investment program and may not be appropriate for an individual with limited
investment resources or who is unable to tolerate fluctuations in the value of
the investment. For a discussion of certain risks involved in investing in
foreign securities, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Emerging Markets. The Portfolio may invest in securities of issuers in
emerging market countries. Investing in emerging market countries involves
exposure to significantly higher risk than investing in countries with developed
markets. Emerging market countries may have economic structures that are
generally less diverse and mature and political systems that can be expected to
be less stable than those of developed countries.
The economies of emerging market countries may be predominantly based
on only a few industries or dependent on revenues from particular commodities or
on international aid or development assistance, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. In addition, securities markets in
emerging market countries may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities traded on those markets. For an additional discussion of the special
risks involved in investing in developing countries or "emerging markets," see
this Prospectus under "Certain Risk Factors and Investment Methods."
Forward Currency Exchange Contracts. Some of the securities held by the
Portfolio will be denominated in foreign currencies. Other securities, such as
DRs, may be denominated in U.S. dollars, but have a value that is dependent upon
the performance of a foreign security, as valued in the currency of its home
country. As a result, the value of the Portfolio will be affected by changes in
the exchange rates between foreign currencies and the dollar, as well as by
changes in the market values of the securities themselves. The performance of
foreign currencies relative to the dollar may be an important factor in the
overall performance of the Portfolio.
To protect against adverse movements in exchange rates between
currencies, the Portfolio may, for hedging purposes only, enter into forward
currency exchange contracts. A forward currency exchange contract obligates the
Portfolio to purchase or sell a specific currency at a future date at a specific
price. The Portfolio may elect to enter into a forward currency exchange
contract with respect to a specific purchase or sale of a security, or with
respect to the Portfolio's positions generally. By entering into a forward
currency exchange contract with respect to the specific purchase or sale of a
security denominated in a foreign currency, the Portfolio can "lock in" an
exchange rate between the trade and settlement dates for that purchase or sale.
This practice is sometimes referred to as "transaction hedging." The Portfolio
may enter into transaction hedging contracts with respect to all or a
substantial portion of its trades.
When the Sub-advisor believes that a particular currency may decline in
value compared to the dollar, the Portfolio may enter into a foreign currency
exchange contract to sell an amount of foreign currency equal to the value of
some or all of the portfolio securities either denominated in, or whose value is
tied to, that currency. This practice is sometimes referred to as "portfolio
hedging." The Portfolio may not enter into a portfolio hedging transaction where
the Portfolio would be obligated to deliver an amount of foreign currency in
excess of the aggregate value of its portfolio securities or other assets
denominated in, or whose value is tied to, that currency. The Portfolio will
make use of portfolio hedging to the extent deemed appropriate by the
Sub-advisor. However, it is anticipated that the Portfolio will enter into
portfolio hedges much less frequently than transaction hedges.
If the Portfolio enters into a forward contract, the Portfolio, when
required, will instruct its custodian bank to segregate cash or other liquid
assets in a separate account in an amount sufficient to cover its obligation
under the contract. Those assets will be valued at market daily, and if the
value of the segregated securities declines, additional cash or securities will
be added so that the value of the account is not less than the amount of the
Portfolio's commitment. At any given time, no more than 10% of the Portfolio's
assets will be committed to a segregated account in connection with portfolio
hedging transactions.
Predicting the relative future values of currencies is very difficult,
and there is no assurance that any attempt to reduce the risk of adverse
currency movements through the use of forward currency exchange contracts will
be successful. In addition, the use of forward currency exchange contracts tends
to limit the potential gains that might result from a positive change in the
relationship between the foreign currency and the U.S. dollar. For an additional
discussion of foreign currency exchange contracts, certain risks involved
therein and the risks of currency fluctuations generally, see this Prospectus
and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Indirect Foreign Investments. Subject to certain restrictions contained
in the Investment Company Act, the Portfolio may invest up to 10% of its assets
in certain foreign countries indirectly through investment funds and registered
investment companies authorized to invest in those countries. If the Portfolio
invests in investment companies, the Portfolio will bear its proportionate
shares of the costs incurred by such companies, including investment advisory
fees, if any.
Sovereign Debt Obligations. The Portfolio may purchase sovereign debt
instruments issued or guaranteed by foreign governments or their agencies,
including debt of emerging market countries. Sovereign debt may be in the form
of conventional securities or other types of debt instruments such as loans or
loan participations. Sovereign debt of emerging market countries may involve a
high degree of risk and may present a risk of default or renegotiation or
rescheduling of debt payments.
Portfolio Turnover. Investment decisions to purchase and sell
securities are based on the anticipated contribution of the security in question
to the Portfolio's objectives. The rate of portfolio turnover is irrelevant when
the Sub-advisor believes a change is in order to achieve those objectives and
accordingly, the annual portfolio turnover rate cannot be anticipated. The
portfolio turnover may be higher than other mutual funds with similar investment
objectives. For an additional discussion of portfolio turnover, see this
Prospectus under "Portfolio Turnover" and the Trust's SAI under "Investment
Objectives and Policies."
Temporary Investments. Notwithstanding the Portfolio's investment
objective of capital growth, under exceptional market or economic conditions,
the Portfolio may temporarily invest all or a substantial portion of its assets
in cash or investment-grade short-term securities (denominated in U.S. dollars
or foreign currencies). To the extent the Portfolio assumes a defensive
position, it will not be pursuing its investment objective of capital growth.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may invest in repurchase agreements when
such transactions present an attractive short-term return on cash that is not
otherwise committed to the purchase of securities pursuant to the investment
policies of the Portfolio.
The Portfolio will limit repurchase agreement transactions to
securities issued by the U.S. government, its agencies and instrumentalities,
and will enter into such transactions with those commercial banks and
broker-dealers who are deemed creditworthy pursuant to criteria adopted by the
Trust's Board of Trustees. The Portfolio will not invest more than 15% of its
assets in repurchase agreements maturing in more than seven days. For a
discussion of repurchase agreements and certain risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued Transactions. The Portfolio may sometimes purchase new
issues of securities on a when-issued basis without limit when, in the opinion
of the Sub-advisor, such purchases will further the investment objectives of the
Portfolio. For a discussion of when-issued securities and certain risks involved
therein, see the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost. These transactions allow
the Portfolio to hedge against price fluctuations by locking in a sale price for
securities it does not wish to sell immediately.
The Portfolio may make a short sale when it wants to sell the security
it owns at a current attractive price, but also wishes to defer recognition of
gain or loss for federal income tax purposes and for purposes of satisfying
certain tests applicable to regulated investment companies under the Internal
Revenue Code and Regulations.
Rule 144A Securities. The Portfolio may, from time to time, purchase
Rule 144A securities when they present attractive investment opportunities that
otherwise meet the Portfolio's criteria for selection. Rule 144A securities are
securities that are privately placed with and traded among qualified
institutional buyers rather than the general public. Although Rule 144A
securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the
Staff of the Securities and Exchange Commission has taken the position that the
liquidity of such securities in the portfolio of a fund offering redeemable
securities is a question of fact for the board of trustees to determine, such
determination to be based upon a consideration of the readily available trading
markets and the review of any contractual restrictions. Accordingly, the Board
of Trustees of the Trust is responsible for developing and establishing the
guidelines and procedures for determining the liquidity of Rule 144A securities.
As allowed by Rule 144A, the Board of Trustees has delegated the day-to-day
function of determining the liquidity of Rule 144A securities to the
Sub-advisor. The Board retains the responsibility to monitor the implementation
of the guidelines and procedures it has adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and the Portfolio may, from time to time, hold a Rule 144A
security that is illiquid. In such an event, the Sub-advisor will consider
appropriate remedies to minimize the effect on the Portfolio's liquidity. The
Portfolio may not invest more than 15% of its assets in illiquid securities
(securities that may not be sold within seven days at approximately the price
used in determining the net asset value of Portfolio shares). For an additional
discussion of Rule 144A securities and illiquid and restricted securities, and
certain risks involved therein, see this Prospectus under "Certain Risk Factors
and Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
Twentieth Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth and current income. This is a fundamental objective of the
Portfolio.
Investment Policies:
It is the Sub-advisor's intention to maintain approximately 60% of the
Portfolio's assets in common stocks that are considered by the Sub-advisor to
have better-than-average prospects for appreciation and the remainder in bonds
and other fixed income securities.
Equity Investments. With the equity portion of the Portfolio, the
Sub-advisor seeks capital growth by investing in securities, primarily common
stocks, that meet certain fundamental and technical standards of selection
(relating primarily to earnings and revenue acceleration) and have, in the
opinion of the Sub-advisor, better-than-average potential for appreciation. So
long as a sufficient number of such securities are available, the Sub-advisor
intends to keep the equity portion of the Portfolio fully invested in these
securities regardless of the movement of stock prices generally. The Portfolio
may purchase securities only of companies that have a record of at least three
years continuous operation.
The Sub-advisor selects, for the equity portion of the Portfolio,
securities of companies whose earnings and revenue trends meet the Sub-advisor's
standards of selection. The size of the companies in which the Portfolio invests
tends to give it its own characteristics of volatility and risk. These
differences come about because developments such as new or improved products or
methods, which would be relatively insignificant to a large company, may have a
substantial impact on the earnings and revenues of a small company and create a
greater demand and a higher value for its shares. However, a new product failure
which could readily be absorbed by a large company can cause a rapid decline in
the value of the shares of a smaller company. Hence, it could be expected that
the volatility of the Portfolio will be impacted by the size of companies in
which it invests.
Fixed Income Investments. The Sub-advisor intends to maintain
approximately 40% of the Portfolio's assets in fixed income securities,
approximately 80% of which will be invested in domestic fixed income securities
and approximately 20% of which will be invested in foreign fixed income
securities. This percentage will fluctuate from time to time and may be higher
or lower depending on the mix the Sub-advisor believes will provide the most
favorable outlook for achieving the Portfolio's objectives. A minimum of 25% of
the Portfolio's assets will be invested in fixed income senior securities.
The fixed income portion of the Portfolio will include U.S. Treasury
securities, securities issued or guaranteed by the U.S. government or a foreign
government, or an agency or instrumentality of the U.S. or a foreign government,
and non-convertible debt obligations issued by U.S. or foreign corporations. The
Portfolio may also invest in mortgage-related and other asset-backed securities.
As with the equity portion of the Portfolio, the bond portion of the Portfolio
will be diversified among the various types of fixed income investment
categories described above. The Sub-advisor's strategy is to actively manage the
Portfolio by investing the Portfolio's assets in sectors it believes are
undervalued (relative to the other sectors) and which represent better relative
long-term investment opportunities.
The value of fixed income securities fluctuates based on changes in
interest rates, currency values and the credit quality of the issuer. The
Sub-advisor will actively manage the Portfolio, adjusting the weighted average
portfolio maturity as necessary in response to expected changes in interest
rates. During periods of rising interest rates, the weighted average maturity of
the Portfolio may be moved to the shorter end of its maturity range in order to
reduce the effect of bond price declines on the Portfolio's net asset value.
When interest rates are falling and bond prices are rising, the weighted average
portfolio maturity may be moved toward the longer end of its maturity range.
Debt securities that comprise part of the Portfolio's fixed income
portfolio will primarily be limited to "investment grade" obligations. However,
the Portfolio may invest up to 10% of its fixed income assets in "high yield"
securities. "Investment grade" means that at the time of purchase, such
obligations are rated within the four highest categories by a nationally
recognized statistical rating organization for example, at least Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation
("S&P"), or, if not rated, are of equivalent investment quality as determined by
the Sub-advisor. According to Moody's, bonds rated Baa are medium-grade and
possess some speculative characteristics. A BBB rating by S&P indicates S&P's
belief that a security exhibits a satisfactory degree of safety and capacity for
repayment, but is more vulnerable to adverse economic conditions and changing
circumstances. "High yield" securities, sometimes referred to as "junk bonds,"
are higher risk, non-convertible debt obligations that are rated below
investment grade securities, or are unrated, but with similar credit quality.
The rating services' descriptions of securities in the various rating
categories, including the speculative characteristics of securities in the lower
rating categories, are set forth in the Appendix to the Trust's SAI.
There are no credit or maturity restrictions on the fixed income
securities in which the high yield portion of the Portfolio may be invested.
Debt securities rated lower than Baa by Moody's or BBB by S&P or their
equivalent are considered by many to be predominantly speculative. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than is the
case with higher quality debt securities. Regardless of rating levels, all debt
securities considered for purchase by the Portfolio are analyzed by the
Sub-advisor to determine, to the extent reasonably possible, that the planned
investment is sound, given the investment objective of the Portfolio. For an
additional discussion of lower-rated securities and certain risks involved
therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Under normal market conditions, the maturities of fixed-income
securities in which the Portfolio invests will range from 2 to 30 years.
In determining the allocation of assets among U.S. and foreign capital
markets, the Sub-advisor considers the condition and growth potential of the
various economies; the relative valuations of the markets; and social,
political, and economic factors that may affect the markets. In selecting
securities in foreign currencies, the Sub-advisor considers, among other
factors, the impact of foreign exchange rates relative to the U.S. dollar value
of such securities. The Sub-advisor may seek to hedge all or a part of the
Portfolio's foreign currency exposure through the use of forward foreign
currency contracts or options thereon.
Foreign Securities. The Portfolio may invest up to 25% of its assets in
the securities of foreign issuers, including debt securities of foreign
governments and their agencies primarily from developed markets, when these
securities meet its standards of selection. The Portfolio may make such
investments either directly in foreign securities, or by purchasing depositary
receipts ("DRs") for foreign securities. DRs are securities listed on exchanges
or quoted in the over-the-counter market in one country but represent the shares
of issuers domiciled in other countries. DRs may be sponsored or unsponsored.
Direct investments in foreign securities may be made either on foreign
securities exchanges or in the over-the-counter markets.
The Portfolio may invest in common stocks, convertible securities,
preferred stocks, bonds, notes and other debt securities of foreign issuers, and
debt securities of foreign governments and their agencies. The credit quality
standards applicable to domestic securities purchased by the Portfolio are also
applicable to its foreign securities investments. For a discussion of certain
risks involved in investing in foreign securities, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
Forward Currency Exchange Contracts. Some of the foreign securities
held by the Portfolio may be denominated in foreign currencies. Other
securities, such as DRs, may be denominated in U.S. dollars, but have a value
that is dependent on the performance of a foreign security, as valued in the
currency of its home country. As a result, the value of the Portfolio may be
affected by changes in the exchange rates between foreign currencies and the
U.S. dollar, as well as by changes in the market values of the securities
themselves. The performance of foreign currencies relative to the U.S. dollar
may be a factor in the overall performance of the Portfolio.
To protect against adverse movements in exchange rates between
currencies, the Portfolio may, for hedging purposes only, enter into forward
currency exchange contracts and buy put and call options relating to currency
futures contracts. A forward currency exchange contract obligates the Portfolio
to purchase or sell a specific currency at a future date at a specific price. An
option is a contractual right to acquire a financial asset, such as a security,
the securities of a market index, a foreign currency or a foreign currency
exchange contract, at a specified price at the end of a specified term.
The Portfolio may elect to enter into a forward currency exchange
contract with respect to a specific purchase or sale of a security, or with
respect to the Portfolio's positions generally. By entering into a forward
currency exchange contract with respect to the specific purchase or sale of a
security denominated in a foreign currency, the Portfolio can "lock in" an
exchange rate between the trade and settlement dates for that purchase or sale.
This practice is sometimes referred to as "transaction hedging." The Portfolio
may enter into transaction hedging contracts with respect to all or a
substantial portion of its foreign securities trades.
When the Sub-advisor believes that a particular currency may decline in
value compared to the U.S. dollar, the Portfolio may enter into forward currency
exchange contracts to sell the value of some or all of the Portfolio's
securities either denominated in, or whose value is tied to, that currency. This
practice is sometimes referred to as "portfolio hedging." The Portfolio may not
enter into a portfolio hedging transaction where it would be obligated to
deliver an amount of foreign currency in excess of the aggregate value of its
portfolio securities or other assets denominated in, or whose value is tied to,
that currency. The Portfolio will make use of the portfolio hedging to the
extent deemed appropriate by the Sub-advisor. However, it is anticipated that
the Portfolio will enter into portfolio hedges much less frequently than
transaction hedges.
If the Portfolio enters into a forward contract, the Portfolio, when
required, will instruct its custodian bank to segregate cash or other liquid
assets in a separate account in an amount sufficient to cover its obligation
under the contract. Those assets will be valued at market daily, and if the
value of the segregated securities declines, additional cash or securities will
be added so that the value of the account is not less than the amount of the
Portfolio's commitment. At any given time, no more than 10% of the Portfolio's
assets will be committed to a segregated account in connection with portfolio
hedging transactions.
Predicting the relative future values of currencies is very difficult,
and there is no assurance that any attempt to protect the Portfolio against
adverse currency movements through the use of forward currency exchange
contracts will be successful. In addition, the use of forward currency exchange
contracts tends to limit the potential gains that might result from a positive
change in the relationships between the foreign currency and the U.S. dollar.
For an additional discussion of foreign currency exchange contracts, certain
risks involved therein and the risks of currency fluctuations generally, see
this Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
purchase mortgage-related and other asset-backed securities. Mortgage
pass-through securities are securities representing interests in "pools" of
mortgages 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 residential mortgage loans that underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government in the case of
securities guaranteed by the Government National Mortgage Association (GNMA), or
guaranteed by agencies or instrumentalities of the U.S. government in the case
of securities guaranteed by the Federal National Mortgage Association (FNMA) or
the Federal Home Loan Mortgage Corporation (FHLMC), which are supported only by
the discretionary authority of the U.S. government to purchase the agency's
obligations.
Mortgage pass-through securities created by nongovernmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage poolers.
The Portfolio may also invest in collateralized mortgage obligations
(CMOs). CMOs are mortgage-backed securities issued by government agencies;
single-purpose, stand-alone financial subsidiaries; trusts established by
financial institutions; or similar institutions. The Portfolio may buy CMOs that
are: (i) collateralized by pools of mortgages in which payment of principal and
interest of each mortgage is guaranteed by an agency or instrumentality of the
U.S. government; (ii) collateralized by pools of mortgages in which payment of
principal and interest are guaranteed by the issuer, and the guarantee is
collateralized by U.S. government securities; or (iii) securities in which the
proceeds of the issue are invested in mortgage securities and payments of
principal and interest are supported by the credit of an agency or
instrumentality of the U.S. government. For a discussion of certain risks
involved in mortgage related and other asset-back securities, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. Investment decisions to purchase and sell
securities are based on the anticipated contribution of the security in question
to the Portfolio's objectives. The rate of portfolio turnover is irrelevant when
the Sub-advisor believes a change is in order to achieve those objectives and
accordingly, the annual portfolio turnover rate cannot be anticipated. The
portfolio turnover of the Portfolio may be higher than other mutual funds with
similar investment objectives. For an additional discussion of portfolio
turnover, see this Prospectus under "Portfolio Turnover" and the Trust's SAI
under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may invest in repurchase agreements when
such transactions present an attractive short-term return on cash that is not
otherwise committed to the purchase of securities pursuant to the investment
policies of the Portfolio.
The Portfolio will limit repurchase agreement transactions to
securities issued by the U.S. government, its agencies and instrumentalities,
and will enter into such transactions with those banks and securities dealers
who are deemed creditworthy pursuant to criteria adopted by the Trust's Board of
Trustees. The Portfolio will invest no more than 15% of its assets in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Derivative Securities. To the extent permitted by its investment
objectives and policies, the Portfolio may invest in securities that are
commonly referred to as "derivative" securities. Generally, a derivative is a
financial arrangement the value of which is based on, or "derived" from, a
traditional security, asset, or market index. Certain derivative securities are
more accurately described as "index/structured" securities. Index/structured
securities are derivative securities whose value or performance is linked to
other equity securities (such as depositary receipts), currencies, interest
rates, indices or other financial indicators ("reference indices").
Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a fund from exposure to changing interest rates,
securities prices, or currency exchange rates and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities.
The Portfolio may not invest in a derivative security unless the
reference index or the instrument to which it relates is an eligible investment
for the Portfolio. For example, a security whose underlying value is linked to
the price of oil would not be a permissible investment since the Portfolio may
not invest in oil and gas leases or futures. The return on a derivative security
may increase or decrease, depending upon changes in the reference index or
instrument to which it relates.
There are a range of risks associated with derivative investments,
including: the risk that the underlying security, interest rate, market index or
other financial asset will not move in the direction the Sub-advisor
anticipates; the possibility that there may be no liquid secondary market, or
the possibility that price fluctuation limits may be imposed by the exchange,
either of which may make it difficult or impossible to close out a position when
desired; the risk that adverse price movements in an instrument can result in a
loss substantially greater than the Portfolio's initial investment; and the risk
that the counterparty will fail to perform its obligations. For a discussion of
certain risks involved in investing in derivative securities, including futures
and options contracts, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Portfolio Securities Lending. In order to realize additional income,
the Portfolio may lend its portfolio securities to persons not affiliated with
it and who are deemed to be creditworthy. Such loans must be secured
continuously by cash collateral maintained on a current basis in an amount at
least equal to the market value of the securities loaned, or by irrevocable
letters of credit. During the existence of the loan, the Portfolio must continue
to receive the equivalent of the interest and dividends paid by the issuer on
the securities loaned and interest on the investment of the collateral. The
Portfolio must have the right to call the loan and obtain the securities loaned
at any time on five days' notice, including the right to call the loan to enable
the Portfolio to vote the securities. Such loans may not exceed one-third of the
Portfolio's net assets taken at market. Interest on loaned securities may not
exceed 10% of the annual gross income of the Portfolio (without offset for
realized capital gains).
When-Issued Transactions. The Portfolio may sometimes purchase new
issues of securities on a when-issued basis without limit when, in the opinion
of the Sub-advisor, such purchases will further the investment objectives of the
Portfolio. For a discussion of when-issued securities and certain risks involved
therein, see the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost. These transactions allow
the Portfolio to hedge against price fluctuations by locking in a sale price for
securities it does not wish to sell immediately.
The Portfolio may make a short sale when it wants to sell the security
it owns at a current attractive price but also wishes to defer recognition of
gain or loss for federal income tax purposes, and for purposes of satisfying
certain tests applicable to regulated investment companies under the Internal
Revenue Code and Regulations.
Rule 144A Securities. The Portfolio may, from time to time, purchase
Rule 144A securities when they present attractive investment opportunities that
otherwise meet the Portfolio's criteria for selection. Rule 144A securities are
securities that are privately placed with and traded among qualified
institutional buyers rather than the general public. Although Rule 144A
securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the
Staff of the Securities and Exchange Commission has taken the position that the
liquidity of such securities in the portfolio of a fund offering redeemable
securities is a question of fact for the board of trustees to determine, such
determination to be based upon a consideration of the readily available trading
markets and the review of any contractual restrictions. Accordingly, the Board
of Trustees of the Trust is responsible for developing and establishing the
guidelines and procedures for determining the liquidity of Rule 144A securities.
As allowed by Rule 144A, the Board of Trustees has delegated the day-to-day
function of determining the liquidity of Rule 144A securities to the
Sub-advisor. The Board retains the responsibility to monitor the implementation
of the guidelines and procedures it has adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and the Portfolio may, from time to time, hold a Rule 144A
security that is illiquid. In such an event, the Sub-advisor will consider
appropriate remedies to minimize the effect on the Portfolio's liquidity. The
Portfolio may not invest more than 15% of its assets in illiquid securities
(securities that may not be sold within seven days at approximately the price
used in determining the net asset value of Portfolio shares). For an additional
discussion of Rule 144A securities and illiquid and restricted securities, and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowing. For a discussion of the Portfolio's limitations on borrowing and
certain risks involved in borrowing, see this Prospectus under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment
Restrictions."
AST Putnam Value Growth & Income Portfolio:
Investment Objective: The primary investment objective of the Portfolio is
to seek capital growth. Current income is a secondary investment objective.
These are fundamental objectives of the Portfolio.
Investment Policies:
The Portfolio invests primarily in common stocks that offer potential
for capital growth, and may, consistent with its investment objectives, invest
in stocks that offer potential for current income. The Portfolio may also
purchase corporate bonds, notes and debentures, preferred stocks, or convertible
securities (both debt securities and preferred stocks) or U.S. government
securities, if the Sub-advisor determines that their purchase would help further
the Portfolio's investment objectives. The types of securities held by the
Portfolio may vary from time to time in light of the Portfolio's investment
objectives, changes in interest rates, and economic and other factors. When
selecting securities for the Portfolio that have the potential for capital
growth, the Sub-advisor will seek to identify securities that are significantly
undervalued in relation to underlying asset values or earnings potential. The
Portfolio may also hold a portion of its assets in cash or money market
instruments.
Defensive Strategies. At times, the Sub-advisor may judge that
conditions in the securities markets make pursuing the Portfolio's basic
investment strategy inconsistent with the best interests of its shareholders. At
such times, the Sub-advisor may temporarily use alternative strategies primarily
designed to reduce fluctuations in the value of the Portfolio's assets. In
implementing these defensive strategies, the Portfolio may invest without limit
in debt securities or preferred stocks, or invest in any other securities the
Sub-advisor considers consistent with such defensive strategies. It is
impossible to predict when, or for how long, the Portfolio will use these
alternative strategies.
Foreign Securities. The Portfolio may invest up to 20% of its assets in
securities traded in foreign securities markets. The Portfolio may also purchase
Eurodollar certificates of deposit, without regard to the 20% limit. The
Portfolio may invest in securities principally traded in, or issued by issuers
located in, underdeveloped and developing nations, which are sometimes referred
to as "emerging markets." For a discussion of the special risks involved in
investing in developing countries and certain risks involved in investing in
foreign securities in general, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may buy or sell foreign
currencies, foreign currency futures contracts and foreign currency forward
contracts for hedging purposes in connection with its foreign investments. For a
discussion of foreign currency transactions, certain risks involved therein and
the risk of currency fluctuations generally, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Lower-Rated Fixed-Income Securities. The Portfolio may invest a portion
of its assets in fixed-income securities, including lower-rated fixed-income
securities, which are commonly known as "junk bonds," without limitation as to
credit rating. The values of fixed-income securities fluctuate in response to
changes in interest rates. Thus, a decrease in interest rates will generally
result in an increase in the value of such securities. Conversely, during
periods of rising interest rates, the value of the Portfolio's assets will
generally decline. The values of lower-rated securities generally fluctuate more
than those of higher-rated securities. Securities in the lower rating categories
may, depending on their rating, have large uncertainties or major exposure to
adverse conditions, and may be of poor standing and predominantly speculative.
Certain lower-rated securities may be in default. Securities rated Baa or BBB,
while considered investment grade, are more vulnerable to adverse economic
conditions than securities in the higher-rated categories and have speculative
elements. The rating services' descriptions of securities in the various rating
categories, including the speculative characteristics of securities in the lower
rating categories, are set forth in the Appendix to the Trust's SAI. For an
additional discussion of lower-rated securities and certain risks involved
therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Zero Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may invest
in zero coupon bonds and payment-in-kind bonds. Zero coupon bonds are issued at
a significant discount from their principal amount and pay interest only at
maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The values of
zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest in
cash currently. Both zero coupon bonds and payment-in-kind bonds allow an issuer
to avoid the need to generate cash to meet current interest payments.
Accordingly, such bonds may involve greater credit risks than bonds paying
interest currently. Even though such bonds do not pay current interest in cash,
the Portfolio is nonetheless required to accrue interest income on such
investments and to distribute such amounts at least annually to shareholders.
For an additional discussion of zero coupon bonds and certain risks involved
therein, see the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Stock Index Futures and Options. The Portfolio may buy and sell stock
index futures contracts. An "index future" is a contract to buy or sell units of
a particular stock index at an agreed price on a specified future date.
Depending on the change in value of the index between the time when the
Portfolio enters into and terminates an index futures transaction, the Portfolio
realizes a gain or loss. The Portfolio may buy and sell call and put options on
index futures or on stock indices in addition to or as an alternative to
purchasing or selling index futures or, to the extent permitted by applicable
law, to earn additional income. For an additional discussion of index futures
and related options and certain risks involved therein, see this Prospectus and
the Trust's SAI under "Certain Risk Factors and Investment Methods."
Options. The Portfolio may seek to increase its current return by
writing covered call and put options on securities it owns or in which it may
invest. The Portfolio receives a premium from writing a call or put option,
which increases the return if the option expires unexercised or is closed out at
a net profit.
When the Portfolio writes a call option, it gives up the opportunity to
profit from any increase in the price of a security above the exercise price of
the option; when it writes a put option, the Portfolio takes the risk that it
will be required to purchase a security from the option holder at a price above
the current market price of the security. The Portfolio may terminate an option
that it has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written.
The Portfolio may also buy and sell put and call options for hedging
purposes. From time to time, the Portfolio may also buy and sell combinations of
put and call options on the same underlying security to earn additional income.
The aggregate value of the securities underlying the options may not exceed 25%
of Portfolio assets. The use of these strategies may be limited by applicable
law. For an additional discussion of options transactions and certain risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to
broker-dealers. Such transactions must be fully collateralized at all times.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
securities lending and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
Such transactions must be fully collateralized at all times. These transactions
involve some risk to the Portfolio if the other party should default on its
obligation and the Portfolio is delayed or prevented from recovering the
collateral or completing the transaction. For a discussion of repurchase
agreements and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future
delivery, which may increase its overall investment exposure and involves a risk
of loss if the value of the securities declines prior to the settlement date.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
forward commitments and certain risks involved therein, see the Trust's SAI
under "Investment Objectives and Policies."
Borrowing. For a discussion of 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 SAI under "Investment
Restrictions."
AST Putnam International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio seeks its objective by investing primarily in equity
securities of companies located in countries other than the United States. The
Portfolio's investments will normally include common stocks, preferred stocks,
securities convertible into common or preferred stocks, and warrants to purchase
common or preferred stocks. The Portfolio may also invest to a lesser extent in
debt securities and other types of investments if the Sub-advisor believes
purchasing them would help achieve the Portfolio's objective. The Portfolio
will, under normal circumstances, invest at least 65% of its total assets in
issuers located in at least three different countries other than the United
States. The Portfolio may hold a portion of its assets in cash or money market
instruments.
The Portfolio will consider an issuer of securities to be "located in a
country other than the United States" if it is organized under the laws of a
country other than the United States and has a principal office outside the
United States, or if it derives 50% or more of its total revenues from business
outside the United States. The Portfolio may invest in securities of issuers in
emerging markets, as well as more developed markets. Investing in emerging
markets generally involves more risks then in investing in developed markets.
For a discussion of the special risks involved in investing in emerging markets
and foreign securities in general, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investments Methods."
The Portfolio will not limit its investments to any particular type of
company. The Portfolio may invest in companies, large or small, whose earnings
are believed to be in a relatively strong growth trend, or in companies in which
significant further growth is not anticipated but whose market value per share
is thought to be undervalued. It may invest in small and relatively less
well-known companies which meet these characteristics.
The Sub-advisor believes that the securities markets of many nations
move relatively independently of one another, because business cycles and other
economic or political events that influence one country's securities markets may
have little effect on securities markets in other countries. By investing in a
diversified portfolio of foreign securities, the Sub-advisor attempts to reduce
the risks associated with being invested in the economy of only one country. The
countries which the Sub-advisor believes offer attractive opportunities for
investment may change from time to time.
The Portfolio may seek investment opportunities among securities of
large, widely-traded companies as well as securities of smaller, less well known
companies. Smaller companies may present greater opportunities for capital
appreciation, but may also involve greater risks. They may have limited product
lines, markets or financial resources, or may depend on a limited management
group. Their securities may trade less frequently and in limited volume. As a
result, the prices of these securities may fluctuate more than prices of
securities of larger, more established companies.
Defensive Strategies. At times, the Sub-advisor may judge that
conditions in the international securities markets make pursuing the Portfolio's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Sub-advisor may temporarily use alternative
strategies, primarily designed to reduce fluctuations in the value of portfolio
assets. In implementing these defensive strategies, the Portfolio may invest
without limit in cash and money market instruments, securities primarily traded
in the U.S. markets, or in any other securities the Sub-advisor considers
consistent with such defensive strategies. It is impossible to predict when or
for how long the Portfolio will use these alternative strategies.
Options and Futures Transactions. The Portfolio may engage in a variety
of transactions involving the use of options and futures contracts and in
foreign currency exchange transactions for purposes of increasing its investment
return or hedging against market changes. The Portfolio may seek to increase its
current return by writing covered call options and covered put options on its
portfolio securities or other securities in which it may invest. The Portfolio
receives a premium from writing a call or put option, which increases the
Portfolio's return if the option expires unexercised or is closed out at a net
profit. The Portfolio may also buy and sell put and call options on such
securities for hedging purposes. When the Portfolio writes a call option on a
portfolio security, it gives up the opportunity to profit from any increase in
the price of the security above the exercise price of the option; when it writes
a put option, the Portfolio takes the risk that it will be required to purchase
a security from the option holder at a price above the current market price of
the security. The Portfolio may terminate an option that it has written prior to
its expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The Portfolio
may also from time to time buy and sell combinations of put and call options on
the same underlying security to earn additional income.
The Portfolio may buy and sell index futures contracts for hedging
purposes. An "index future" is a contract to buy or sell units of a particular
index at an agreed price on a specified future date. Depending on the change in
value of the index between the time when the Portfolio enters into and
terminates an index future transaction, the Portfolio realizes a gain or loss.
The Portfolio may also purchase and sell call and put options on index futures
or on indices in addition or as an alternative to purchasing or selling index
futures or, to the extent permitted by applicable law, to earn additional
income. The Portfolio may also purchase warrants, issued by banks and other
financial institutions, whose values are based on the values from time to time
of one or more securities indices.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain instances,
however, the Portfolio may purchase and sell options in the over-the-counter
markets. The Portfolio's ability to terminate options in over-the-counter
markets may be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio.
Because the markets for certain options and futures contracts in which
the Portfolio will invest (including markets located in foreign countries) are
relatively new and still developing and may be subject to regulatory restraints,
the Portfolio's ability to engage in transactions using such investments may be
limited. The Portfolio's ability to engage in hedging transactions may be
limited by certain regulatory requirements and tax considerations. The
Portfolio's hedging transactions may affect the character or amount of the
Portfolio's distributions. For an additional discussion of options and futures
transactions and certain risks involved therein, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods."
Foreign Currency Exchange Transactions. The Portfolio may engage in
foreign currency exchange transactions to protect against uncertainty in the
level of future exchange rates. The Sub-advisor may engage in foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities ("transaction hedging") and to protect against changes in the value
of specific portfolio positions ("position hedging").
The Portfolio may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on which the
Portfolio contracts to purchase or sell a security and the settlement date, or
to "lock in" the U.S. dollar equivalent of a dividend or interest payment in a
foreign currency. The Portfolio may purchase or sell a foreign currency on a
spot (or cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in that foreign
currency.
If conditions warrant, for transaction hedging purposes the Portfolio
may also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts. A foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be higher or
lower than the spot rate. Foreign currency futures contracts are standardized
exchange-traded contracts and have margin requirements. In addition, for
transaction hedging purposes the Portfolio may also purchase or sell
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
The Portfolio may engage in position hedging to protect against a
decline in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in value of a
currency in which securities the Portfolio intends to buy are denominated). For
position hedging purposes, the Portfolio may purchase or sell foreign currency
futures contacts, foreign currency forward contracts, and options on foreign
currency futures contracts and on foreign currencies. In connection with
position hedging, the Portfolio may also purchase or sell foreign currency on a
spot basis.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The decision as to whether and to what extent the Portfolio will engage
in foreign currency exchange transactions will depend on a number of factors,
including prevailing market conditions, the composition of the Portfolio's
portfolio and the availability of suitable transactions. Accordingly, there can
be no assurance that the Portfolio will engage in foreign currency exchange
transactions at any given time or from time to time. For an additional
discussion of foreign currency exchange transactions, certain risks involved
therein, and the risk of currency fluctuations generally, see this Prospectus
and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to
broker-dealers. Such transactions must be fully collateralized at all times.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
securities lending and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
Such transactions must be fully collateralized at all times. These transactions
involve some risk to the Portfolio if the other party should default on its
obligation and the Portfolio is delayed or prevented from recovering the
collateral or completing the transaction. For a discussion of repurchase
agreements and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future
delivery, which may increase its overall investment exposure and involves a risk
of loss if the value of the securities declines prior to the settlement date.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
forward commitments and certain risks involved therein, see the Trust's SAI
under "Investment Objectives and Policies."
Borrowing. For a discussion of 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 SAI under "Investment
Restrictions."
AST Putnam Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide a
balanced investment composed of a well-diversified portfolio of stocks and bonds
which will produce both capital growth and current income. This is a fundamental
objective of the Portfolio.
Investment Policies:
In seeking its objective the Portfolio may invest in almost any type of
security or negotiable instrument, including cash or money market instruments.
The Portfolio's portfolio will include some securities selected primarily to
provide for capital protection, others selected for dependable income and still
others for growth in value. The portion of the Portfolio's assets invested in
equity securities and fixed income securities will vary from time to time in
light of the Portfolio's investment objective, changes in interest rates and
economic and other factors. However, under normal market conditions, it is
expected that at least 25% of the Portfolio's total assets will be invested in
fixed income securities, which for this purpose includes debt securities,
preferred stocks and that portion of the value of convertible securities
attributable to the fixed income characteristics of those securities.
Defensive Strategies. At times, the Sub-advisor may judge that
conditions in the securities markets make pursuing the Portfolio's basic
investment strategy inconsistent with the best interests of its shareholders. At
such times, the Sub-advisor may temporarily use alternative strategies primarily
designed to reduce fluctuations in the value of the Portfolio's assets. In
implementing these defensive strategies, the Portfolio may concentrate its
investments in debt securities, preferred stocks, cash or money market
instruments or invest in any other securities the Sub-advisor considers
consistent with such defensive strategies. It is impossible to predict when, or
for how long, the Portfolio will use these alternative strategies.
Foreign Securities. The Portfolio may invest up to 20% of its assets in
securities traded in foreign securities markets. The Portfolio may also purchase
Eurodollar certificates of deposit without regard to the 20% limit. The
Portfolio may invest in securities principally traded in, or issued by issuers
located in, underdeveloped and developing nations, which are sometimes referred
to as "emerging markets." For a discussion of the special risks involved in
investing in developing countries and certain risks involved in investing in
foreign securities, in general, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may buy or sell foreign
currencies and foreign currency forward contracts for hedging purposes in
connection with its foreign investments. For a discussion of foreign currency
transactions, certain risks involved therein, and the risk of currency
fluctuations generally, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Fixed-Income Securities. The Portfolio may invest in both higher-rated
and lower-rated fixed-income securities. The values of fixed-income securities
fluctuate in response to changes in interest rates. Thus, a decrease in interest
rates will generally result in an increase in the value of the Portfolio's
fixed-income securities. Conversely, during periods of rising interest rates,
the value of the Portfolio's fixed-income securities will generally decline. In
addition, the values of such securities are affected by changes in general
economic conditions and business conditions affecting the specific industries of
their issuers. Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. Changes
in the value of portfolio securities generally will not affect income derived
from such securities, but will affect the Portfolio's net asset value. The
values of lower-rated securities generally fluctuate more than those of
higher-rated securities.
The Portfolio will not invest in securities rated at the time of
purchase lower than B by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's ("S&P") and other nationally recognized rating organizations or in
unrated securities which the Sub-advisor determines are of comparable quality.
Securities rated B are predominantly speculative and have large uncertainties or
major risk exposures to adverse conditions. Securities rated lower than Baa by
Moody's or BBB by S&P and unrated securities of comparable quality are sometimes
referred to as "junk bonds." The rating services' descriptions of securities in
the various rating categories, including the speculative characteristics of
securities in the lower rating categories, are set forth in the Appendix to the
Trust's SAI. The Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
The Sub-advisor seeks to minimize the risks of investing in lower-rated
securities through careful investment analysis. When the Portfolio invests in
securities in the lower rating categories, the achievement of the Portfolio's
goals is more dependent on the Sub-advisor's ability than would be the case if
the Portfolio were investing in securities in the higher rating categories. For
an additional discussion of lower-rated securities and certain risks involved
therein, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
At times, a substantial portion of portfolio assets may be invested in
securities as to which the Portfolio, by itself or together with other funds and
accounts managed by the Sub-advisor and its affiliates, holds all or a major
portion. Under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio could find it
more difficult to sell these securities when the Sub-advisor believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in the
event of a default of these securities, the Portfolio may be required to
participate in various legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value.
Certain securities held by the Portfolio may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were to redeem
securities held by the Portfolio during a time of declining interest rates, the
Portfolio may not be able to reinvest the proceeds in securities providing the
same investment return as the securities redeemed.
Zero Coupon Bonds. The Portfolio may invest in so-called zero coupon
bonds whose values are subject to greater fluctuation in response to changes in
market interest rates than bonds that pay interest currently. Zero coupon bonds
are issued at a significant discount from face value and pay interest only at
maturity rather than at intervals during the life of the security. Zero coupon
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks than
bonds paying interest currently. The Portfolio is required to accrue and
distribute income from zero coupon bonds on a current basis, even though it does
not receive that income currently in cash. Thus the Portfolio may have to sell
other investments to obtain cash needed to make income distributions. For an
additional discussion of zero coupon bonds and certain risks involved therein,
see the Trust's SAI under "Certain Risk Factors and Investment Methods."
Financial Futures, Index Futures and Options. The Portfolio may buy and
sell financial futures contracts on stock indexes, U.S. government securities,
fixed income securities and currencies. A futures contract is a contract to buy
or sell units of a particular stock index, or a certain amount of a U.S.
government security, foreign fixed income security or foreign currency, at an
agreed price on a specified future date. Depending on the change in value of the
index, security or currency between the time a fund enters into and terminates a
futures contract, that fund realizes a gain or loss. The Portfolio may purchase
and sell futures contracts for hedging purposes and for non-hedging purposes,
such as to adjust its exposure to the relevant stock or bond markets. For
example, when the Sub-advisor wants to increase the Portfolio's exposure to
equity securities, it may do so by taking long positions in futures contracts on
equity indices such as futures contracts on the Standard & Poor's 500 Composite
Stock Price Index. Similarly, when the Sub-advisor wants to increase the
Portfolio's exposure to fixed income securities, it may do so by taking long
positions in futures contracts relating to fixed income securities such as
futures contracts on U.S. Treasury securities.
The Portfolio may buy and sell call and put options on futures
contracts or on stock indices in addition to or as an alternative to purchasing
or selling futures contracts or to earn additional income.
Options on certain U.S. government securities are traded in significant
volume on securities exchanges. However, other options which the Portfolio may
purchase or sell are traded in the "over-the-counter" market rather than on an
exchange. This means that the Portfolio will enter into such option contracts
with particular securities dealers who make markets in these options. The
Portfolio's ability to terminate options positions in the over-the-counter
market may be more limited than for exchange-traded options and may also involve
the risk that securities dealers participating in such transactions might fail
to meet their obligations to the Portfolio. For an additional discussion of
options and futures transactions and certain risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Options. The Portfolio may seek to increase its current return by
writing covered call and put options on securities it owns or in which it may
invest. The Portfolio receives a premium from writing a call or put option,
which increases the return if the option expires unexercised or is closed out at
a net profit.
When the Portfolio writes a call option, it gives up the opportunity to
profit from any increase in the price of a security above the exercise price of
the option; when it writes a put option, the Portfolio takes the risk that it
will be required to purchase a security from the option holder at a price above
the current market price of the security. The Portfolio may terminate an option
that it has written prior to its expiration by entering into a closing purchase
transaction in which it purchases an option having the same terms as the option
written.
The Portfolio may also buy and sell put and call options for hedging
purposes. From time to time, the Portfolio may also buy and sell combinations of
put and call options on the same underlying security to earn additional income.
The aggregate value of the securities underlying the options may not exceed 25%
of portfolio assets. The use of these strategies may be limited by applicable
law. For an additional discussion of option transactions and certain risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to
broker-dealers. Such transactions must be fully collateralized at all times.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
securities lending and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies" and "Investment Restrictions."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
Such transactions must be fully collateralized at all times. These transactions
involve some risk to the Portfolio if the other party should default on its
obligation and the Portfolio is delayed or prevented from recovering the
collateral or completing the transaction. For a discussion of repurchase
agreements and certain risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Forward Commitments. The Portfolio may purchase securities for future
delivery, which may increase its overall investment exposure and involves a risk
of loss if the value of the securities declines prior to the settlement date.
These transactions involve some risk to the Portfolio if the other party should
default on its obligation and the Portfolio is delayed or prevented from
recovering the collateral or completing the transaction. For a discussion of
forward commitments and certain risks involved therein, see the Trust's SAI
under "Investment Objectives and Policies."
Borrowing. For a discussion of 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 SAI under "Investment
Restrictions."
Portfolio Turnover. The length of time the Portfolio has held a
particular security is not generally a consideration in investment decisions. A
change in the securities held by the Portfolio is known as "portfolio turnover."
As a result of the Portfolio's investment policies, under certain market
conditions the Portfolio's turnover rate may be higher than that of other mutual
funds. For a discussion of portfolio turnover and its effects, see this
Prospectus and the Trust's SAI under "Portfolio Turnover."
Cohen & Steers Real Estate Investment Portfolio:
Investment Objective: The investment objective of Cohen & Steers Real Estate
Investment Portfolio (the "Portfolio") is to maximize total return through
investment in real estate securities. This is a fundamental objective of the
Portfolio.
Investment Policies:
The Portfolio pursues its investment objective of maximizing total return by
seeking, with approximately equal emphasis, capital appreciation (both realized
and unrealized) and current income. There can be no assurance that the
Portfolio's investment objective will be achieved.
Under normal circumstances, the Portfolio will invest substantially all of its
assets in the equity securities of real estate companies. Such equity securities
will consist of (i) common stocks (including shares in real estate investment
trusts), (ii) rights or warrants to purchase common stocks, (iii) securities
convertible into common stocks where the conversion feature represents, in the
Sub-advisor's view, a significant element of the securities' value, and (iv)
preferred stocks. For purposes of the Portfolio's investment policies, a "real
estate company" is one that derives at least 50% of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate or that has at least 50% of its assets in
such real estate. The Portfolio may invest up to 10% of its total assets in
securities of foreign real estate companies. For a discussion of certain risks
involved in investing in foreign securities in general, including the risks of
currency fluctuations, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods." When, in the judgment of the Portfolio's
Sub-advisor, market or general economic conditions justify a temporary defensive
position, the Portfolio will deviate from its investment objective and invest
all or any portion of its assets in high-grade debt securities, including
corporate debt securities, U.S. government securities, and short-term money
market instruments, without regard to whether the issuer is a real estate
company. The Portfolio may also at any time invest funds awaiting investment or
funds held as reserves to satisfy redemption requests or to pay dividends and
other distributions to shareholders in short-term money market instruments.
The Portfolio will not invest more than 15% of its net assets in
illiquid securities. For this purpose illiquid securities include, among others,
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. Certain securities that
have legal or contractual restrictions on resale but have a readily available
market are not deemed illiquid for purposes of this limitation. The Sub-advisor
will monitor the liquidity of such restricted securities under the supervision
of the Board of Trustees. For a discussion of illiquid securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Real Estate Investment Trusts. The Portfolio may invest without limit
in shares of real estate investment trusts ("REITs"). REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. A REIT is not taxed on amounts distributed to
shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it distribute
to its shareholders at least 95% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority of
their assets directly in real property, derive their income primarily from
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs, which invest the majority of their
assets in real estate mortgages, derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs.
Risks of Investment in Real Estate Securities. The Portfolio will not
invest in real estate directly, but only in securities issued by real estate
companies. However, the Portfolio may be subject to risks similar to those
associated with the direct ownership of real estate (in addition to securities
markets risks) because of its policy of concentration in the securities of
companies in the real estate industry. These include declines in the value of
real estate, risks related to general and local economic conditions, dependency
on management skill, heavy cash flow dependency, possible lack of availability
of mortgage funds, overbuilding, extended vacancies of properties, increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, losses due to costs resulting from the clean-up of environmental
problems, liability to third parties for damages resulting from environmental
problems, casualty or condemnation losses, limitations on rents, changes in
neighborhood values, the appeal of properties to tenants and changes in interest
rates.
In addition to these risks, Equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while Mortgage REITs
may be affected by the quality of any credit extended. Further, Equity and
Mortgage REITs are dependent upon the skills of their managers and generally may
not be diversified. Equity and Mortgage REITs are also subject to heavy cash
flow dependency, defaults by borrowers and self-liquidation. In addition, Equity
and Mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Internal Revenue Code of 1986, as amended (the "Code"), or to
maintain their exemptions from registration under the Investment Company Act of
1940 (the "1940 Act"). The factors noted in the previous paragraph may also
adversely affect a borrower's or a lessee's ability to meet its obligations to
the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Investment Techniques. The Portfolio is authorized to use the following
investment techniques, subject to the accompanying restrictions. Although these
techniques or strategies are used regularly by some investment companies, the
Sub-advisor expects that the Portfolio's use of these techniques will not be
routine and will be limited to special situations.
Options on Securities and Stock Indices. The Portfolio may
write (i.e., sell) covered put and call options and purchase put and call
options on securities or stock indices that are listed on a national securities
or commodities exchange. An option on a security is a contract that gives the
purchaser of the option, in return for the premium paid, the right to buy a
specified security (in the case of a call option) or to sell a specified
security (in the case of a put option) from or to the writer of the option at a
designated price during the term of the option. An option on a stock index gives
the purchaser of the option, in return for the premium paid, the right to
receive from the seller cash equal to the difference between the closing price
of the index and the exercise price of the option.
The Portfolio may write a call or put option only if the option is
"covered." This means that so long as the Portfolio is obligated as the writer
of a call option, it will own the underlying securities subject to the call, or
hold a call at the same or lower exercise price, for the same exercise period,
and on the same securities as the written call. A put is covered if the
Portfolio maintains collateral consisting of cash or other liquid assets with a
value equal to the exercise price in a segregated account, or holds a put on the
same underlying security at an equal or greater exercise price. The value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the total assets of the Portfolio. The Portfolio will not purchase
put or call options if the aggregate premiums paid for such options would exceed
5% of its total assets at the time of purchase.
Futures Contracts. The Portfolio may buy and sell financial
futures contracts, stock and bond index futures contracts, foreign currency
futures contracts and options on any of the foregoing. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date. For a
discussion of the risks involved in investments in futures and related options,
and certain limitations of such investments, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Forward Foreign Currency Contracts. The Portfolio may enter
into forward foreign currency exchange contracts ("forward contracts") to
attempt to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers.
The Portfolio will enter into forward contracts under the following
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 in relation to another currency by
entering into a forward contract to buy the amount of foreign currency needed to
settle the transaction. Second, when it is believed 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 amount
of 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
portfolio securities denominated in such foreign currency. The second investment
practice is generally referred to as "cross-hedging." The Portfolio's forward
transactions may call for the delivery of one foreign currency in exchange for
another foreign currency and may at times involve currencies in which no
portfolio securities are denominated. The Portfolio will not enter into forward
foreign currency contracts if, as a result, the Portfolio will have more than
15% of the value of its net assets committed to the consummation of such
contracts. To the extent such contracts would be deemed to be illiquid, they
will be included in the maximum limitation of 15% of net assets invested in
illiquid securities.
For an additional discussion of foreign currency contracts and the
risks involved therein, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Short Sales. The Portfolio may enter into short sales,
provided the dollar amount of short sales at any one time would not exceed 25%
of the net assets of the Portfolio, and the value of securities of any one
issuer in which the Portfolio is short would not exceed the lesser of 2% of the
value of the Portfolio's net assets or 2% of the securities of any class of any
issuer. The Portfolio must maintain collateral in a segregated account
consisting of cash or other liquid assets with a value equal to the current
market value of the shorted securities, which are marked to market daily. If the
Portfolio owns an equal amount of such securities or securities convertible into
or exchangeable for, without payment of any further consideration, securities of
the same issuer as, and equal in amount to, the securities sold short (which
sales are commonly referred to as "short sales against the box"), the above
requirements are not applicable.
Non-Diversified Status, Portfolio Turnover. The Portfolio is classified
as a "non-diversified" investment company under the 1940 Act, which means the
Portfolio is not limited by the 1940 Act in the proportion of its assets that
may be invested in the securities of a single issuer. However, the Portfolio
intends to conduct its operations so as to qualify as a regulated investment
company for purposes of the Code, which generally will relieve the Portfolio of
any liability for Federal income tax to the extent its earnings are distributed
to shareholders. See this Prospectus under "Tax Matters." To so qualify, among
other requirements, the Portfolio will limit its investments so that, at the
close of each quarter of the taxable year, (i) not more than 25% of the market
value of the Portfolio's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Portfolio will not own
more than 10% of the outstanding voting securities of a single issuer. The
Portfolio's investments in securities issued by the U.S. Government, its
agencies and instrumentalities are not subject to these limitations. Because the
Portfolio, as a non-diversified investment company, may invest in a smaller
number of issuers than a diversified investment company, an investment in the
Portfolio may present greater risk to an investor than an investment in a
diversified company.
The Portfolio may have higher portfolio turnover than other mutual
funds with similar objectives. For a discussion of portfolio turnover and its
effects, see this Prospectus and the Trust's SAI under "Portfolio Turnover."
Stein Roe Small Cap Blend Portfolio:
Investment Objective: The investment objective of the Small Roe Small Cap Blend
Portfolio (the "Portfolio") is long-term capital appreciation. The Portfolio
emphasizes investments in financially strong small and medium-sized companies,
based principally on management appraisal and stock valuation.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in a
diversified portfolio of common stocks and other equity-type securities (such as
preferred stocks, securities convertible or exchangeable for common stocks, and
warrants or rights to purchase common stocks) of entrepreneurially managed
companies that the Sub-advisor believes represent special opportunities. The
Portfolio emphasizes investments in financially strong small and medium-sized
companies, based principally on appraisal of their management and stock
valuations. The Sub-advisor considers "small" and "medium-sized" companies to be
those with market capitalizations of less than $1 billion and $1 to $3 billion,
respectively.
In both its initial and ongoing appraisals of a company's management,
the Sub-advisor seeks to know both the principal owners and senior management
and to assess their business judgment and strategies through personal visits.
The Sub-advisor favors companies whose management has an owner/operator,
risk-averse orientation and a demonstrated ability to create wealth for
investors. Attractive company characteristics include unit growth, favorable
cost structures or competitive positions, and financial strength that enables
management to execute business strategies under difficult conditions. A company
is attractively valued when its stock can be purchased at a meaningful discount
to the value of the underlying business.
Portfolio Investments and Strategies.
Debt Securities. In pursuing its investment objective, the Portfolio
may invest in debt securities of corporate and governmental issuers. The
Portfolio may invest up to 35% of its net assets in debt securities, but does
not expect to invest more than 5% of its net assets in debt securities that are
rated below investment grade (i.e., below the four highest grades assigned by a
nationally recognized statistical rating organization). Securities in the fourth
highest grade may possess speculative characteristics, and changes in economic
conditions are more likely to affect the issuer's capacity to pay interest and
repay principal.
The risks inherent in debt securities depend primarily on the term and
quality of the obligation as well as on market conditions. A decline in the
prevailing levels of interest rates generally increases the value of debt
securities. Conversely, an increase in rates usually reduces the value of debt
securities. Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation, and therefore
carry greater investment risk, including the possibility of issuer default and
bankruptcy. When the Sub-advisor determines that adverse market or economic
conditions exist and considers a temporary defensive position advisable, the
Portfolio may invest without limitation in high-quality fixed income securities
or hold assets in cash or cash equivalents.
Convertible Securities. By investing in convertible securities, the
Portfolio obtains the right to benefit from the capital appreciation potential
in the underlying stock upon exercise of the conversion right, while earning
higher current income than would be available if the stock were purchased
directly. In determining whether to purchase a convertible security, the
Sub-advisor will consider substantially the same criteria that would be
considered in purchasing the underlying stock. Although convertible securities
purchased by the Portfolio are frequently rated investment grade, the Portfolio
also may purchase unrated securities or securities rated below investment grade
if the securities meet the Sub-advisor's other investment criteria. Convertible
securities rated below investment grade:
o Tend to be more sensitive to interest rate and economic changes;
o May be obligations of issuers who are less creditworthy than issuers
of higher quality convertible securities; o May be more thinly traded
due to the fact that such securities are less well known to investors
than investment grade convertible securities, common stock or
conventional debt securities.
As a result, the Sub-advisor's own investment research and analysis
tends to be more important than other factors in the purchase of such
securities.
Foreign Securities. The Portfolio may invest in foreign securities.
Other than American Depositary Receipts (ADRs), foreign debt securities
denominated in U.S. dollars, and securities guaranteed by a U.S. person, the
Portfolio is limited to investing no more than 25% of its total assets in
foreign securities. The Portfolio may invest in sponsored or unsponsored ADRs.
In addition to, or in lieu of, such direct investment, the Portfolio may
construct a synthetic foreign debt position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b) concurrently
entering into a forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date and at a
specified rate of exchange. Because of the availability of a variety of highly
liquid U.S. dollar debt instruments, a synthetic foreign debt position utilizing
such U.S. dollar instruments may offer greater liquidity than direct investment
in foreign currency debt instruments. In connection with the purchase of foreign
securities, the Portfolio may contract to purchase an amount of foreign currency
sufficient to pay the purchase price of the securities at the settlement date.
Such a contract involves the risk that the value of the foreign currency may
decline relative to the value of the dollar prior to the settlement date--this
risk is in addition to the risk that the value of the foreign security purchased
may decline. The Portfolio also may enter into foreign currency contracts as a
hedging technique to limit or reduce exposure to currency fluctuations. In
addition, the Portfolio may use options and futures contracts, as described
below, to limit or reduce exposure to currency fluctuations. For a further
discussion of the risks involved in investing in foreign securities, including
the risk of currency fluctuations, see this prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Interfund Lending; When-Issued and Delayed-Delivery Securities. The
Portfolio may participate in an interfund lending program, subject to certain
restrictions described in the SAI. The Portfolio may invest in securities
purchased on a when-issued or delayed-delivery basis. Although the payment terms
of these securities are established at the time the Portfolio enters into the
commitment, the securities may be delivered and paid for a month or more after
the date of purchase, when their value may have changed. The Portfolio will make
such commitments only with the intention of actually acquiring the securities,
but may sell the securities before settlement date if it is deemed advisable for
investment reasons.
Derivatives. Consistent with its objective, the Portfolio may invest in
a broad array of financial instruments and securities, including conventional
exchange-traded and non-exchange-traded options, futures contracts, futures
options, swaps, caps, floors, collars, securities collateralized by underlying
pools of mortgages or other receivables, floating rate instruments, and other
instruments that securitize assets of various types ("Derivatives"). In each
case, the value of the instrument or security is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index, an interest
rate, or a currency. The Portfolio does not expect to invest more than 5% of its
net assets in any type of Derivative except for options, futures contracts, and
futures options.
Derivatives are most often used to manage investment risk or to create
an investment position indirectly because they are more efficient or less costly
than direct investment. They also may be used in an effort to enhance portfolio
returns.
The successful use of Derivatives depends on the Sub-advisor's ability
to correctly predict changes in the levels and directions of movements in
currency exchange rates, security prices, interest rates and other market
factors affecting the Derivative itself or the value of the underlying asset or
benchmark. In addition, correlations in the performance of an underlying asset
to a Derivative may not be well established. Finally, privately negotiated and
over-the-counter Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For an additional discussion of
certain risks involved in derivative securities, see this Prospectus under
"Certain Risk Factors and Investment Methods."
In seeking to achieve its desired investment objective, provide
additional revenue, or to hedge against changes in security prices, interest
rates or currency fluctuation, the Portfolio may: (1) purchase and write both
call options and put options on securities, indices and foreign currencies; (2)
enter into interest rate, index and foreign currency futures contracts; (3)
write options on such futures contracts; and (4) purchase other types of forward
or investment contracts linked to individual securities, indices or other
benchmarks. The Portfolio may write a call or put option only if the option is
covered. As the writer of a covered call option, the Portfolio foregoes, during
the option's life, the opportunity to profit from increases in market value of
the security covering the call option above the sum of the premium and the
exercise price of the call. Because futures positions may require low margin
deposits, the use of futures contracts involves a high degree of leverage and
may result in losses in excess of the amount of the margin deposit.
Short Sales Against the Box. The Portfolio may sell short securities it
owns or has the right to acquire without further consideration, a technique
called selling short "against the box." Short sales against the box may protect
the Portfolio against the risk of losses in the value of its portfolio
securities because any unrealized losses with respect to such securities should
be wholly or partly offset by a corresponding gain in the short position.
However, any potential gains in such securities should be wholly or partially
offset by a corresponding loss in the short position. Short sales against the
box may be used to lock in a profit on a security when, for tax reasons or
otherwise, the Sub-advisor does not want to sell the security.
Risks and Investment Considerations.
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. The Portfolio is designed for
long-term investors who want greater return potential than is available from the
stock market in general, and who are willing to tolerate the greater investment
risk and market volatility associated with investments in small and medium-sized
companies. Of course, there can be no guarantee that the Portfolio will achieve
its objective.
The Portfolio's investment objective is not a fundamental policy and
may be changed by the Board of Trustees without shareholder approval. However,
shareholders of the Portfolio will receive at least 30 days written notice prior
to any change in the Portfolio's investment objective. If there is a change in
the Portfolio's investment objective, shareholders should consider whether the
Portfolio remains an appropriate investment.
Securities of small and medium-sized companies may be subject to
greater price volatility than securities of larger companies and tend to have a
lower degree of market liquidity. They also may be more sensitive to changes in
economic and business conditions, and may react differently than securities of
larger companies. In addition, such companies are less well known to the
investing public and may not be as widely followed by the investment community.
Although the Portfolio does not attempt to reduce or limit risk through
wide industry diversification of investment, it usually allocates its
investments among a number of different industries rather than concentrating in
a particular industry or group of industries. The Portfolio will not invest more
than 25% of the total value of its assets (at the time of investment) in the
securities of companies in any one industry.
Bankers Trust Enhanced 500 Index Portfolio:
Investment Objective: The investment objective of the Bankers Trust Enhanced 500
Index Portfolio (the "Portfolio") is to outperform the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500(R) Index") through stock selection
resulting in different weightings of common stocks relative to the index.
Investment Policies:
The Portfolio will include the common stock of companies included in
the S&P 500. The S&P 500 is an index of 500 common stocks, most of which trade
on the New York Stock Exchange Inc. (the "NYSE"). The Sub-advisor believes that
the S&P 500 is representative of the performance of publicly traded common
stocks in the U.S. in general.
In seeking to outperform the S&P 500, the Sub-advisor starts with a
portfolio of stocks representative of the holdings of the index. It then uses a
set of quantitative criteria that are designed to indicate whether a particular
stock will predictably generate returns that will exceed or be less than the
performance of the S&P 500. Based on these criteria, the Sub-advisor determines
whether the Portfolio should overweight, underweight or hold a neutral position
in the stock relative to the proportion of the S&P 500 that the stock
represents. While the majority of the issues held by the Portfolio will have
neutral weightings to the S&P 500, approximately 100 will be over or
underweighted relative to the index. The Sub-advisor believes that the various
quantitative criteria used to determine which issues to over or underweight will
balance each other so that the overall risk of the Portfolio will not be
materially different than the risk of the S&P 500 itself.
The Sub-advisor will not purchase the stock of its parent company, Bankers
Trust New York Corporation, which is included in the S&P 500, and instead will
overweight its holdings of companies engaged in similar businesses.
About the S&P 500. The S&P 500 is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all common stocks
publicly traded in the United States, most of which are listed on the NYSE.
Stocks in the S&P 500 are weighted according to their market capitalization
(i.e., the number of shares outstanding multiplied by the stock's current
price). The composition of the S&P 500 is determined by S&P and is based on such
factors as the market capitalization and trading activity of each stock and its
adequacy as a representation of stocks in a particular industry group, and may
be changed from time to time.
The Portfolio is not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the shareholders of
the Fund or any member of the public regarding the advisability of investing in
securities generally or in the Portfolio particularly or the ability of the S&P
500 to track general stock market performance. S&P does not guarantee the
accuracy and/or the completeness of the S&P 500 or any data included therein.
S&P makes no warranty, express or implied, as to the results to be
obtained by the Portfolio, owners of the Portfolio, or any other person or
entity from the use of the S&P 500 or any data included therein. S&P makes no
express or implied warranties and hereby expressly disclaims all such warranties
of merchantability or fitness for a particular purpose or use with respect to
the S&P 500 or any data included therein.
For more information about the performance of the S&P 500, see the
Trust's SAI under "Investment Objectives and Policies."
Investment Considerations. The Portfolio is not managed according to
traditional methods of "active" investment management, which involve the buying
and selling of securities based upon economic, financial and market analysis and
investment judgment. Instead, the Portfolio utilizes a "quantitative" investment
approach and attempts to outperform the S&P 500 through statistical procedures.
Therefore, the Sub-advisor will not attempt to judge the merits of any
particular stock as an investment.
The Portfolio may be appropriate for investors who are willing to
endure stock market fluctuations in pursuit of potentially higher long-term
returns. The Portfolio invests for growth and does not pursue income. The
Portfolio is intended to be a long-term investment vehicle and is not designated
to provide investors with a means of speculating on short-term market movements.
As a mutual fund investing primarily in common stocks, the Portfolio is
subject to market risk --- i.e., the possibility that common stock prices will
decline over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when prices
generally decline.
The Portfolio's investment objective is not a fundamental policy and
may be changed upon notice to, but without the approval of, the Portfolio's
shareholders. If there is a change in the Portfolio's investment objective, a
shareholder should conisder whether the Portfolio remains an appropriate
investment. Shareholders of the Fund will receive 30 days prior written notice
with respect to any change in the investment objective of the Fund.
As a diversified fund, no more than 5% of the assets of the Porfolio
may be invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. In the unlikely
event that the S&P 500 should concentrate to an extent greater than that amount,
the Portfolio's ability to achieve its objective may be impaired. These are
fundamental investment policies of the Portfolio which may not be changed
without shareholder approval. No more than 15% of the Portfolio's net assets may
be invested in illiquid or not readily marketable securities (including
repurchase agreements and time deposits with maturities of more than seven
days). Additional information on the investment policies and restrictions of the
Portfolio are contained in the Trust's SAI under Investment Objectives and
Policies" and "Investment Restrictions."
The Portfolio may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the S&P 500. Securities index futures
contracts and related options, warrants and convertible securities may be used
for several reasons: to simulate full investment in the S&P 500 while retaining
a cash balance for fund management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns when a futures contract,
option, warrant or convertible security is priced more attractively than the
underlying equity security or S&P 500. These instruments may be considered
derivatives.
The following discussion contains more detailed information
about types of instruments in which the Portfolio may invest and strategies the
Sub-advisor may employ in pursuit of the Portfolio's investment objective.
Short-Term Investments. The Portfolio may invest in certain short-term
fixed income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Portfolio's investment in
securities index futures or related options or warrants. These securities
include: obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities or by any of the states, repurchase agreements,
time deposits, certificates of deposit, bankers' acceptances and commercial
paper.
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, 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
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
When Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio maintains with its custodian a segregated
account containing cash or other liquid assets in an amount at least equal to
these commitments.
Derivatives. The Portfolio may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a traditional
security, asset, or market index. Some "derivatives" such as mortgage-related
and other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices or currency exchange rates and as a
low cost method of gaining exposure to a particular securities market without
investing directly in those securities.
The Portfolio will only use derivatives for cash management purposes.
While derivatives can be used as leveraged investments, the Portfolio may not
use them to leverage its net assets. Derivatives will not be used to increase
portfolio risk above the level that would be achieved using only traditional
investment securities or to acquire exposure to changes in the value of assets
or indices that by themselves would not be purchased for the Portfolio. The
Portfolio will not invest in such instruments as part of a temporary defensive
strategy (in anticipation of declining stock prices) to protect against
potential market declines.
Securities Index Futures and Related Options. The Portfolio
may enter into securities index futures contracts and related options provided
that not more than 5% of its assets are required as a margin deposit for futures
contracts or options and provided that not more than 20% of the Portfolio's
assets are invested in futures and options at any time. When the Portfolio has
cash from new investments in the Portfolio or holds a portion of its assets in
money market instruments, it may enter into index futures or options to attempt
to increase its exposure to the market. Strategies the Portfolio could use to
accomplish this include purchasing futures contracts, writing put options and
purchasing call options. When the Portfolio wishes to sell securities, because
of shareholder redemptions or otherwise, it may use index futures or options to
hedge against market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options and purchasing put
options.
Warrants. Warrants are instruments which entitle the holder to
buy underlying equity securities at a specific price for a specific period of
time. A warrant tends to be more volatile than its underlying securities and
ceases to have value if it is not exercised prior to its expiration date. In
addition, changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying securities.
Convertible Securities. The Porfolio may invest in convertible
securities, which are bonds or preferred stocks that may be converted at a
stated price within a specific period of time into a specified number of shares
of common stock of the same or different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a fixed income
stream -- generally higher in yield than the income derived from a common stock
but lower than that afforded by a non-convertible debt security -- a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation of common stock into which
it is convertible.
In general, the market value of a convertible security is the higher of
its investment value (its value as a fixed income security) or its conversion
value (the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
Further risks associated with the use of futures contracts,
options, warrants and convertible securities. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Fund will not use futures contracts, options, warrants and convertible
securities for speculative purposes or to leverage their net assets.
Accordingly, the primary risks associated with the use of futures contracts,
options, warrants and convertible securities by the Portfolio are: (i) imperfect
correlation between the change in market value of the securities held by the
Portfolio and the prices of futures contracts, options, warrants and convertible
securities; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be minimized by investing
only in those contracts whose behavior is expected to resemble that of the
Portfolio's underlying securities. The risk that the Portfolio will be unable to
close out a futures position will be minimized by entering into stock
transactions on an exchange with an active and liquid secondary market. However,
options, warrants and convertible securities purchased or sold over-the-counter
may be less liquid than exchange-traded securities. Illiquid securities, in
general, may not represent more than 15% of the net assets of the Portfolio.
Asset Coverage. To assure that futures and related options, as
well as when-issued and delayed-delivery securities, are not used by the
Portfolio to achieve excessive investment leverage, the Portfolio will cover
such transactions, as required under applicable interpretations of the SEC,
either by owning the underlying securities, entering into an off-setting
transaction, or by establishing a segregated account with the Portfolio's
custodian containing cash or liquid portfolio securities in an amount at all
times equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
Marsico Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. This is a fundamental objective of the Portfolio. Income
realization is not an investment objective and any income realized on the
Portfolio's investments, therefore, will be incidental to the Portfolio's
objective.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in
common stocks. Common stock investments will be in industries and companies that
the Sub-advisor believes are experiencing favorable demand for their products
and services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Portfolio's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Portfolio may also invest to a lesser degree in preferred
stocks, convertible securities, warrants, and debt securities when the Portfolio
perceives an opportunity for capital growth from such securities or so that the
Portfolio may receive a return on its idle cash. Debt securities that the
Portfolio may purchase include corporate bonds and debentures (not to exceed 5%
of net assets in bonds rated below investment grade), government securities,
mortgage- and asset-backed securities, zero-coupon bonds, indexed/structured
notes, high-grade commercial paper, certificates of deposit and repurchase
agreements. For a discussion of risks involved in lower-rated securities,
mortgage- and asset-backed securities and zero coupon bonds, see this Prospectus
and the Trust's SAI under "Certain Risk Factors and Investment Methods."
Although it is the general policy of the Portfolio to purchase and hold
securities for capital growth, changes in the Portfolio will be made as the
Sub-advisor deems advisable. For example, portfolio changes may result from
liquidity needs, securities having reached a price objective, or by reason of
developments not foreseen at the time of the original investment decision.
Portfolio changes may be effected for other reasons. In such circumstances,
investment income will increase and may constitute a large portion of the return
on the Portfolio and the Portfolio will not participate in the market advances
or declines to the extent that it would if it were fully invested.
The Portfolio may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and depositary
receipts. Foreign securities are selected on a stock-by-stock basis without
regard to any defined allocation among countries or geographic regions. However,
certain factors such as expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships, and
prospects for economic growth among countries, regions or geographic areas may
warrant greater consideration in selecting foreign stocks. For a discussion of
depositary receipts and the risks involved in investing in foreign securities,
including the risk of currency fluctuations, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Futures, Options and Other Derivative Instruments. The Portfolio may
purchase and write options on securities, financial indices, and foreign
currencies, and may invest in futures contracts on securities, financial
indices, and foreign currencies ("futures contracts"), options on futures
contracts, forward contracts and swaps and swap-related products. These
instruments will be used primarily to hedge the Portfolio's positions against
potential adverse movements in securities prices, foreign currency markets or
interest rates. To a limited extent, the Portfolio may also use derivative
instruments for non-hedging purposes such as increasing the Portfolio's income
or otherwise enhancing return. The Portfolio will not use futures contracts and
options for leveraging purposes. There can be no assurance, however, that the
use of these instruments by the Portfolio will assist it in achieving its
investment objective. The use of futures, options, forward contracts and swaps
involves investment risks and transaction costs to which the Portfolio would not
be subject absent the use of these strategies. The Sub-advisor may, from time to
time, at its own expense, call upon the experience of experts to assist it in
implementing these strategies. The Portfolio may also use a variety of currency
hedging techniques, including forward currency contracts, to manage exchange
rate risk with respect to investments exposed to foreign currency fluctuations.
For an additional discussion of futures and options transactions and certain
risks involved therein, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements,
which involve the purchase of a security by the Portfolio and a simultaneous
agreement (generally with a bank or dealer) to repurchase the security from the
Portfolio at a specified date or upon demand. The Portfolio's repurchase
agreements will at all times be fully collateralized. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price. For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio
may purchase securities on a when-issued or delayed delivery basis, which
generally involves the purchase of a security with payment and delivery due at
some time in the future. The Portfolio does not earn interest on such securities
until settlement and bears the risk of market value fluctuations between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may also invest up to 15% of its net assets
in securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
For a discussion of these instruments and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the
Portfolio may borrow money from banks. For a discussion of the Portfolio's
limitations on borrowing and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
SAI under "Investment Restrictions."
Portfolio Turnover. Because investment changes usually will be made
without reference to the length of time a security has been held, a significant
number of short-term transactions may result. To a limited extent, the Portfolio
may also purchase individual securities in anticipation of relatively short-term
price gains, and the rate of portfolio turnover will not be a determining factor
in the sale of such securities. For an additional discussion of portfolio
turnover and its effects, see this Prospectus and the Trust's SAI under
"Portfolio Turnover."
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Portfolios are described in
the "Investment Objectives and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods" sections of the Trust's SAI. The following is a description of certain
additional risk factors related to various of these securities, instruments and
techniques. The risks so described only apply to those Portfolios which may
invest in such securities and instruments or use such techniques. Also included
is a general description of some of the investment instruments, techniques and
methods which may be used by one or more of the Portfolios. The methods
described only apply to those Portfolios which may use such methods.
Derivative Instruments:
To the extent permitted by the investment objectives and policies of a
Portfolio, a Portfolio may invest in securities and other instruments that are
commonly referred to as "derivatives." For instance, a Portfolio may purchase
and write call and put options on securities, securities indexes and foreign
currencies, and enter into futures contracts and use options on futures
contracts, and enter into swap agreements with respect to foreign currencies,
interest rates, and securities indexes. A Portfolio may use these techniques to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices or as part of their overall investment strategies.
In general, derivative instruments are those securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, but not those securities whose payment of principal and/or
interest depend upon cash flows from underlying assets, such as mortgage or
asset-backed securities. The value of some derivative instruments in which a
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of a Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. If the Sub-advisor incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing market trends,
the Portfolio could be exposed to the risk of a loss.
A Portfolio might not employ any of the derivative strategies described
below, and no assurance can be given that any strategy used will succeed. If a
Sub-advisor incorrectly forecasts interest rates, market values or other
economic factors in utilizing a derivatives strategy for a Portfolio, the
Portfolio might have been in a better position if it had not entered into the
transaction at all. The use of these strategies involves certain special risks,
including a possible imperfect correlation, or even no correlation, between
price movements of derivative instruments and price movements of related
investments. In addition, while some strategies involving derivative instruments
can reduce the risk of loss, they can also reduce the opportunity for gain, or
even result in losses, by offsetting favorable price movements in related
investments. Furthermore, a Portfolio may be unable to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or need to sell a portfolio security at a disadvantageous time, due to the need
to maintain asset coverage or offsetting positions in connection with
transactions in derivative instruments. Finally, a Portfolio may be unable to
close out or to liquidate its derivatives positions.
Options and Futures Contracts:
Call Options. A call option on a security gives the purchaser of the
option, in return for a premium paid to the writer (seller), the right to buy
the underlying security at the exercise price at any time during the option
period. Upon exercise by the purchaser, the writer (seller) of a call option has
the obligation to sell the underlying security at the exercise price. When a
Portfolio purchases a call option, it will pay a premium to the party writing
the option and a commission to the broker selling the option. If the option is
exercised by such Portfolio, the amount of the premium and the commission paid
may be greater than the amount of the brokerage commission that would be charged
if the security were to be purchased directly. By writing a call option, a
Portfolio assumes the risk that it may be required to deliver the security
having a market value higher than its market value at the time the option was
written. The Portfolio will write call options in order to obtain a return on
its investments from the premiums received and will retain the premiums whether
or not the options are exercised. Any decline in the market value of Portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
If a Portfolio writes a call option on a security it already owns, it
gives up the opportunity for capital appreciation above the exercise price
should market price of the underlying security increase, but retains the risk of
loss should the price of the underlying security decline. Writing call options
also involves the risk relating to a Portfolio's ability to close out options it
has written.
A call option on a securities index is similar to a call option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index, and all settlements are
made in cash. A call option may be terminated by the writer (seller) by entering
into a closing purchase transaction in which it purchases an option of the same
series as the option previously written.
Put Options. A put option on a security gives the purchaser of the
option, in return for premium paid to the writer (seller), the right to sell the
underlying security at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. By writing a put option,
a Portfolio assumes the risk that it may be required to purchase the underlying
security at a price in excess of its current market value.
A put option on a securities index is similar to a put option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index, and all settlements are
made in cash.
A Portfolio may sell a call option or a put option which it has
previously purchased prior to the purchase (in the case of a call) or the sale
(in the case of a put) of the underlying security. Any such sale would result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the call or put
which is sold.
Futures Contracts and Related Options. A financial futures contract
calls for delivery of a particular security at a specified price at a certain
time in the future. The seller of the contract agrees to make delivery of the
type of security called for in the contract and the buyer agrees to take
delivery at a specified future time. A Portfolio may also write call options and
purchase put options on financial futures contracts as a hedge to attempt to
protect the Portfolio's securities from a decrease in value. When a Portfolio
writes a call option on a futures contract, it is undertaking the obligation of
selling a futures contract at a fixed price at any time during a specified
period if the option is exercised. Conversely, the purchaser of a put option on
a futures contract is entitled (but not obligated) to sell a futures contract at
a fixed price during the life of the option.
Financial futures contracts consist of interest rate futures contracts
and securities index futures contracts. An interest rate futures contract
obligates the seller of the contract to deliver, and the purchaser to take
delivery of, interest rate securities called for in a contract at a specified
future time at a specified price. A stock index assigns relative values to
common stocks included in the index and the index fluctuates with changes in the
market values of the common stocks included. A stock index futures contract is a
bilateral contract pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume a
position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
Risks of Options and Futures Contracts. Futures contracts and options
can be highly volatile and could result in reduction of a Portfolio's total
return, and a Portfolio's attempt to use such investments for hedging purposes
may not be successful. Successful futures strategies require the ability to
predict future movements in securities prices, interest rates and other economic
factors. A Portfolio's potential losses from the use of futures extends beyond
its initial investment in such contracts. Also, losses from options and futures
could be significant if a Portfolio is unable to close out its position due to
distortions in the market or lack of liquidity.
The use of futures and options involves investment risks and
transaction costs to which a Portfolio would not be subject absent the use of
these strategies. If a Sub-advisor seeks to protect a Portfolio against
potential adverse movements in the securities, foreign currency or interest rate
markets using these instruments, and such markets do not move in a direction
adverse to the Portfolio, the Portfolio could be left in a less favorable
position than if such strategies had not been used. The successful use of these
strategies therefore may depend on the ability of the Sub-advisor to correctly
forecast interest rate movements and general stock market price movements. Risks
inherent in the use of futures and options include: (a) the risk that interest
rates, securities prices and currency markets will not move in the directions
anticipated; (b) imperfect correlation between the price of futures and options
and movements in the prices of the securities or currencies being hedged; (c)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (d) the possible absence of a liquid
secondary market for any particular instrument at any time; and (e) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. A Portfolio's ability to terminate option positions established in
the over-the-counter market may be more limited than in the case of
exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to such
Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of a hedge. Particularly with respect
to options on stock indices and stock index futures, the risk of imperfect
correlation increases as the composition of the Portfolio diverges from the
composition of the relevant index.
Pursuant to regulations of the Commodity Futures Trading Commission,
the Trust has represented that:
(i) a Portfolio will not purchase or sell futures or options on futures
contracts or stock indices for purposes other than bona fide hedging
transactions (as defined by the CFTC) if as a result the sum of the initial
margin deposits and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions would exceed 5% of the fair market value of the
Portfolio's net assets; and
(ii) a Portfolio will not enter into any futures contracts if the aggregate
amount of the Portfolio's commitments under outstanding futures contracts
positions would exceed the market value of the Portfolio's total assets.
Asset-Backed Securities:
Asset-backed securities represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, for
example, credit card, automobile or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
Mortgage Pass-Through Securities:
Mortgage pass-through securities are securities representing interests
in "pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) expose a Portfolio to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, in the event of prepayment the value
of the premium would be lost. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-related security will generally decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed-income securities. The value of these securities also may change because
of changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs):
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities. CMOs may also be less marketable than other
securities.
Stripped Agency Mortgage-Backed Securities:
Stripped Agency Mortgage-Backed securities represent interests in a
pool of mortgages, the cash flow of which has been separated into its interest
and principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities may be issued by
U.S. Government Agencies or by private issuers. Unlike other debt instruments
and other mortgage-backed securities, the value of IOs tends to move in the same
direction as interest rates.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Foreign Securities:
Investments in securities of foreign issuers may involve risks that are
not present with domestic investments. While investments in foreign securities
are intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to credit and market risks.
Sovereign risk includes local political or economic developments, potential
nationalization, withholding taxes on dividend or interest payments, and
currency blockage (which would prevent cash from being brought back to the
United States). Compared to United States issuers, there is generally less
publicly available information about foreign issuers and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers and
listed companies. Brokerage commissions on foreign securities exchanges, which
may be fixed, are generally higher than in the United States. Foreign issuers
are not generally subject to uniform accounting and auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic issuers. Securities of some foreign issuers are less liquid and
their prices are more volatile than securities of comparable domestic issuers.
In some countries, there may also be the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
difficulty in enforcing contractual and other obligations, political or social
instability or revolution, or diplomatic developments which could affect
investments in those countries. Settlement of transactions in some foreign
markets may be delayed or less frequent than in the United States, which could
affect the liquidity of investments. For example, securities which are listed on
foreign exchanges or traded in foreign markets may trade on days (such as
Saturday or Holidays) when a Portfolio does not compute its price or accept
orders for the purchase, redemption or exchange of its shares. As a result, the
net asset value of a Portfolio may be significantly affected by trading on days
when shareholders cannot make transactions. Further, it may be more difficult
for the Trust's agents to keep currently informed about corporate actions which
may affect the price of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., increasing the
risk of delayed settlements or loss of certificates for portfolio securities.
Currency Fluctuations. Investments in foreign securities may be
denominated in foreign currencies. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. A Portfolio's net asset
value per share may, therefore, be affected by changes in currency exchange
rates. Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Portfolio. Foreign currency exchange rates generally are
determined by the forces of supply and demand in foreign exchange markets and
the relative merits of investment in different countries, actual or perceived
changes in interest rates or other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene, or by currency controls or political developments in
the U.S. or abroad. In addition, a Portfolio may incur costs in connection with
conversions between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are often
heightened for investments in emerging or developing countries.
Developing Countries. Investing in developing countries involves
certain risks not typically associated with investing in U.S. securities, and
imposes risks greater than, or in addition to, risks of investing in foreign,
developed countries. These risks include: the risk of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; social, economic and political
uncertainty and instability (including the risk of war); more substantial
government involvement in the economy; higher rates of inflation; less
government supervision and regulation of the securities markets and participants
in those markets; controls on foreign investment and limitations on repatriation
of invested capital and on a Portfolio's ability to exchange local currencies
for U.S. dollars; unavailability of currency hedging techniques in certain
developing countries; the fact that companies in developing countries may be
smaller, less seasoned and newly organized companies; the difference in, or lack
of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets.
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs"):
ADRs are dollar-denominated receipts generally issued by a domestic
bank that represents the deposit of a security of a foreign issuer. ADRs may be
publicly traded on exchanges or over-the-counter in the United States. EDRs are
receipts similar to ADRs and are issued and traded in Europe. GDRs may be
offered privately in the United States and also trade in public or private
markets in other countries. Depositary Receipts may be issued as sponsored or
unsponsored programs. In sponsored programs, the issuer makes arrangements to
have its securities traded in the form of a Depositary Receipt. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, the issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, the import of such information may not be
reflected in the market value of such securities.
Forward Foreign Currency Exchange Contracts:
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date, which may be any fixed
number of days from the date the contract is agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency contract, a Portfolio "locks in" the exchange rate between the currency
it will deliver and the currency it will receive for the duration of the
contract. As a result, a Portfolio reduces its exposure to changes in the value
of the currency it will deliver and increases its exposure to changes in the
value of the currency into which it will exchange. The effect on the value of a
Portfolio is similar to selling securities denominated in one currency and
purchasing securities denominated in another. The Portfolios may enter into
these contracts for the purposes of hedging against foreign exchange risk
arising from such Portfolio's investment or anticipated investment in securities
denominated in or exposed to foreign currencies. Although a Sub-advisor may,
from time to time, seek to protect a Portfolio by using forward contracts,
anticipated currency movements may not be accurately predicted and the Portfolio
may incur a gain or a loss on a forward contract. A forward contract may reduce
a Portfolio's losses on securities denominated in foreign currency, but it may
also reduce the potential gain on the securities depending on changes in the
currency's value relative to the U.S. dollar or other currencies.
Lower-Rated High-Yield Bonds:
Lower-rated high-yield bonds (commonly known as "junk bonds") are
generally considered to be high risk investments, as they are subject to a
higher risk of default than higher-rated bonds. In addition, the market for
lower-rated high-yield bonds generally is more limited than the market for
higher-rated bonds, and because their markets may be thinner and less active,
the market prices of lower-rated high-yield bonds may fluctuate more than the
prices of higher-rated bonds, particularly in times of market stress. In
addition, while the market for high-yield corporate debt securities has been in
existence for many years, the market in recent years has experienced a dramatic
increase in the large-scale use of such securities to fund highly leveraged
corporate acquisitions and restructurings. Accordingly, past experience may not
provide an accurate indication of future performance of the high-yield bond
market, especially during periods of economic recession. Other risks which may
be associated with lower-rated high-yield bonds include: the exercise of any
redemption or call provisions in a declining market may result in their
replacement by lower yielding bonds; and legislation, from time to time, may
adversely affect their market. Since the risk of default is higher among
lower-rated high-yield bonds, a Sub-advisor's research and analysis are an
important ingredient in the selection of lower-rated high-yield bonds. Through
portfolio diversification, good credit analysis and attention to current
developments and trends in interest rates and economic conditions, investment
risk may be reduced, although there is no assurance that losses will not occur.
Illiquid and Restricted Securities:
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities. Illiquid securities are deemed as such because
they are subject to restrictions on their resale ("restricted securities") or
because, based upon their nature or the market for such securities, they are not
readily marketable. Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. However, the restrictions on resale may make it difficult for
a Portfolio to dispose of such securities at the time considered most
advantageous by its Sub-advisor, and/or may involve expenses that would not be
incurred in the sale of securities that were freely marketable. A Portfolio that
may purchase restricted securities may qualify for and trade restricted
securities in the "institutional trading market" pursuant to Rule 144A of the
Securities Act of 1933. Trading in the institutional trading market may enable a
Sub-advisor to dispose of restricted securities at a time the Sub-advisor
considers advantageous and/or at a more favorable price than would be available
if such securities were not traded in such market. However, the institutional
trading market is relatively new and liquidity of a Portfolio's investments in
such market could be impaired if trading does not develop or declines. Risks
associated with restricted securities include the potential obligation to pay
all or part of the registration expenses in order to sell certain restricted
securities. A considerable period of time may elapse between the time of the
decision to sell a security and the time a Portfolio may be permitted to sell it
under an effective registration statement. If, during such a period, adverse
conditions were to develop, a Portfolio might obtain a less favorable price than
prevailing when it decided to sell.
Repurchase Agreements:
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements. Repurchase agreements are agreements by which
a Portfolio purchases a security and obtains a simultaneous commitment from the
seller to repurchase the security at an agreed upon price and date. The resale
price is in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. A repurchase transaction
is usually accomplished either by crediting the amount of securities purchased
to the account of a Portfolio's custodian maintained in a central depository or
book-entry system or by physical delivery of the securities to a Portfolio's
custodian in return for delivery of the purchase price to the seller. Repurchase
transactions are intended to be short-term transactions with the seller
repurchasing the securities, usually within seven days.
A Portfolio which enters into a repurchase agreement bears a risk of
loss in the event that the other party to such an agreement defaults on its
obligation and such Portfolio is delayed or prevented from exercising its rights
to dispose of the collateral securities, including the risk of a possible
decline in value of the underlying securities during the period such Portfolio
seeks to assert these rights, as well as the risk of incurring expenses in
asserting these rights and the risk of losing all or part of the income from
such an agreement. If the seller institution defaults, a Portfolio might incur a
loss or delay in the realization of proceeds if the value of the collateral
securing the repurchase agreement declines and it might incur disposition costs
in liquidating the collateral. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by a
Portfolio might be delayed pending court action.
Reverse Repurchase Agreements:
In a reverse repurchase agreement, a Portfolio transfers possession of
a portfolio instrument to another person, such as a broker-dealer or financial
institution in return for a percentage of the instrument's market value in cash
and agrees that on a stipulated date in the future such Portfolio will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. When effecting reverse repurchase agreements,
assets of a Portfolio, in a dollar amount sufficient to make payment for the
obligations to be repurchased, are segregated on such Portfolio's records at the
trade date and are maintained until the transaction is settled. Reverse
repurchase agreements involve the risk that the market value of the securities
retained by the Portfolio may decline below the repurchase price of the
securities which it is obligated to repurchase.
Borrowing:
Each Portfolio's borrowings are limited so that immediately after such
borrowing the value of the Portfolio's assets (including borrowings) less its
liabilities (not including borrowings) is at least three times the amount of the
borrowings. Should a Portfolio, for any reason, have borrowings that do not meet
the above test then, within three business days, such Portfolio must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, such
Portfolio may have to liquidate securities at a time when it is disadvantageous
to do so. Gains made with additional funds borrowed will generally cause the net
asset value of such Portfolio's shares to rise faster than could be the case
without borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of such Portfolio could decrease faster than if
there had been no borrowings.
Convertible Securities and Warrants:
Convertible securities generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. Warrants are options to buy a stated number of shares of common
stock at a specified price any time during the life of the warrants. The value
of warrants may fluctuate more than the value of the securities underlying such
warrants. The value of a warrant detached from its underlying security will
expire without value if the rights under such warrant are not exercised prior to
its expiration date.
Lending:
With respect to the lending of securities, there is the risk of delays
in receiving additional collateral or in the recovery of securities and possible
loss of rights in collateral in the event that a borrower fails financially.
Other Investment Companies
The Trust has made arrangements with certain money market mutual funds
so that the Sub-advisors for the various Portfolios can "sweep" excess cash
balances of the Portfolios to those funds for temporary investment purposes.
Mutual funds pay their own operating expenses, and the Portfolios, as
shareholders in the money market funds, will indirectly pay their proportionate
share of such funds' expenses. Investments in other mutual funds and investment
companies will be made subject to the restrictions of the Investment Company Act
of 1940, which, among other restrictions, places certain limits on the
proportion of a Portfolio's assets that can be invested in other investment
companies.
REGULATORY MATTERS:
The Trust currently does not foresee any disadvantages to the holders
of variable annuity contracts and variable life insurance policies of affiliated
or unaffiliated Participating Insurance Companies or participants of Qualified
Plans (see page 2 of this Prospectus) arising from the fact that the interests
of the holders of variable annuity contracts and variable life insurance
policies and participants of Qualified Plans may differ due to differences of
tax treatment or other considerations or due to conflicts between the affiliated
or unaffiliated Participating Insurance Companies or Qualified Plans.
Nevertheless, the Trustees intend to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken in response to such conflicts. The variable
annuity contracts and variable life insurance policies are described in the
separate prospectuses issued by the Participating Insurance Companies. The Trust
assumes no responsibility for such prospectuses.
PORTFOLIO TURNOVER:
Each Portfolio may generally change its investments at any time in
accordance with its Sub-advisor's appraisal of factors affecting any particular
issuer or the market or economy in general. The frequency of the Portfolio's
transactions -- the Portfolio's turnover rate -- will vary from year to year
depending upon market conditions. High turnover (generally in excess of 100%)
involves correspondingly greater brokerage commissions and other transaction
costs. Trading in fixed income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. A 100%
portfolio turnover rate would occur if all the securities in a portfolio of
investments were replaced during a given period. The following Portfolios have
anticipated annual rates of turnover exceeding 100%.
JanCap Growth Portfolio (not to exceed 200% under normal market
conditions).
AST Janus Overseas Growth Portfolio (not to exceed 200% under normal
market conditions).
T. Rowe Price International Bond Portfolio (not to exceed 350%).
Founders Capital Appreciation Portfolio (not to exceed 150% under
normal market conditions).
Founders Passport Portfolio (not to exceed 150% under normal market
conditions).
INVESCO Equity Income Portfolio (not to exceed 100% under normal market
conditions).
PIMCO Total Return Bond Portfolio (not to exceed 350% under normal
market conditions).
PIMCO Limited Maturity Bond Portfolio (not to exceed 350% under normal
market conditions).
Berger Capital Growth Portfolio (not to exceed 150% under normal market
conditions).
Robertson Stephens Value + Growth Portfolio (not to exceed 250% under
normal market conditions).
Twentieth Century International Growth Portfolio (not to exceed 150%
under normal market conditions).
Twentieth Century Strategic Balanced Portfolio (not to exceed 150%
under normal market conditions).
AST Putnam Balanced Portfolio (not to exceed 200% under normal market
conditions).
Cohen & Steers Real Estate Investment Portfolio (not to exceed 150%
under normal market conditions).
For further details regarding the portfolio turnover rates, see
"Portfolio Turnover" in the Trust's SAI.
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing Portfolio securities
transactions with broker-dealers is to obtain, and maintain the availability of,
execution at the best net price available and in the most effective manner
possible. The Trust's brokerage allocation policy may permit a Portfolio to pay
a broker-dealer which furnishes research services a higher commission than that
which might be charged by another broker-dealer which does not furnish research
services, provided that such commission is deemed reasonable in relation to the
value of the services provided by such broker-dealer. Each Portfolio's
Sub-advisor may consider the use of broker-dealers that are, or might be deemed
to be, their affiliates or affiliates of the Investment Manager. In addition, a
Sub-advisor may consider sale of shares of the Portfolios or variable insurance
products that use the Portfolios as investment vehicles, or may consider or
follow recommendations of the Investment Manager that take such sales into
account, as factors in selection of broker-dealers to effect transactions,
subject to the requirements of best net price available and most favorable
execution. In this regard, the Investment Manager has directed certain of the
Sub-advisors to try to effect a portion of their Portfolios' transactions
through broker-dealers that give prominence to variable insurance products using
the Portfolios as investment vehicles, to the extent consistent with best net
price available and most favorable execution. For a complete discussion of
portfolio transactions and brokerage allocation, see "Brokerage Allocation" in
the Statement of Additional Information.
INVESTMENT RESTRICTIONS:
For each Portfolio the Trust has adopted a number of investment
restrictions which are fundamental policies and may not be changed without the
approval of the holders of a majority of the affected Portfolio's outstanding
voting securities as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). The Trust's SAI describes all the restrictions on each
Portfolio's investment activities.
NET ASSET VALUES:
The net asset value per share of each Portfolio, 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 as of 4:00 P.M.
Eastern Time on each "business" day, which is each day that the New York Stock
Exchange (the "NYSE") is open for business. The Trust's Board of Trustees has
established procedures for valuing the Portfolios' securities. In general, these
valuations are based on market value with special provisions for: securities not
listed on an exchange or securities market; securities for which recent market
quotations are not readily available; short-term obligations; and open short
positions and options written on securities. In addition, the AST Money Market
Portfolio values all securities by the amortized cost method. This method
attempts to maintain a constant net asset value per share of $1.00. No assurance
can be given that this goal can be attained. See "Computation of Net Asset
Values" in the Trust's SAI.
PURCHASE AND REDEMPTION OF SHARES:
Purchases of shares of the Portfolios may be made only by separate
accounts of Participating Insurance Companies for the purpose of funding
variable annuity contracts and variable life insurance policies or by Qualified
Plans. The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Trust based on, among other things,
the amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies) to be effected on that day
pursuant to variable annuity contracts and variable life insurance policies.
Orders received by the Trust or the Trust's transfer agent are effected on days
on which the NYSE is open for trading. For orders received before 4:00 P.M.
Eastern time, purchases and redemptions of the shares of the Trust are effected
at the net asset value per share determined as of 4:00 P.M. Eastern Time on that
same day. Orders received after 4:00 P.M. Eastern Time are effected at the next
calculated net asset value. Payment for redemptions will be made by the Trust's
transfer agent on behalf of the Trust within seven days after the request is
received. The Trust does not assess any fees, either when it sells or when it
redeems its securities. Surrender charges, mortality and expense risk fees and
other charges may be assessed by Participating Insurance Companies under the
variable annuity contracts or variable life insurance policies.
These fees should be described in the Participating Insurance Companies'
prospectuses.
As of the date of this Prospectus, American Skandia Life Assurance
Corporation ("ASLAC") and Kemper Investors Life Insurance Company are the only
Participating Insurance Companies. In the future, shares of the Trust may be
sold to and held by separate accounts that fund variable annuity and variable
life insurance contracts issued by other affiliated and unaffiliated
Participating Insurance Companies and also directly to Qualified Plans. While it
is not anticipated, should any conflict arise between the holders of variable
annuity contracts and variable life insurance policies of affiliated or
unaffiliated Participating Insurance Companies and participants in Qualified
Plans which would require that a substantial amount of net assets be withdrawn
from the Trust, orderly Portfolio management could be disrupted to the potential
detriment of such holders (see "Other Information" for more details). As of
September 15, 1997, more than 99% of each Portfolio of the Trust was owned of
record by ASLAC on behalf of the owners of variable annuity contracts issued by
ASLAC.
ORGANIZATION AND MANAGEMENT OF THE TRUST:
The Trust is a managed, open-end investment company organized as a
Massachusetts business trust, whose separate Portfolios are diversified, unless
otherwise indicated. As of the date of this Prospectus, twenty-nine Portfolios
are available. The Trust may offer additional Portfolios with a range of
investment objectives that Participating Insurance Companies may consider
suitable for variable annuities and variable life insurance policies or that may
be considered suitable for Qualified Plans. The Trust's current approach to
achieving this goal is to seek to have multiple organizations unaffiliated with
each other be responsible for conducting the investment programs for the
Portfolios. Each such organization would be responsible for the Portfolio or
Portfolios to which such organization's expertise is best suited.
Formerly, the Trust was known as the Henderson International Growth
Fund, which consisted of only one Portfolio. The Investment Manager was
Henderson International, Inc. Shareholders of what was, at the time, the
Henderson International Growth Fund, approved certain changes in a meeting held
April 17, 1992. These changes included engagement of a new Investment Manager,
engagement of a Sub-advisor and election of new Trustees. Subsequent to that
meeting, the new Trustees adopted a number of resolutions, including, but not
limited to, resolutions renaming the Trust. Since that time the Trustees have
adopted a number of resolutions, including, but not limited to, making new
Portfolios available and adopting forms of Investment Management Agreements and
Sub-advisory Agreements between the Investment Manager and the Trust and the
Investment Manager and each Sub-advisor, respectively.
The Trustees of the Trust have oversight responsibility for the operations
of each Portfolio. The Trustees are David E.A. Carson, Julian A. Lerner, Thomas
M. O'Brien, F. Don Schwartz, Jan R. Carendi and Gordon C. Boronow. Additional
information about the Trustees and the Trust's executive officers may be found
in the Trust's SAI under the section "Management."
Investment Manager: American Skandia Investment Services, Incorporated
("ASISI"), One Corporate Drive, Shelton, Connecticut, acts as Investment Manager
to the Trust. ASISI, a Connecticut corporation organized in 1991, is registered
as an investment adviser with the Securities and Exchange Commission. Prior to
April 7, 1995, ASISI was known as American Skandia Life Investment Management,
Inc. ASISI is a wholly-owned subsidiary of American Skandia Investment Holding
Corporation, whose indirect parent is Skandia Insurance Company Ltd.
("Skandia"). Skandia is a Swedish company that owns, directly or indirectly, a
number of insurance companies in many countries. The predecessor to Skandia
commenced operations in 1855.
American Skandia Life Assurance Corporation, a Participating Insurance
Company, is also a wholly-owned subsidiary of American Skandia Investment
Holding Corporation. Certain officers of the Trust are officers and/or directors
of one or more of the following companies: ASISI, American Skandia Life
Assurance Corporation, American Skandia Marketing, Incorporated (the principal
underwriter for various annuities deemed to be securities for American Skandia
Life Assurance Corporation) and American Skandia Investment Holding Corporation.
Sub-advisors:
Lord Abbett & Co. ("Lord Abbett"), The General Motors Building, 767
Fifth Avenue, New York, New York 10153-0203, serves as Sub-advisor for the Lord
Abbett Growth and Income Portfolio and the Lord Abbett Small Cap Value
Portfolio. Lord Abbett has been an investment manager for over 65 years. As of
June 30, 1997, Lord Abbett managed approximately $[INSERT] billion in a family
of mutual funds and other advisory accounts.
The portfolio manager responsible for management of the Lord Abbett Growth
and Income Portfolio is W. Thomas Hudson, Jr., Executive Vice President. Mr.
Hudson has served in this capacity since the Portfolio's inception and has held
certain positions in the equity research department of Lord Abbett since 1982.
The portfolio manager responsible for management of the Lord Abbett Small
Cap Value Portfolio is Robert P. Fetch. Mr. Fetch, who has managed the Portfolio
since its inception, joined Lord Abbett as a Portfolio Manager in August, 1995.
From 1989 to 1995, Mr. Fetch was a Managing Director of Prudential Investment
Advisors.
Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver,
Colorado 80206-4923, serves as Sub-advisor for the JanCap Growth Portfolio and
the AST Janus Overseas Growth Portfolio. Janus serves as the investment advisor
to the Janus Funds, as well as advisor or sub-advisor to several other mutual
funds and individual, corporate, charitable and retirement accounts. As of June
30, 1997, Janus managed assets worth over $[INSERT] billion. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 83% of the outstanding
voting stock of Janus, most of which it acquired in 1984. KCSI is a
publicly-traded holding company whose primary subsidiaries are engaged in
transportation and financial services.
The portfolio manager responsible for management of the JanCap Growth
Portfolio is Scott W. Schoelzel. Mr. Schoelzel, a Senior Portfolio Manager at
Janus who has managed the Portfolio since August, 1997, joined Janus in January,
1994 as Vice President of Investments. From 1991 to 1993, Mr. Schoelzel was a
Portfolio Manager with Founders Asset Management.
The portfolio manager responsible for management of the AST Janus
Overseas Growth Portfolio is Helen Young Hayes, Executive Vice President and
portfolio manager of the Janus Worldwide Fund and Janus Overseas Fund. Ms. Hayes
joined Janus in 1987. She has managed or co-managed Janus Worldwide Fund, Janus
Overseas Fund and the Portfolio since their respective inceptions. Ms. Hayes
holds a Bachelor of Arts in Economics from Yale University and is a Chartered
Financial Analyst.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan"), with principal
offices at 522 Fifth Avenue, New York, New York 10036, serves as Sub-advisor for
the AST Money Market Portfolio. J.P. Morgan is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank holding company
organized under the laws of Delaware which is located at 60 Wall Street, New
York, New York 10260. J.P. Morgan & Co., through J.P. Morgan and other
subsidiaries, offers a wide range of services to governmental, institutional,
corporate and individual customers, and acts as investment advisor to individual
and institutional clients with combined assets under management of approximately
$[INSERT] billion as of June 30, 1997. J.P. Morgan has managed investments for
clients for almost a century, since 1913. In addition, J.P. Morgan has managed
short-term fixed income assets for clients since 1969. As of June 30, 1997,
these short-term assets under J.P. Morgan's management totaled over $[INSERT]
billion. As of the date of this Prospectus, J.P. Morgan was also engaged to
manage a portion of the assets of a separate account of American Skandia Life
Assurance Corporation, an affiliate of the Investment Manager and, as of the
date of this Prospectus, one of two Participating Insurance Companies.
Federated Investment Counseling ("Federated Investment"), Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779, serves as Sub-advisor for
the Federated Utility Income Portfolio and the Federated High Yield Portfolio.
Federated Investment, organized as a Delaware business trust in 1989 and a
wholly owned subsidiary of Federated Investors, is a registered investment
advisor under the Investment Advisers Act of 1940. Federated Investment and
other subsidiaries of Federated Investors serve as investment advisors to a
number of investment companies and private accounts. Total assets under
management or administration by these and other subsidiaries of Federated
Investors as of June 30, 1997, was approximately $[INSERT] billion.
Linda A. Duessel and Steven J. Lehman are primarily responsible for the
day-to-day management of the Federated Utility Income Portfolio. Ms. Duessel
joined Federated Investors in 1991 and has been a Vice President of a subsidiary
of Federated Investment since 1995. From 1991 through 1995, Ms. Duessel was an
Assistant Vice President of a subsidiary of Federated Investment. Mr. Lehman
joined Federated Investors in May, 1997 as a Vice President. From 1985 to May,
1997, Mr. Lehman served as a Portfolio Manager, then Vice President/Senior
Portfolio Manager, at First Chicago NBD Investment Management Company.
Mark E. Durbiano and Stefanie L. Bachhuber are primarily responsible
for the day-to-day management of the Federated High Yield Portfolio. Mr.
Durbiano, who has managed the Portfolio since it commenced operations in 1994,
joined Federated Investors in 1982 and has been a Senior Vice President of a
subsidiary of Federated Investment since January, 1996. From 1988 through 1995,
Mr. Durbiano was a Vice President of a subsidiary of Federated Investment. Ms.
Bachhuber, who has co-managed the Portfolio since July, 1997, joined Federated
Investors in 1993 as an Investment Analyst and has been an Assistant Vice
President of a subsidiary of Federated Investment since 1996. Ms. Bachhuber
earned her M.B.A., with a concentration in finance, from Duke University in
1993.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt
Street, Baltimore, Maryland 21202, serves as Sub-advisor for the T. Rowe Price
Asset Allocation Portfolio, the T. Rowe Price Natural Resources Portfolio, and
the T. Rowe Price Small Company Value Portfolio. T. Rowe Price was founded in
1937 by the late Thomas Rowe Price, Jr. As of June 30, 1997, the firm and its
affiliates managed approximately $[INSERT] billion for approximately [INSERT]
million individual and institutional accounts.
The T. Rowe Price Asset Allocation Portfolio is managed by an Investment
Advisory Committee composed of the following members: Edmund M. Notzon,
Chairman, Heather R. Landon, James M. McDonald, Jerome Clark, Peter Van Dyke, M.
David Testa and Richard T. Whitney. The Committee Chairman has day-to-day
responsibility for managing the Portfolio and works with the Committee in
developing and executing the Portfolio's investment program. Mr. Notzon joined
T. Rowe Price in 1989 and has been managing investments since 1991. Prior to
joining T. Rowe Price, Mr. Notzon was Director of the Analysis and Evaluation
Division at the U.S. Environmental Protection Agency.
The T. Rowe Price Natural Resources Portfolio is managed by an Investment
Advisory Committee composed of the following members: David J. Wallack,
Chairman, Charles M. Ober, David M. Lee, Hugh M. Evans III, Richard P. Howard
and James A.C. Kennedy. The Committee Chairman has day-to-day responsibility for
managing the Portfolio and works with the Committee in developing and executing
the Portfolio's investment program. Mr. Wallack, who joined T. Rowe Price in
1990, is a Vice President of T. Rowe Price and an Investment Analyst for the
firm's Equity Research Division.
The T. Rowe Price Small Company Value Portfolio is managed by an
Investment Advisory Committee composed of the following members: Preston G.
Athey, Chairman, Hugh M. Evans III and Gregory A. McCrickard. The Committee
Chairman has day-to-day responsibility for managing the Portfolio and works with
the Committee in developing and executing the Portfolio's investment program.
Mr. Athey joined T. Rowe Price in 1978, has been managing investments since 1982
and has been Chairman of the Investment Advisory Committee since the Portfolio's
inception in December, 1996.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), 100 East Pratt
Street, Baltimore, Maryland 21202, serves as Sub-advisor for the T. Rowe Price
International Equity Portfolio and the T. Rowe Price International Bond
Portfolio. Price-Fleming was founded in 1979 as a joint venture between T. Rowe
Price Associates, Inc. and Robert Fleming Holdings Limited. Price-Fleming is one
of the world's largest international mutual fund asset managers with
approximately $[INSERT] billion under management as of June 30, 1997 in its
offices in Baltimore, London, Tokyo, Hong Kong and Singapore. Each Portfolio has
an investment advisory group that has day-to-day responsibility for managing the
Portfolio and developing and executing the Portfolio's investment program.
The advisory group for the T. Rowe Price International Equity Portfolio
consists of Martin G. Wade, Christopher D. Alderson, Peter B. Askew, Mark J.T.
Edwards, John R. Ford, James B.M. Seddon, Benedict R.F. Thomas, and David J.L.
Warren. Martin Wade joined Price-Fleming in 1979 and has 27 years of experience
with Fleming Group (Fleming Group includes Robert Fleming Holdings Ltd. and/or
Jardine Fleming International Holdings Ltd.) in research, client service and
investment management. Christopher Alderson joined Price-Fleming in 1988, and
has 9 years of experience with the Fleming Group in research and portfolio
management. Peter Askew joined Price-Fleming in 1988 and has 21 years of
experience managing multicurrency fixed income portfolios. Mark J.T. Edwards
joined Price-Fleming in 1986 and has 15 years of experience in financial
analysis. John R. Ford joined Price-Fleming in 1982 and has 16 years of
experience with Fleming Group in research and portfolio management. James B.M.
Seddon joined Price-Fleming in 1987 and has 11 years of experience in investment
management. Benedict R.F. Thomas joined Price-Fleming in 1988 and has 7 years of
portfolio management experience. David J.L. Warren joined Price-Fleming in 1984
and has 16 years experience in equity research, fixed income research and
portfolio management.
The advisory group for the T. Rowe Price International Bond Portfolio
consists of Peter Askew, Christopher Rothery and Michael Conelius. Peter Askew
joined Price-Fleming in 1988 and has 21 years of experience managing
multi-currency fixed-income portfolios. Christopher Rothery joined Price-Fleming
in 1994 and has 8 years of experience managing multi-currency fixed-income
portfolios. Prior to joining Price-Fleming, he worked with Fleming International
Fixed Income Management Limited. Michael Conelius joined Price-Fleming in 1995.
Prior to that, he had been with T. Rowe Price since 1988.
Founders Asset Management, Inc. ("Founders"), Founders Financial
Center, 2930 East Third Avenue, Denver, Colorado 80206, serves as Sub-advisor
for the Founders Capital Appreciation Portfolio and the Founders Passport
Portfolio. Founders has acted as an investment advisor since 1938 and serves as
investment advisor to Founders Discovery, Frontier, Passport, Special,
International Equity, Worldwide Growth, Growth, Blue Chip, Balanced, Government
Securities, and Money Market Funds. Founders, which is also the investment
advisor for a number of private accounts, managed assets aggregating
approximately $[INSERT] billion as of June 30, 1997.
Michael K. Haines, a Senior Vice President of Investments of Founders,
has been responsible for management of the Founders Capital Appreciation
Portfolio since the Portfolio commenced operations in January 1994. Mr. Haines
has been associated with Founders since 1985, serving as a lead portfolio
manager and an assistant portfolio manager.
Michael W. Gerding, a Vice President of Investments of Founders, has
been responsible for management of the Founders Passport Portfolio since
Founders became the Portfolio's Sub-advisor in October 1996. Mr. Gerding is a
chartered financial analyst who has been part of Founders' investment department
since 1990. Prior to joining Founders, Mr. Gerding served as a portfolio manager
and research analyst with NCNB Texas for several years.
INVESCO Trust Company ("INVESCO"), 7800 East Union Avenue, P.O. Box
173706, Denver, Colorado 80217-3706, serves as Sub-advisor for the INVESCO
Equity Income Portfolio. INVESCO, a trust company founded in 1969, is a
wholly-owned subsidiary of INVESCO Funds Group, Inc., which was established in
1932. INVESCO also serves as sub-advisor to INVESCO Growth Fund, Inc., INVESCO
Dynamics Fund, Inc., INVESCO Money Market Funds, Inc., INVESCO Income Funds,
Inc., INVESCO Tax-Free Income Funds, Inc., INVESCO Strategic Portfolios, Inc.,
INVESCO Emerging Opportunity Funds, Inc., INVESCO Industrial Income Fund, Inc.,
INVESCO Multiple Asset Funds, Inc., INVESCO Specialty Funds, Inc., INVESCO
Strategic Portfolios, Inc., and INVESCO Variable Investment Funds, Inc. AMVESCAP
PLC, the parent of INVESCO Funds Group, Inc. and INVESCO, is one of the largest
independent investment management businesses in the world and managed
approximately $[INSERT] billion of assets as of June 30, 1997.
The portfolio managers responsible for management of the Portfolio are
Charles P. Mayer, Portfolio Co-Manager, and Donovan J. (Jerry) Paul, Portfolio
Co-Manager. Mr. Mayer has served as Co-Manager of the Portfolio since April,
1993. Mr. Mayer began his investment career in 1969 and is now a senior vice
president of INVESCO. From 1993 to 1994, he was vice president of INVESCO, and
from 1984 to 1993, he was a portfolio manager with Westinghouse Pension. Mr.
Paul has served as Co-Manager of the Portfolio since May 1994. Mr. Paul entered
the investment management industry in 1976, and has been a senior vice president
of INVESCO since 1994. From 1993 to 1994, he was president of Quixote Investment
Management, Inc. From 1987 to 1992, Mr. Paul was a portfolio manager, and from
1989 to 1992 he was senior vice president and director of fixed-income research
with Stein, Roe & Farnham, Inc.
Pacific Investment Management Company ("PIMCO"), 840 Newport Center
Drive, Suite 360, Newport Beach, California 92660 serves as Sub-advisor for the
PIMCO Total Return Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio.
PIMCO, a subsidiary general partnership of PIMCO Advisors L.P. ("PIMCO
Advisors"), is an investment counseling firm founded in 1971 and, as of June 30,
1997, had over $[INSERT] billion of assets under management. A majority interest
in PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Financial Asset Management Corporation, an indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company, and PIMCO Partners, LLC, a
California limited liability company controlled by the managing directors of
PIMCO. PIMCO is a registered investment advisor with the Securities and Exchange
Commission and a commodity trader advisor with the CFTC.
The portfolio manager responsible for management of the PIMCO Total
Return Bond Portfolio and the PIMCO Limited Maturity Bond Portfolio is William
H. Gross. Mr. Gross is managing director of PIMCO has been associated with the
firm since 1971, and has managed each Portfolio since their respective
commencement of operations.
Berger Associates, Inc. ("Berger Associates"), 210 University Blvd.,
Suite 900, Denver, Colorado, 80206, serves as Sub-advisor for the Berger Capital
Growth Portfolio. Berger Associates has acted as an investment adviser since
1973 and, as of June 30, 1997, managed assets worth approximately $[INSERT]
billion. Berger Associates also serves as investment adviser to other mutual
funds and to institutional investors. Kansas City Southern Industries, Inc.
("KCSI") owns approximately 87% of the outstanding stock of Berger Associates,
most of which it acquired in 1994. KCSI is a publicly-traded holding company
whose primary subsidiaries are engaged in transportation and financial services.
The portfolio manager responsible for management of the Portfolio since
February, 1997 is Patrick S. Adams. Mr. Adams co-managed the Portfolio from
February, 1997 to December, 1997. Mr. Adams joined Berger Associates as a Senior
Vice President in February 1997, where he is also the manager of the Berger 100
Fund and co-manager of the Berger Growth and Income Fund and the Berger Balanced
Fund. From June 1996 to January 1997, Mr. Adams served as Senior Vice President
with Zurich Kemper Investments, Inc., where he was portfolio manager of the
Kemper Growth Fund. From March 1993 to May 1996, Mr. Adams served as portfolio
manager with Founders Asset Management, Inc., where he managed the Founders Blue
Chip Growth Fund and the Founders Balanced Fund. Prior to that, Mr. Adams served
in various positions with First of America Investment Corp. for over three
years, including as Senior Portfolio Manager/Senior Analyst from January 1992 to
February 1993.
Robertson, Stephens & Company Investment Management, L.P. ("Robertson
Stephens"), 555 California Street, San Francisco, California 94104, serves as
Sub-advisor for the Robertson Stephens Value + Growth Portfolio and the
Robertson Stephens Contrarian Portfolio. Robertson Stephens, a California
limited partnership, was formed in 1993 and is registered as an investment
advisor with the Securities and Exchange Commission. The sole limited partner of
Robertson Stephens is Robertson, Stephens & Company, L.L.C., a major investment
banking firm specializing in emerging growth companies that has developed
substantial investment research, underwriting, and venture capital expertise.
Since 1978, Robertson, Stephens & Company, L.L.C. has managed underwritten
public offerings for over $[INSERT] billion of securities of emerging growth
companies. As of June 30, 1997, Robertson Stephens and its affiliates had in
excess of $[INSERT] billion under management in public and private investment
funds. Robertson, Stephens & Company, L.L.C., its parent, Robertson, Stephens &
Company Group, L.L.C. and Sanford R. Robertson may be deemed to be control
persons of Robertson Stephens.
Mr. Ronald Elijah has been the portfolio manager responsible for management
of the Robertson Stephens Value + Growth Portfolio since the Portfolio commenced
operations in May, 1996. From August, 1985 to January, 1990, Mr. Elijah was a
securities analyst for Robertson, Stephens & Company, L.P. From January, 1990 to
January, 1992, Mr. Elijah was an analyst and portfolio manager for Water Street
Capital, which managed short selling investment funds. Mr. Elijah joined
Robertson Stephens as a portfolio manager in 1992.
The portfolio manager responsible for management of the Robertson
Stephens Contrarian Portfolio is Paul H. Stephens. He is a founder of Robertson,
Stephens & Company L.L.C. In addition to managing public investment portfolios
for individuals since 1975, Mr. Stephens has acted as the firm's Chief
Investment Officer since 1978.
American Century Investment Management, Inc. ("American Century")
(formerly, Investors Research Corporation), American Century Tower, 4500 Main
Street, Kansas City, Missouri 64111, serves as Sub-advisor for the Twentieth
Century International Growth Portfolio and the Twentieth Century Strategic
Balanced Portfolio. American Century has been providing investment advisory
services to investment companies and institutional clients since 1958. In June
1995, American Century Companies, Inc. ("ACC"), the parent of American Century,
acquired Benham Management International, Inc. In the acquisition, Benham
Management Corporation ("BMC"), the investment adviser to The Benham Group of
mutual funds, became a wholly owned subsidiary of ACC. Certain employees of BMC
will be providing investment management services to American Century funds,
while certain American Century employees will be providing investment management
services to Benham funds. As of June 30, 1997, American Century and its
affiliates managed assets totaling approximately $[INSERT] billion.
American Century utilizes a team of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the
Portfolios.
The portfolio manager members of the portfolio team responsible for
management of the Twentieth Century International Growth Portfolio are Henrik
Strabo and Mark S. Kopinski. Henrik Strabo joined American Century in 1993 as an
investment analyst member of the American Century International Equity and
International Small Company Fund team, has been a portfolio manager member of
the team since 1994 and has managed the Portfolio since its inception. Prior to
joining American Century, Mr. Strabo was Vice President, International Equity
Sales with Barclays de Zoete Wedd (1991 to 1993) and obtained international
equity sales experience at Cresvale International (1990 to 1991). Mark S.
Kopinski, Vice President and Portfolio Manager for American Century, rejoined
American Century in April 1997 and has co-managed the Portfolio since that time.
From June 1995 to March 1997, Mr. Kopinski served as Vice President and
Portfolio Manager for Federated Investors, Inc. Prior to June 1995, Mr. Kopinski
was a Vice President and Portfolio Manager for American Century.
The portfolio manager members of the portfolio team responsible for
management of the equity portion of the Twentieth Century Strategic Balanced
Portfolio are James E. Stowers III and Bruce A. Wimberly. Mr. Stowers, President
and Portfolio Manager, joined American Century in 1981. Mr. Wimberly, Portfolio
Manager, joined American Century in 1994 as an Investment Analyst. Prior to
joining American Century, Mr. Wimberly attended Kellogg Graduate School of
Management, Northwestern University, where he obtained his M.B.A. degree in
August, 1994. Prior to that, he served as a Research Analyst for Frontier
Capital Management Company, Boston, Massachusetts. The portfolio manager members
of the portfolio team responsible for management of the fixed income portion of
the Portfolio are Casey Colton, Norman E. Hoops, Brian Howell, Jeffrey L.
Houston, David Schroeder and Jeffrey R. Tyler. Casey Colton joined BMC in 1990
as a Municipal Analyst. Norman Hoops joined American Century in November 1989 as
a Vice President and Portfolio Manager and became Senior Vice President and
Fixed Income Portfolio Manager in April 1993. Brian Howell joined BMC in 1987 as
a research analyst and was promoted to his current position in January 1994.
Jeffrey Houston has worked for American Century as a Portfolio Manager since
November, 1990. David Schroeder joined BMC in 1990. Jeffrey Tyler, Senior Vice
President and Portfolio Manager, joined BMC in January, 1988 as a Portfolio
Manager.
Putnam Investment Management, Inc. ("Putnam Management"), One Post
Office Square, Boston, Massachusetts 02109, serves as Sub-advisor for the AST
Putnam Value Growth & Income Portfolio, the AST Putnam International Equity
Portfolio, and the AST Putnam Balanced Portfolio. Putnam Management is a
subsidiary of Putnam Investments, Inc., a holding company which in turn is
wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding
company whose principal businesses are international insurance and reinsurance
brokerage, employee benefit consulting and investment management. Putnam
Management is one of America's oldest and largest money management firms,
managing mutual funds since 1937. As of June 30, 1997, Putnam Management and its
affiliates managed over $[INSERT] billion in assets.
Anthony I. Kreisel, Managing Director of Putnam Management, has had
primary responsibility for the day-to-day management of the AST Putnam Value
Growth & Income Portfolio since the Portfolio's inception in December, 1996. Mr.
Kreisel has been employed as an investment professional by Putnam Management
since 1986.
Justin Scott, Managing Director of Putnam Management, and Omid Kamshad,
Senior Vice President of Putnam Management, have had primary responsibility for
the day-to-day management of the AST Putnam International Equity Portfolio since
Putnam Management became the Portfolio's Sub-advisor in October, 1996. Mr. Scott
has been employed as an investment professional by Putnam Management since 1988.
Mr. Kamshad has been employed as an investment professional by Putnam Management
since January, 1996. Prior to January, 1996, Mr. Kamshad was Director of
Investments at Lombard Odier International. Prior to April, 1995, he was
Director at Baring Asset Management Company.
Putnam Management's Global Asset Allocation Committee has primary
responsibility for the day-to-day management of the AST Putnam Balanced
Portfolio. No person is primarily responsible for making recommendations to the
Committee in respect of the Portfolio.
Cohen & Steers Capital Management, Inc. ("Cohen & Steers"), 757 Third
Avenue, New York, New York 10017, acts as the Sub-advisor for the Cohen & Steers
Real Estate Investment Portfolio. Cohen & Steers, a registered investment
advisor, is the leading U.S. manager of portfolios dedicated to investments in
real estate investment trusts ("REITS").
As of June 30, 1997, Cohen & Steers managed approximately $[INSERT] in assets.
Robert H. Steers, Chairman, and Martin Cohen, President formed Cohen &
Steers in 1986 and are responsible for the day-to-day management of the Cohen &
Steers Real Estate Investment Portfolio. Mr. Cohen and Mr. Steers may be deemed
"controlling persons" of the Sub-advisor on the basis of their ownership of the
Sub-advisor's stock.
Stein Roe & Farnham Incorporated ("Stein Roe"), One South Wacker Drive,
Chicago, Illinois 60606 serves as Sub-advisor to the Stein Roe Small Cap Blend
Portfolio. Stein Roe was organized in 1986 to succeed the business of Stein Roe
& Farnham, a partnership that had advised and managed mutual fund since 1949.
Stein Roe is a wholly owned subsidiary of Liberty Financial Companies, Inc.,
which in turn is a majority owned indirect subsidiary of Liberty Mutual
Insurance Company.
Richard B. Peterson and John S. McLandsborough are co-portfolio
managers of the Portfolio. Mr. Peterson is a senior vice president of the
Sub-advisor. Mr. Peterson began his investment career at Stein Roe & Farnham in
1965 and rejoined Stein Roe in 1991 after 15 years of equity research and
portfolio management experience with State Farm Investment Management Corp.
Prior to joining the Sub-advisor in April 1996, Mr. McLandsborough was an equity
research analyst with CS First Boston from June 1994 until January 1996 with
National City Bank of Cleveland prior thereto.
Bankers Trust Global Investment Management, a unit of Bankers Trust
Company ("Bankers Trust"), is the Sub-advisor to the Bankers Trust Enhanced 500
Index Portfolio. Bankers Trust, a New York banking corporation with executive
offices at 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, is a wholly-owned subsidiary of Bankers Trust New York Corporation.
Bankers Trust conducts a variety of general banking and trust activities and is
a major supplier of financial services to the international and domestic
institutional markets. As of June 30, 1997 Bankers Trust New York Corporation
was the seventh largest bank holding company in the United States. Bankers Trust
is one of the nation's largest and most experienced investment managers with
approximately $[INSERT} billion in assets under management globally.
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the Portfolio. Mr. Salerno oversees administration,
management and trading of international and domestic equity index strategies. He
has been employed by Bankers Trust since 1981.
Marsico Capital Management, LLC ("Marsico Capital"), 1200 17th Street, Suite
1300, Denver, CO 80202, serves as Sub-advisor for the Marsico Capital Growth
Portfolio. Thomas F. Marsico, who has managed the Portfolio since its inception,
has primary responsibility for management of the Portfolio. Mr. Marsico is
President and Chief Executive Officer, and has sole voting control, of Marsico
Capital. Prior to forming Marsico Capital in September, 1997, Mr. Marsico served
as Executive Vice President and Portfolio Manager at Janus Capital Corporation
("Janus"). Mr. Marsico joined Janus in March, 1986 and served as Portfolio
Manager of the Janus Twenty Fund from February, 1988 to August, 1997 and the
Janus Growth & Income Fund from May, 1990 (inception) to August, 1997.
Investment Management Agreements: The Trust has entered into Investment
Management Agreements with the Investment Manager (the "Management Agreements")
which provide that the Investment Manager will furnish each applicable Portfolio
with investment advice and investment management and administrative services
with respect to the applicable Portfolio subject to the supervision of the Board
of Trustees and in conformity with the stated policies of the applicable
Portfolio. The Investment Manager has engaged the Sub-advisors noted above to
conduct the investment programs of each Portfolio, including the purchase,
retention, disposition and lending of securities. Such Sub-advisors are required
to provide research and statistical analysis and to keep books and records of
securities transactions. The Investment Manager is responsible for monitoring
the activities of the Sub-advisors and reporting on the activities of the
Sub-advisors to the Trustees. The Investment Manager must also provide or obtain
for the Trust, and thereafter supervise, such executive, administrative,
accounting, custody, transfer agent and shareholder servicing services as are
deemed advisable by the Trustees of the Trust.
Under the terms of the Management Agreements, each Portfolio pays all
of its expenses, including, but not limited to, the costs incurred in connection
with the maintenance of its registration under the Securities Act of 1933, as
amended, and the 1940 Act, printing and mailing prospectuses and statements of
additional information to shareholders, certain office and financial accounting
services, taxes or governmental fees, brokerage commissions, portfolio pricing,
custodial, transfer and shareholder servicing agent costs, expenses of outside
counsel and independent accountants, preparation of shareholder reports and
expenses of trustee and shareholder meetings. Expenses incurred by the Trust not
directly attributable to any specific Portfolio or Portfolios are allocated on
the basis of the net assets of the respective Portfolios.
The Investment Manager receives a fee, payable each month, for the
performance of its services. The Investment Manager pays each Sub-advisor a
portion of such fee for the performance of the Sub-advisory services. The
Investment Management fee payable differs from Portfolio to Portfolio,
reflecting the objective, policies and restrictions of each Portfolio and the
nature of each Investment Management Agreement and Sub-advisory Agreement. Each
Portfolio's fee is accrued daily for the purposes of determining the offering
and redemption price of the Portfolio's shares. The fees payable to the
Investment Manager are as follows:
Lord Abbett Growth and Income Portfolio: An annual rate of .75% of the
average daily net assets of the Portfolio.
Lord Abbett Small Cap Value Portfolio: An annual rate of [INSERT]% of the
average daily net assets of the Portfolio.
JanCap Growth Portfolio: An annual rate of .90% of the average daily net
assets of the Portfolio.
AST Janus Overseas Growth Portfolio: An annual rate of 1.0% of the average
daily net assets of the Portfolio.
AST Money Market Portfolio: An annual rate of .50% of the average daily
net assets of the Portfolio. The Investment Manager has also voluntarily agreed
to waive a portion of its fee equal to .05% of the average daily net assets of
the Portfolio. The Investment Manager may terminate this voluntary agreement at
any time.
Federated Utility Income Portfolio: An annual rate equal to .75% of the
first $50 million of the average daily net assets of the Portfolio; plus .60% of
the Portfolio's average daily net assets in excess of $50 million.
Federated High Yield Portfolio: An annual rate of .75% of the average daily
net assets of the Portfolio.
T. Rowe Price Asset Allocation Portfolio: An annual rate of .85% of the
average daily net assets of the Portfolio.
T. Rowe Price International Equity Portfolio: An annual rate of 1.0% of the
average daily net assets of the Portfolio.
T. Rowe Price Natural Resources Portfolio: An annual rate of .90% of the
average daily net assets of the Portfolio.
T. Rowe Price International Bond Portfolio: An annual rate of .80% of
the average daily net assets of the Portfolio. Prior to May 1, 1996, the
Investment Manager had engaged Scudder, Stevens & Clark, Inc. as Sub-advisor for
the Portfolio (formerly, the AST Scudder International Bond Portfolio), for a
total Investment Management fee of 1.0% of the average daily net assets of the
Portfolio.
T. Rowe Price Small Company Value Portfolio: An annual rate of .90% of the
average daily net assets of the Portfolio.
Founders Capital Appreciation Portfolio: An annual rate of .90% of the
average daily net assets of the Portfolio.
Founders Passport Portfolio: An annual rate of 1.0% of the average
daily net assets of the Portfolio. Prior to October 15, 1996, the Investment
Manager had engaged Seligman Henderson Co. as Sub-advisor for the Portfolio
(formerly, the Seligman Henderson International Small Cap Portfolio), for a
total Investment Management fee of 1.0% of the average daily nets assets of the
Portfolio.
INVESCO Equity Income Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
PIMCO Total Return Bond Portfolio: An annual rate of .65% of the average
daily net assets of the Portfolio.
PIMCO Limited Maturity Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio.
Berger Capital Growth Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
Robertson Stephens Value + Growth Portfolio: An annual rate of
[INSERT]% of the average daily net assets of the Portfolio, plus or minus
[INSERT]% of such assets for each percentage point by which the performance of
the Portfolio exceeds or is less than the performance of the Standard & Poor's
500 Composite Stock Price Index; provided, however, that any increase or
decrease in the sub-advisory fee due to the performance of the Portfolio will be
limited to no more than [INSERT]% of the average daily net assets of the
Portfolio.
Robertson Stephens Contrarian Portfolio: An annual rate of [INSERT]% of the
average daily net assets of the Portfolio.
Twentieth Century International Growth Portfolio: An annual rate of 1.0% of
the average daily net assets of the Portfolio.
Twentieth Century Strategic Balanced Portfolio: An annual rate of .85% of
the average daily net assets of the Portfolio.
AST Putnam Value Growth & Income Portfolio: An annual rate of .75% of the
average daily net assets of the Portfolio.
AST Putnam International Equity Portfolio: An annual rate of 1.0% of
the average daily net assets of the Portfolio not in excess of $75 million; plus
.85% of the Portfolio's average daily net assets over $75 million. Prior to
October 15, 1996, the Investment Manager had engaged Seligman Henderson Co. as
Sub-advisor for the Portfolio (formerly, the Seligman Henderson International
Equity Portfolio), for a total Investment Management fee of 1.0% of the average
daily nets assets of the Portfolio. The Investment Manager had also voluntarily
agreed to waive a portion of its fee equal to .15% on assets in excess of $75
million. Such agreement was terminated as of the opening of business on October
15, 1996.
AST Putnam Balanced Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio not in excess of $300 million; plus .70% of
the Portfolio's average daily net assets in excess of $300 million. Prior to
October 15, 1996, the Investment Manager had engaged Phoenix Investment Counsel,
Inc. as Sub-advisor for the Portfolio (formerly, the AST Phoenix Balanced Asset
Portfolio), for a total Investment Management fee of .75% of the average daily
net assets of the Portfolio not in excess of $75 million; plus .65% of the
Portfolio's average daily net assets in excess of $75 million.
Cohen & Steers Real Estate Investment Portfolio: An annual rate of
[INSERT]% of the average daily net assets of the Portfolio.
Stein Roe Small Cap Blend Portfolio: An annual rate of [INSERT]% of the
average daily net assets of the Portfolio.
Bankers Trust Enhanced 500 Index Portfolio: Up until December [INSERT],
1998, an annual rate of [INSERT]% of the average daily net assets of the
Portfolio (the "Base Rate"). For each period thereafter, the Base Rate plus or
minus a performance adjustment represented as a percentage of the Portfolio's
average daily net assets (the "Performance Adjustment"); provided, however, that
any positive or negative Performance Adjustment will be limited to no more than
[INSERT]% of the average daily net assets of the Portfolio. The Performance
Adjustment will be computed as [INSERT]% of the percentage differential in the
Portfolio's performance as compared to the Standard & Poor's 500 Composite Stock
Price Index.
Marsico Capital Growth Portfolio: An annual rate of [INSERT]% of the
average daily net assets of the Portfolio.
The Investment Manager has agreed, by the terms of the Management
Agreements for certain Portfolios of the Trust, and voluntarily for the other
Portfolios of the Trust, to reimburse the Portfolio for certain operating
expenses so that total expenses of the Portfolio do not exceed a specified
percentage of the Portfolio's average daily net assets. Such specified
percentage differs between the Portfolios, reflecting the objective, policies
and restrictions of each Portfolio and the expenses involved in conducting an
investment program for each Portfolio. For an additional discussion of Portfolio
expense limitations, see "Investment Advisory and Other Services" in the Trust's
SAI.
Sub-Advisory Agreements: The Investment Manager pays each Sub-advisor for the
performance of sub-advisory services. The fee paid to the Sub-advisors differs
from Portfolio to Portfolio, reflecting the objectives, policies and
restrictions of each Portfolio and the nature of each Sub-advisory Agreement.
Each Sub-advisor's fee is accrued daily for purposes of determining the amount
payable to the Sub-advisor. The fees payable to the present Sub-advisors are as
follows:
Lord, Abbett & Co. for the Lord Abbett Growth and Income Portfolio: An
annual rate of .50% of the portion of the average daily net assets of the
Portfolio not in excess of $200 million; plus .40% of the portion over $200
million but not in excess of $500 million; plus .375% of the portion over $500
million but not in excess of $700 million; plus .35% of the portion over $700
million but not in excess of $900 million; plus .30% of the portion in excess of
$900 million.
Lord, Abbett & Co. for the Lord Abbett Small Cap Value Portfolio: An annual
rate of .50% of the average daily net assets of the Portfolio.
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.
Janus Capital Corporation for the AST Janus Overseas Growth Portfolio:
An annual rate of .65% of the portion of the average daily net assets of the
Portfolio not in excess of $100 million; plus .60% of the portion of the net
assets over $100 million but not in excess of $500 million; and .50% of the
portion of the net assets over $500 million.
J.P. Morgan Investment Management, Inc. for the AST Money Market
Portfolio: An annual rate of .25% of the portion of the average daily net assets
of the Portfolio not in excess of $100 million; plus .20% of the portion over
$100 million but not in excess of $200 million; plus .15% of the portion over
$200 million but not in excess of $1 billion; and .10% of the portion in excess
of $1 billion. Commencing December 30, 1996, the Sub-advisor has voluntarily
agreed to waive a portion of its fee equal to .10% of the portion of the
Portfolio's average daily net assets not in excess of $100 million; and .05% of
the portion of the Portfolio's average daily net assets over $100 million but
not in excess of $200 million; and .06% of the portion of the Portfolio's
average daily net assets over $500 million but not in excess of $1 billion; and
.04% 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.
Federated Investment Counseling for the Federated Utility Income
Portfolio: An annual rate of .50% of the portion of the average daily net assets
of the Portfolio not in excess $25 million; plus .35% of the portion in excess
of $25 million but not in excess of $50 million; plus .25% of the portion in
excess of $50 million.
Federated Investment Counseling for the Federated High Yield Portfolio:
An annual rate of .50% of the portion of the average daily net assets of the
Portfolio under $30 million; plus .40% of the portion of the net assets equal to
or in excess of $30 million but under $50 million; plus .30% of the portion
equal to or in excess of $50 million but under $75 million; and .25% of the
portion equal to or in excess of $75 million.
T. Rowe Price Associates, Inc. for the T. Rowe Price Asset Allocation
Portfolio: An annual rate of .50% of the portion of the average daily net assets
of the Portfolio not in excess of $25 million; plus .35% of the portion in
excess of $25 million but not in excess of $50 million; and .25% of the portion
in excess of $50 million.
Rowe Price-Fleming International, Inc. for the T. Rowe Price
International Equity Portfolio: An annual rate of .75% of the portion of the
average daily net assets of the Portfolio not in excess of $20 million; plus
.60% of the portion of the net assets over $20 million but not in excess of $50
million; and .50% of the portion in excess of $50 million. Commencing May 1,
1996, the Sub-advisor has voluntarily agreed to waive a portion of its fee equal
to .25% of the portion of the Portfolio's average daily net assets not in excess
of $20 million and .10% of the portion of the net assets over $20 million but
not in excess of $50 million, so long as the average daily net assets of the
Portfolio equal or exceed $200 million. The Sub-advisor may terminate this
voluntary agreement at any time.
T. Rowe Price Associates, Inc. for the T. Rowe Price Natural Resources
Portfolio: An annual rate of .60% of the portion of the average daily net assets
of the Portfolio not in excess of $20 million; plus .50% of the portion of the
net assets over $20 million but not in excess of $50 million. When the net
assets of the Portfolio exceed $50 million, the fee is an annual rate of .50% of
the average daily net assets of the Portfolio.
Rowe Price-Fleming International, Inc. for the T. Rowe Price International
Bond Portfolio: An annual rate of .40% of the average daily net assets of the
Portfolio. Prior to May 1, 1996, the Investment Manager had engaged Scudder,
Stevens & Clark, Inc. (the "Former Sub-advisor") as Sub-advisor for the
Portfolio (formerly, the AST Scudder International Bond Portfolio), for a
Sub-advisory fee of .60% of the average daily net assets of the Portfolio.
T. Rowe Price Associates, Inc. for the T. Rowe Price Small Company
Value Portfolio: An annual rate of .60% of the portion of the average daily net
assets of the Portfolio not in excess of $20 million; plus .50% of the portion
of the net assets over $20 million but not in excess of $50 million. When the
net assets of the Portfolio exceed $50 million, the fee is an annual rate of
.50% of the average daily net assets of the Portfolio.
Founders Asset Management, Inc. for the Founders Capital Appreciation
Portfolio: An annual rate of .65% of the portion of the average daily net assets
of the Portfolio not in excess of $75 million; plus .60% of the portion of the
net assets over $75 million but not in excess of $150 million; and .55% of the
net assets in excess of $150 million.
Founders Asset Management, Inc. for the Founders Passport Portfolio: An
annual rate of .60% of the portion of the average net assets of the Portfolio
not in excess of $100 million; plus .50% of the portion of the average net
assets of the Portfolio in excess of $100 million. Prior to October 15, 1996,
the Investment Manager had engaged Seligman Henderson Co. (the "Former
Sub-advisor") as Sub-advisor for the Portfolio (formerly, the Seligman Henderson
International Small Cap Portfolio), for a Sub-advisory fee of .60% of the
average daily net assets of the Portfolio not in excess of $100 million; plus
.50% of the average daily net assets of the Portfolio in excess of $100 million.
INVESCO Trust Company for the INVESCO Equity Income Portfolio: An
annual rate of .50% of the portion of the average daily net assets of the
Portfolio not in excess of $25 million; plus .45% of the portion of the net
assets over $25 million but not in excess of $75 million; plus .40% of the
portion of the net assets in excess of $75 million but not in excess of $100
million; and .35% of the portion of the net assets over $100 million.
Pacific Investment Management Company for the PIMCO Total Return Bond
Portfolio: An annual rate of .30% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25% on the portion of the net
assets over $150 million.
Pacific Investment Management Company for the PIMCO Limited Maturity
Bond Portfolio: An annual rate of .30% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25% on the portion of the net
assets over $150 million.
Berger Associates, Inc. for the Berger Capital Growth Portfolio: An
annual rate of .55% of the average daily net assets of the Portfolio not in
excess of $25 million; plus .50% of the portion of average daily net assets over
$25 million but not in excess of $50 million; plus .40% of the portion of the
average daily net assets over $50 million.
Robertson, Stephens & Company Investment Management, L.P. for the Robertson
Stephens Value + Growth Portfolio: An annual rate of .60% of the average daily
net assets of the Portfolio not in excess of $200 million; and .50% of the
portion of the net assets over $200 million.
Robertson, Stephens & Company Investment Management, L.P. for the
Robertson Stephens Contrarian Portfolio: An annual rate of [INSERT]% of the
average daily net assets of the Portfolio, plus or minus [INSERT]% of such
assets for each percentage point by which the performance of the Portfolio
exceeds or is less than the performance of the Standard & Poor's 500 Composite
Stock Price Index; provided, however, that any increase or decrease in the
sub-advisory fee due to the performance of the Portfolio will be limited to no
more than [INSERT]% of the average daily net assets of the Portfolio.
American Century Investment Management, Inc. for the Twentieth Century
International Growth Portfolio: An annual rate of .70% of the portion of the
average daily net assets of the Portfolio not in excess of $100 million; plus
.60% of the portion of the net assets over $100 million.
American Century Investment Management, Inc. for the Twentieth Century
Strategic Balanced Portfolio: An annual rate of .50% of the portion of the of
the average daily net assets of the Portfolio not in excess of $50 million; plus
.45% of the portion of the net assets over $50 million.
Putnam Investment Management, Inc. for the AST Putnam Value Growth &
Income Portfolio: An annual rate of .45% of the portion of the average daily net
assets of the Portfolio not in excess of $150 million; plus .40% of the portion
of the net assets over $150 million but not in excess of $300 million; plus .35%
of the portion of the net assets over $300 million.
Putnam Investment Management, Inc. for the AST Putnam International
Equity Portfolio: An annual rate of .65% of the portion of the average daily net
assets of the Portfolio not in excess of $150 million; plus .55% of the portion
of the average daily net assets of the Portfolio over $150 million but not in
excess of $300 million; plus .45% of the portion of the average daily net assets
of the Portfolio in excess of $300 million. Prior to October 15, 1996, the
Investment Manager had engaged Seligman Henderson Co. (the "Former Sub-advisor")
as Sub-advisor for the Portfolio (formerly, the Seligman Henderson International
Equity Portfolio), for a Sub-advisory fee of 1.0% of the average daily nets
assets of the Portfolio not in excess of $100 million; plus .75% of the portion
of the average daily net assets of the Portfolio over $100 million. The Former
Sub-advisor had voluntarily agreed to waive a portion of its fee equal to .25%
on assets not in excess of $50 million; plus .35% on assets over $50 million but
not in excess of $75 million; plus .50% on assets over $75 million but not in
excess of $100 million; plus .25% on assets over $100 million. Such agreement
was terminated as of the opening of business on October 15, 1996.
Putnam Investment Management, Inc. for the AST Putnam Balanced
Portfolio: An annual rate of .45% of the portion of the average daily net assets
of the Portfolio not in excess of $150 million; plus .40% of the portion of the
average daily net assets of the Portfolio over $150 million but not in excess of
$300 million; plus .35% of the portion of the average daily net assets of the
Portfolio in excess of $300 million. Prior to October 15, 1996, the Investment
Manager had engaged Phoenix Investment Counsel, Inc. (the "Former Sub-advisor")
as Sub-advisor for the Portfolio (formerly, the AST Phoenix Balanced Asset
Portfolio), for a total Sub-advisory fee of .50% of the average daily net assets
of the Portfolio not in excess of $25 million; plus .40% of the portion of the
average daily net assets of the Portfolio over $25 million but not in excess of
$75 million; plus .30% of the portion of the average daily net assets of the
Portfolio in excess of $75 million.
Cohen & Steers Capital Management, Inc. for the Cohen & Steers Real
Estate Investment 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
.40% of the portion over $100 million but not in excess of $250 million; plus
.30% of the portion over $250 million.
Stein Roe & Farnham Incorporated for the Stein Roe Small Cap Blend
Portfolio: An annual rate of .50% of the average daily net assets of the
Portfolio.
Bankers Trust Global Investment Management for the Bankers Trust Enhanced
500 Index Portfolio: Up until December [INSERT], 1998, an annual rate of
[INSERT]% of the average daily net assets of the Portfolio (the "Base Rate").
For each period thereafter, the Base Rate plus or minus a performance adjustment
represented as a percentage of the Portfolio's average daily net assets (the
"Performance Adjustment"); provided, however, that any positive or negative
Performance Adjustment will be limited to no more than [INSERT]% of the average
daily net assets of the Portfolio. The Performance Adjustment will be computed
as [INSERT]% of the percentage differential in the Portfolio's performance as
compared to the Standard & Poor's 500 Composite Stock Price Index.
Marsico Capital Management, LLC for the Marsico Capital Growth
Portfolio: An annual rate of [INSERT]% of the average daily net assets of the
Portfolio.
Administrator: PFPC Inc. (the "Administrator"), 103 Bellevue Parkway,
Wilmington, Delaware 19809, a Delaware corporation that is an indirect
wholly-owned subsidiary of PNC Financial Corp., serves as the administrator for
the Trust pursuant to a Trust Accounting and Administration Agreement between
the Trust and the Administrator, dated May 1, 1992 (the "Administration
Agreement"). The Administrator provides certain fund accounting and
administrative services to the Trust, including, among other services,
accounting relating to the Trust and investment transactions of the Trust, and
computing daily net asset values. The Administrator does not have any
responsibility or authority for the management of the assets of the Trust, the
determination of its investment policies, or for any matter pertaining to the
distribution of securities issued by the Trust.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreement, the Trust has agreed to pay to
the Administrator its "out-of-pocket" expenses plus the greater of certain
percentages of the average daily net assets of the Trust or certain specified
minimum amounts calculated for each Portfolio. The percentages of the average
daily net assets are: (a) 0.10% of the first $200 million; (b) 0.06% of the next
$200 million; (c) 0.0375% of the next $200 million; and (d) 0.03% of average
daily net assets over $600 million. The minimum amount is $75,000 for each of
the Lord Abbett Growth and Income Portfolio, the JanCap Growth Portfolio, the
AST Money Market Portfolio, the Federated High Yield Portfolio, the Federated
Utility Income Portfolio, the AST Putnam Balanced Portfolio, the T. Rowe Price
Asset Allocation Portfolio, the T. Rowe Price Natural Resources Portfolio, the
Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio,
the PIMCO Total Return Bond Portfolio, the PIMCO Limited Maturity Bond
Portfolio, the Berger Capital Growth Portfolio and the Robertson Stephens Value
& Growth Portfolio. The minimum amount is $100,000 for the T. Rowe Price
International Bond Portfolio, the T. Rowe Price International Equity Portfolio,
the Founders Passport Portfolio and the AST Putnam International Equity
Portfolio. The minimum amounts for the year beginning May 1, 1997 for the AST
Janus Overseas Growth Portfolio, the T. Rowe Price Small Company Value
Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth
Century Strategic Balanced Portfolio and the AST Putnam Value Growth & Income
Portfolio are $64,667, $57,500, $64,667, $57,500 and $57,500, respectively. The
minimum amounts for the period beginning December [INSERT}, 1997 (commencement
of operations) to April 30, 1998 for the Lord Abbett Small Cap Value Portfolio,
the Robertson Stephens Contrarian Portfolio, the Cohen & Steers Real Estate
Investment Portfolio, the Stein Roe Small Cap Blend Portfolio, the Bankers Trust
Enhanced 500 Index Portfolio, and the Marsico Capital Growth Portfolio are
$[INSERT], $[INSERT], $[INSERT], $[INSERT], $[INSERT], and $[INSERT],
respectively. For an additional discussion of the services provided by the
Administrator under the Administration Agreement, and the "out-of-pocket"
expenses the Trust is to pay the Administrator, see the Trust's SAI under
"Management of the Trust: The Administrator and Transfer and Shareholder
Servicing Agent."
Sale of Shares: Shares are sold at net asset value to Participating Insurance
Companies and Qualified Plans. The Trust has entered into separate agreements
for the sale of shares with American Skandia Life Assurance Corporation
("ASLAC") and Kemper Investors Life Insurance Company ("Kemper"), respectively.
Pursuant to these agreements, the Trust will pay ASLAC and Kemper for printing
and delivery of certain documents to the beneficial owners of Trust shares who
are holders of variable annuity and variable life insurance policies issued by
ASLAC and Kemper. Such documents include prospectuses, semi-annual and annual
reports and any proxy materials. The Trust will pay ASLAC 0.1%, on an annualized
basis, of the net asset value of the shares legally owned by any separate
account of ASLAC, and will pay Kemper 0.1%, on an annualized basis, of the net
asset value of the shares legally owned by the separate accounts of Kemper named
in the sales agreement. The Trust may enter into sales agreements with other
Participating Insurance Companies or certain Qualified Plans in the future.
Qualified Plans and owners of variable annuity contracts and variable insurance
policies will receive annual and semi-annual reports including the financial
statement of the Portfolios that they have authorized for investment.
TAX MATTERS:
This discussion of federal income tax consequences applies to the
Participating Insurance Companies, Qualified Plans and plan participants in
certain types of Qualified Plans since the separate accounts of the
Participating Insurance Companies, the Qualified Plans and plan participants in
certain Qualified Plans will be the shareholders of the Trust. Holders of
variable annuity contracts or variable life insurance policies must consult the
prospectuses of their respective contracts or policies for information on the
federal income tax consequences to such holders, and plan participants must
consult with any applicable plan documents for information on the federal income
tax consequences to such holders. The Trust intends to qualify as a regulated
investment company by satisfying the requirements under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), including requirements
with respect to diversification of assets, distribution of income and sources of
income. It is the Trust's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the timing requirements imposed by the Code so that
the Trust will satisfy the distribution requirement of Subchapter M and not be
subject to federal income taxes or the 4% excise tax.
Distributions by the Trust of its net investment income and the excess,
if any, of its net short-term capital gain over its net long-term capital loss
are taxable to shareholders as ordinary income. These distributions are treated
as dividends for federal income tax purposes, but will not qualify for the 70%
dividends-received deduction for corporate shareholders. Distributions by the
Trust of the excess, if any, of its net long-term capital gain over its net
short-term capital loss are designated as capital gain dividends and are taxable
to shareholders as long-term capital gains, regardless of the length of time the
shareholder held his shares.
Portions of certain Portfolio's investment income may be subject to
foreign income taxes withheld at source. The Trust may elect to "pass-through"
to the shareholders of such Portfolios these foreign taxes, in which event each
shareholder will be required to include his pro rata portion thereof in his
gross income, but will be able to deduct or (subject to various limitations)
claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Trust. In general, distributions by the Trust are taken into
account by the shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Trust and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
or deemed made during the year, including any amount of foreign taxes "passed
through," will be sent to shareholders promptly after the end of each year.
Notwithstanding the foregoing, distributions by the Trust to certain Qualified
Plans may be exempt from federal income tax.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in Treasury
regulations. For purposes of these alternative diversification tests, a
segregated asset account investing in shares of a regulated investment company
will be entitled to "look-through" the regulated investment company to its pro
rata portion of the regulated investment company's assets, provided the
regulated investment company satisfies certain conditions relating to the
ownership of its shares. The Trust intends to satisfy these ownership
conditions. Further, the Trust intends that each Portfolio separately will be
adequately diversified. Accordingly, a segregated asset account investing solely
in shares of a Portfolio will be adequately diversified, and a segregated asset
account investing in shares of one or more Trust Portfolios and shares of other
adequately diversified funds generally will be adequately diversified.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. As the foregoing
discussion is for general information only, a prospective shareholder should
also review the more detailed discussion of federal income tax considerations
relevant to the Trust that is contained in the Trust's SAI. In addition, each
prospective shareholder should consult with his own tax advisor as to the tax
consequences of investments in the Trust, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
DESCRIPTION OF SHARES OF THE TRUST:
The Trust's Declaration of Trust dated October 31, 1988, which governs
certain Trust matters, permits the Trust's Board of Trustees to issue multiple
classes of shares, and within each class, an unlimited number of shares of
beneficial interest with a par value of $.001 per share. Each share entitles the
holder to one vote for the election of Trustees and on all other matters that
are not specific to one class of shares, and to participate equally in
dividends, distributions of capital gains and net assets of each applicable
Portfolio. Only shareholders of shares of a specific Portfolio may vote on
matters specific to that Portfolio. Shares of one class may not bear the same
economic relationship to the Trust as shares of another class. In the event of
dissolution or liquidation, holders of shares of a Portfolio will receive pro
rata, subject to the rights of creditors, the proceeds of the sale of the assets
held in such Portfolio less the liabilities attributable to such Portfolio.
Shareholders of a Portfolio will not be liable for the expenses, obligations or
debts of another Portfolio.
There are no preemptive or conversion rights applicable to any of the
Trust's shares. The Trust's shares, when issued, will be fully paid,
non-assessable and transferable. The Trustees may at any time create additional
series of shares without shareholder approval.
Generally, there will not be annual meetings of shareholders. A Trustee
may, in accordance with certain rules of the Securities and Exchange Commission,
be removed from office when the holders of record of not less than two-thirds of
the outstanding shares either present a written declaration to the Trust's
custodian or vote in person or by proxy at a meeting called for this purpose. In
addition, the Trustees will promptly call a meeting of shareholders to remove a
Trustee(s) when requested to do so in writing by record holders of not less than
10% of the outstanding shares. Finally, the Trustees shall, in certain
circumstances, give such shareholders access to a list of the names and
addresses of all other shareholders or inform them of the number of shareholders
and the cost of mailing their request.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees to all parties, and each party thereto must expressly waive all rights
of action directly against shareholders. The Declaration of Trust provides for
indemnification out of the Trust's property for all loss and expense of any
shareholder of the Trust held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations wherein the complaining party was held not to be
bound by the disclaimer.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involving the conduct of
his office. The Declaration of Trust provides for indemnification by the Trust
of the Trustees and officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust's
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. The Declaration of Trust also authorizes
the purchase of liability insurance on behalf of Trustees and officers.
PERFORMANCE:
The Portfolios may measure performance in terms of total return, which
is calculated for any specified period of time by assuming the purchase of
shares of the Portfolio at the net asset value at the beginning of the period.
Each dividend or other distribution paid by each Portfolio during such period is
assumed to have been reinvested at the net asset value on the reinvestment date.
The shares then owned as a result of this process are valued at the net asset
value at the end of the period. The percentage increase is determined by
subtracting the initial value of the investment from the ending value and
dividing the remainder by the initial value. Each Portfolio's total return shows
a Portfolio's overall dollar or percentage change in value, including changes in
share price and assuming each Portfolio's dividends and capital gains
distributions are reinvested. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if a Portfolio's performance had been constant over the entire
period. Total return figures are based on the overall change in value of a
hypothetical investment in each Portfolio. Because average annual returns for
more than one year tend to smooth out variations in each Portfolio's return,
investors should recognize that such figures are not the same as actual
year-by-year results. To illustrate the components of overall performance, a
Portfolio may separate its cumulative and average annual returns into income
results and capital gains or losses.
The Portfolios may also measure performance in terms of yield. Each
Portfolio's yield shows the rate of income the Portfolio earns on its
investments as a percentage of the Portfolio's share price. To calculate yield,
the Portfolio takes the interest and dividend income it earned from its
investments for a 30-day period (net of expenses), divides it by the average
number of Portfolio shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Portfolio's net asset value
at the end of the 30-day period. For the Portfolio's investments denominated in
foreign currencies, income and expenses are calculated in their respective
currencies and then converted to U.S. dollars. Yields are calculated according
to methods that are standardized for all stock and bond funds. Because yield
calculation methods differ from the method used for other accounting purposes
(for instance, currency gains and losses are not reflected in the yield
calculation), a Portfolio's yield may not equal the income paid to shareholders'
accounts or the income reported in the Portfolio's financial statements.
The Portfolios impose no sales or other charges that would impact the
total return or yield computations. Portfolio performance figures are based upon
historical results and are not intended to indicate future performance. The
investment return and principal value of an investment in any of the Portfolios
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Yield and total returns quoted from the Portfolios include the effect
of deducting each Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Because shares of the
Portfolios may be purchased through variable insurance contracts, the prospectus
of the Participating Insurance Company sponsoring such contract should be
carefully reviewed for information on relevant charges and expenses. Excluding
these charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. The effect of these charges should be
considered when comparing a Portfolio's performance to that of other mutual
funds. In advertising and sales literature, these figures will be accompanied by
figures that reflect the applicable contract charges.
From time to time in advertisements or sales material, the Portfolios
(or Participating Insurance Companies) may discuss their performance ratings or
other information as published by recognized mutual fund statistical or rating
services, such as Lipper Analytical Services, Inc., Morningstar or by
publications of general interest, such as Forbes or Money. The Portfolios may
also compare their performance to that of other selected mutual funds, mutual
fund averages or recognized stock market indicators, including the Standard &
Poor's 500 Stock Index, the Standard & Poor Midcap Index, the Dow Jones
Industrial Average, the Russell 2000 and the NASDAQ composite. In addition, the
Portfolios may compare their total return or yield to the yield on U.S. Treasury
obligations and to the percentage change in the Consumer Price Index. Each of
the AST Janus Overseas Growth Portfolio, T. Rowe Price International Equity
Portfolio, T. Rowe Price International Bond Portfolio, Founders Passport
Portfolio, Twentieth Century International Growth Portfolio and AST Putnam
International Equity Portfolio may compare its performance to the record of
global market indicators such as Morgan Stanley Capital International Europe,
Australia, Far East Index (EAFE Index), an unmanaged index of foreign common
stock prices translated into U.S. dollars. Such performance ratings or
comparisons may be made with funds that may have different investment
restrictions, objectives, policies or techniques than the Portfolios and such
other funds or market indicators may be comprised of securities that differ
significantly from the Portfolios' investments.
TRANSFER AND SHAREHOLDER SERVICING AGENT: PFPC Inc., 103 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the Trust's transfer and shareholder
servicing agent.
CUSTODIAN: The custodian for all cash and securities holdings of the AST Janus
Overseas Growth Portfolio, T. Rowe Price International Equity Portfolio, T. Rowe
Price International Bond Portfolio, Founders Passport Portfolio, Twentieth
Century International Growth Portfolio and AST Putnam International Equity
Portfolio is Morgan Stanley Trust Company, One Pierrepont, Brooklyn, New York.
The custodian for all cash and securities holdings of the other Portfolios is
PNC Bank, Airport Business Center, International Court 2, 200 Stevens Drive,
Philadelphia, Pennsylvania 19113. For these Portfolios, Morgan Stanley Trust
Company will serve as co-custodian with respect to foreign securities holdings.
COUNSEL AND AUDITORS: The firm of Werner & Kennedy, 1633 Broadway, 46th Floor,
New York, New York 10019, is counsel for the Trust. Deloitte & Touche LLP, 117
Campus Drive, Princeton, New Jersey 08540, has been appointed independent
auditor for the Trust.
OTHER INFORMATION: This Prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted herefrom, may be obtained
from the Commission by paying the charges prescribed under its rules and
regulations.
Shareholder inquiries should be made by telephone to (203) 926-1888 or,
if in writing, to the Trust's office at One Corporate Drive, Shelton,
Connecticut 06484. Holders of variable annuity contracts or variable life
insurance policies issued by Participating Insurance Companies for which shares
of the Trust are the investment vehicle will receive from the Participating
Insurance Companies unaudited semi-annual financial statements and year-end
financial statements audited by the Trust's independent auditors. If applicable,
each plan participant will receive from the Qualified Plan trustees, or directly
from the Trust, unaudited semi-annual financial statements and year-end
financial statements audited by the Trust's independent auditors. Each report
will show the investments owned by the Trust and the market values of the
investments and will provide other information about the Trust and its
operations.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION
OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION December [INSERT], 1997
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
- -------------------------------------------------------------------------------
American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing objectives of its Portfolios.
Currently, these Portfolios are the Lord Abbett Growth and Income Portfolio, the
Lord Abbett Small Cap Value Portfolio, the JanCap Growth Portfolio, the AST
Janus Overseas Growth Portfolio, the AST Money Market Portfolio, the Federated
Utility Income Portfolio, the Federated High Yield Portfolio, the T. Rowe Price
Asset Allocation Portfolio, the T. Rowe Price International Equity Portfolio,
the T. Rowe Price Natural Resources Portfolio, the T. Rowe Price International
Bond Portfolio, the T. Rowe Price Small Company Value Portfolio, the Founders
Capital Appreciation Portfolio, the Founders Passport Portfolio, the INVESCO
Equity Income Portfolio, the PIMCO Total Return Bond Portfolio, the PIMCO
Limited Maturity Bond Portfolio, the Berger Capital Growth Portfolio, the
Robertson Stephens Value + Growth Portfolio, the Robertson Stephens Contrarian
Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth
Century Strategic Balanced Portfolio, the AST Putnam Value Growth & Income
Portfolio, the AST Putnam International Equity Portfolio, the AST Putnam
Balanced Portfolio, the Cohen Steers Real Estate Investment Portfolio, the Stein
Roe Small Cap Blend Portfolio, the Bankers Trust Enhanced 500 Index Portfolio,
and the Marsico Capital Growth Portfolio.
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Lord, Abbett & Co.: Lord Abbett Growth and
Income Portfolio, Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio; (c)
J.P. Morgan Investment Management, Inc.: AST Money Market Portfolio; (d)
Federated Investment Counseling: Federated Utility Income Portfolio, Federated
High Yield Portfolio; (e) T. Rowe Price Associates, Inc.: T. Rowe Price Asset
Allocation Portfolio, T. Rowe Price Natural Resources Portfolio, T. Rowe Price
Small Company Value Portfolio; (f) Rowe Price-Fleming International, Inc.: T.
Rowe Price International Equity Portfolio, T. Rowe Price International Bond
Portfolio; (g) Founders Asset Management, Inc.: Founders Capital Appreciation
Portfolio, Founders Passport Portfolio; (h) INVESCO Trust Company: INVESCO
Equity Income Portfolio; (i) Pacific Investment Management Company: PIMCO Total
Return Bond Portfolio, PIMCO Limited Maturity Bond Portfolio; (j) Berger
Associates, Inc.: Berger Capital Growth Portfolio; (k) Robertson, Stephens &
Company Investment Management, L.P.: Robertson Stephens Value + Growth
Portfolio, Robertson Stephens Contrarian Portfolio; (l) American Century
Investment Management, Inc. (formerly, Investors Research Corporation):
Twentieth Century International Growth Portfolio, Twentieth Century Strategic
Balanced Portfolio; (m) Putnam Investment Management, Inc.: AST Putnam Value
Growth & Income Portfolio, AST Putnam International Equity Portfolio, AST Putnam
Balanced Portfolio; (n) Cohen & Steers Capital Management, Inc.: Cohen & Steers
Real Estate Investment Portfolio; (o) Stein Roe & Farnham Incorporated: Stein
Roe Small Cap Blend Portfolio; (p) Bankers Trust Global Investment Management:
Bankers Trust Enhanced 500 Index Portfolio; (q) Marsico Capital Management, LLC:
Marsico Capital Growth Portfolio.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Trust's current Prospectus, a copy of which may be
obtained by writing the Trust's administrative office at One Corporate Drive,
Shelton, Connecticut 06484 or by calling (203) 926-1888.
This Statement relates to the Trust's Prospectus dated December [INSERT], 1997
<PAGE>
<TABLE>
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TABLE OF CONTENTS
<S> <C> <C>
Caption Page
General Information and History....................................................................................
Investment Objectives and Policies.................................................................................
Lord Abbett Growth and Income Portfolio.......................................................................
Lord Abbett Small Cap Value Portfolio.........................................................................
JanCap Growth Portfolio.......................................................................................
AST Janus Overseas Growth Portfolio...........................................................................
AST Money Market Portfolio....................................................................................
Federated Utility Income Portfolio............................................................................
Federated High Yield Portfolio................................................................................
T. Rowe Price Asset Allocation Portfolio......................................................................
T. Rowe Price International Equity Portfolio..................................................................
T. Rowe Price Natural Resources Portfolio.....................................................................
T. Rowe Price International Bond Portfolio....................................................................
T. Rowe Price Small Company Value Portfolio...................................................................
Founders Capital Appreciation Portfolio.......................................................................
Founders Passport Portfolio...................................................................................
INVESCO Equity Income Portfolio...............................................................................
PIMCO Total Return Bond Portfolio.............................................................................
PIMCO Limited Maturity Bond Portfolio.........................................................................
Berger Capital Growth Portfolio...............................................................................
Robertson Stephens Value + Growth Portfolio...................................................................
Robertson Stephens Contrarian Portfolio.......................................................................
Twentieth Century International Growth Portfolio..............................................................
Twentieth Century Strategic Balanced Portfolio................................................................
AST Putnam Value Growth & Income Portfolio....................................................................
AST Putnam International Equity Portfolio.....................................................................
AST Putnam Balanced Portfolio.................................................................................
Cohen Steers Real Estate Investment Portfolio.................................................................
Stein Roe Small Cap Blend Portfolio...........................................................................
Bankers Trust Enhanced 500 Index Portfolio....................................................................
Marsico Capital Growth Portfolio..............................................................................
Investment Restrictions............................................................................................
Certain Risk Factors and Investment Methods........................................................................
Portfolio Turnover.................................................................................................
Management.........................................................................................................
Investment Advisory and Other Services.............................................................................
Brokerage Allocation...............................................................................................
Allocation of Investments..........................................................................................
Computation of Net Asset Values....................................................................................
Purchase and Redemption of Shares..................................................................................
Tax Matters........................................................................................................
Underwriter........................................................................................................
Performance........................................................................................................
Other Information..................................................................................................
Financial Statements...............................................................................................
Appendix...........................................................................................................
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY:
Prior to May 1, 1992, the Trust was known as the Henderson International
Growth Fund, which consisted of only one portfolio. This Portfolio is now known
as the AST Putnam International Equity Portfolio (formerly, the Seligman
Henderson International Equity Portfolio). The Lord Abbett Growth and Income
Portfolio was first offered as of May 1, 1992. The JanCap Growth Portfolio and
the AST Money Market Portfolio were first offered as of November 4, 1992. The
Federated Utility Income Portfolio and the AST Putnam Balanced Portfolio
(formerly, the AST Phoenix Balanced Asset Portfolio) were first offered as of
May 1, 1993. The Federated High Yield Portfolio, the T. Rowe Price Asset
Allocation Portfolio, the T. Rowe Price International Equity Portfolio, the
Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio and
the PIMCO Total Return Bond Portfolio were first offered as of December 31,
1993. The T. Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio) was first offered as of May 1, 1994. The Berger
Capital Growth Portfolio was first offered as of October 19, 1994. The Founders
Passport Portfolio (formerly, the Seligman Henderson International Small Cap
Portfolio), the T. Rowe Price Natural Resources Portfolio and the PIMCO Limited
Maturity Bond Portfolio were first offered as of May 2, 1995. The Robertson
Stephens Value + Growth Portfolio was first offered as of May 2, 1996. The AST
Janus Overseas Growth Portfolio, the T. Rowe Price Small Company Value
Portfolio, the Twentieth Century International Growth Portfolio, the Twentieth
Century Strategic Balanced Portfolio and the AST Putnam Value Growth & Income
Portfolio were first offered as of January 2, 1997. The Lord Abbett Small Cap
Value Portfolio, the Robertson Stephens Contrarian Portfolio, the Cohen & Steers
Real Estate Investment Portfolio, the Stein Roe Small Cap Blend Portfolio, the
Bankers Trust Enhanced 500 Index Portfolio, and the Marsico Capital Growth
Portfolio are first being offered as of the date of this Statement.
INVESTMENT OBJECTIVES AND POLICIES:
The following information supplements, and should be read in conjunction
with, the discussion in the Trust's Prospectus of the investment objective and
policies of each Portfolio. The investment objective and supplemental
information regarding the investment policies for each of the Portfolios are
described below and should be considered separately. Each Portfolio has a
different investment objective and certain policies may vary. As a result, the
risks, opportunities and return in each Portfolio may differ. There can be no
assurance that any Portfolio's investment objective will be achieved. Certain
risk factors in relation to various securities and instruments in which the
Portfolios may invest are described in this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
The investment objective and the investment policies and limitations of
each Portfolio, unless otherwise specified, are not "fundamental" policies and
may be changed by the Board of Trustees of the Trust without approval of the
shareholders of the affected Portfolio. Those investment policies specifically
labeled as "fundamental," including those described in the "Investment
Restrictions" section of this Statement, may not be changed without shareholder
approval. Fundamental investment policies of a Portfolio may be changed only
with the approval of at least the lesser of (1) 67% or more of the total shares
of the Portfolio represented at a meeting at which more than 50% of the
outstanding shares of the Portfolio are represented, or (2) a majority of the
outstanding shares of the Portfolio.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Portfolio is
long-term growth of capital and income without excessive fluctuation in market
value. This is a fundamental objective of the Portfolio.
Investment Policies:
Covered Call Options. The Portfolio may write covered call options which
are traded on a national securities exchange with respect to its securities in
an attempt to increase income and to provide greater flexibility in the
disposition of securities. A "call option" is a contract sold for a price (the
"premium") giving its holder the right to buy a specific number of shares of
stock at a specific price prior to a specified date. A "covered call option" is
a call option issued on securities already owned by the writer of the call
option for delivery to the holder upon the exercise of the option. During the
period of the option, the Portfolio forgoes the opportunity to profit from any
increase in the market price of the underlying security above the exercise price
of the option (to the extent that the increase exceeds the net premium). The
Portfolio may also enter into "closing purchase transactions" in order to
terminate its obligation to deliver the underlying security (this may result in
a short-term gain or loss). A closing purchase transaction is the purchase of a
call option (at a cost which may be more or less than the premium received for
writing the original call option) on the same security with the same exercise
price and call period as the option previously written. If the Portfolio is
unable to enter into a closing purchase transaction, it may be required to hold
a security that it might otherwise have sold to protect against depreciation.
The Sub-advisor does not intend to have the Portfolio write covered call options
with respect to securities with an aggregate market value of more than 10% of
the Portfolio's gross assets at the time an option is written. This percentage
limitation will not be increased without prior disclosure in the current
Prospectus of the Trust. For an additional discussion of call options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in illiquid securities.
Investments in illiquid securities are limited to a maximum of 10% of Portfolio
net assets. Illiquid securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A of the Securities
Act of 1933 which have been determined to be liquid by the Sub-advisor under the
supervision of the Trustees. Examples of factors which the Sub-advisor may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security, and the nature of the security
and the nature of the marketplace (e.g., the time period needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
For a discussion of illiquid or restricted securities and certain risks involved
therein see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Lord Abbett Small Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term capital appreciation. This is a fundamental objective of the
Portfolio.
Investment Policies:
Repurchase Agreements. If the Portfolio enters into repurchase agreements,
it will do so only with those primary reporting dealers that report to the
Federal Reserve Bank of New York and with the 100 largest U.S. commercial banks
and the underlying securities purchased under the agreements will consist only
of those securities in which the Portfolio otherwise may invest.
The Board of Trustees of the Trust has promulgated guidelines with respect
to repurchase agreements.
Foreign Currency Hedging Techniques. The Portfolio expects to enter into
forward foreign currency contracts in primarily 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 management believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, the
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's securities
denominated in such foreign currency or, in the alternative, the Portfolio may
use a cross-hedging technique whereby it sells another currency which the
Portfolio expects to decline in a similar way but which has a lower transaction
cost. The Portfolio does not intend to enter into such forward contracts under
this second circumstance on a continuous basis. For an additional discussion of
forward foreign currency contracts and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The Portfolio also may purchase foreign currency put options and write
foreign currency call options on U.S. exchanges or U.S. over-the-counter
markets. Exchange-listed options markets in the United States include several
major currencies, and trading may be thin and illiquid. A number of major
investment firms trade unlisted options which are more flexible than
exchange-listed options with respect to strike price and maturity date. Unlisted
options generally are available in a wider range of currencies. Unlisted foreign
currency options are generally less liquid than listed options and involve the
credit risk associated with the individual issuer. Unlisted options, together
with other illiquid securities, are subject to a limit of 15% of the Portfolio's
net assets.
The Portfolio may write a call option on a foreign currency only in
conjunction with a purchase of a put option on that currency. Such a strategy is
designed to reduce the cost of downside currency protection by limiting currency
appreciation potential. The face value of such writing may not exceed 90% of the
value of the securities denominated in such currency invested in by the
Portfolio or in such cross currency (referred to above) to cover such call
writing. For an additional discussion of foreign currency options and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Call Options on Stock. The Portfolio may, from time to time, write call
options on its portfolio securities. The Portfolio may write only call options
which are "covered," meaning that the Portfolio either owns the underlying
security or has an absolute and immediate right to acquire that security,
without additional cash consideration, upon conversion or exchange of other
securities currently held in its portfolio. In addition, the Portfolio will not
permit the call to become uncovered prior to the expiration of the option or
termination through a closing purchase transaction.
The Portfolio would not be able to effect a closing purchase transaction
after it had received notice of exercise. In order to write a call option, the
Portfolio is required to comply with the rules of The Options Clearing
Corporation and the various exchanges with respect to collateral requirements.
The Portfolio may not purchase call options except in connection with a closing
purchase transaction. It is possible that the cost of effecting a closing
purchase transaction may be greater than the premium received by the Portfolio
for writing the option.
Generally, the Portfolio intends to write listed covered call options
during periods when it anticipates declines in the market values of portfolio
securities because the premiums received may offset to some extent the decline
in the Portfolio's net asset value occasioned by such declines in market value.
Except as part of the "sell discipline" described below, the Portfolio will
generally not write listed covered call options when it anticipates that the
market values of its portfolio securities will increase.
One reason for the Portfolio to write call options is as part of a "sell
discipline." If the Portfolio decides that a portfolio security would be
overvalued and should be sold at a certain price higher than the current price,
it could write an option on the stock at the higher price. Should the stock
subsequently reach that price and the option be exercised, the Portfolio would,
in effect, have increased the selling price of that stock, which it would have
sold at that price in any event, by the amount of the premium. In the event the
market price of the stock declined and the option were not exercised, the
premium would offset all or some portion of the decline. It is possible that the
price of the stock could increase beyond the exercise price; in that event, the
Portfolio would forego the opportunity to sell the stock at that higher price.
In addition, call options may be used as part of a different strategy in
connection with sales of portfolio securities. If, in the judgment of the
Sub-advisor, the market price of a stock is overvalued and it should be sold,
the Portfolio may elect to write a call option with an exercise price below the
current market price. As long as the value of the underlying security remains
above the exercise price during the term of the option, the option will, in all
probability, be exercised, in which case the Portfolio will be required to sell
the stock at the exercise price. If the sum of the premium and the exercise
price exceeds the market price of the stock at the time the call option is
written, the Portfolio would, in effect, have increased the selling price of the
stock. The Portfolio would not write a call option in these circumstances if the
sum of the premium and the exercise price were less than the current market
price of the stock. For an additional discussion of call options and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Put Options on Stock. The Portfolio may also write listed put options.
Writing listed put options is a useful portfolio investment strategy when the
Portfolio has cash or other reserves available for investment as a result of
sales of Portfolio shares or, more importantly, because the Sub-advisor believes
a more defensive and less fully invested position is desirable in light of
market conditions. If the Sub-advisor wishes to invest its cash or reserves in a
particular security at a price lower than current market value, it may write a
put option on that security at an exercise price which reflects the lower price
it is willing to pay. The buyer of the put option generally will not exercise
the option unless the market price of the underlying security declines to a
price near or below the exercise price. If the Portfolio writes a listed put,
the price of the underlying stock declines and the option is exercised, the
premium, net of transaction charges, will reduce the purchase price paid by the
Portfolio for the stock. The price of the stock may decline by an amount in
excess of the premium, in which event the Portfolio would have foregone an
opportunity to purchase the stock at a lower price.
If, prior to the exercise of a put option, the Portfolio determines that it
no longer wishes to invest in the stock on which the put option had been
written, the Portfolio may be able to effect a closing purchase transaction on
an exchange by purchasing a put option of the same series as the one which it
has previously written. The cost of effecting a closing purchase transaction may
be greater than the premium received on writing the put option and there is no
guarantee that a closing purchase transaction can be effected. For an additional
discussion of put options and certain risks involved therein, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Stock Index Options. Except as describe below, the Portfolio will write
call options on indices only if on such date it holds a portfolio of stocks at
least equal to the value of the index times the multiplier times the number of
contracts. When the Portfolio writes a call option on a broadly-based stock
market index, the Portfolio will segregate or put into escrow with its
custodian, or pledge to a broker as collateral for the option, one or more
"qualified securities" with a market value at the time the option is written of
not less than 100% of the current index value times the multiplier times the
number of contracts.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop in all index option contracts. The Portfolio will not
purchase or sell any index option contract unless and until, in the
Sub-advisor's opinion, the market for such options has developed sufficiently
that such risk in connection with such transactions in no greater than such risk
in connection with options on stocks. For an additional discussion of stock
index options and certain risks involved therein, see this Statement under
"Certain Risk Factors and Investment Methods."
Segregated Accounts. If the Portfolio has written an option on an industry
or market segment index, it will segregate or put into escrow with its
custodian, or pledge to a broker as collateral for the option, at least ten
different "qualified securities," which are securities of an issuer in such
industry or market segment, with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on the National
Association of Securities Dealers Automated Quotation System against which the
Portfolio has not written a stock call option and which has not been hedged by
the Portfolio by the sale of stock index futures. Such securities will include
stocks which represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of the Portfolio's holdings in
that industry or market segment. No individual security will represent more than
25% of the amount so segregated, pledged or escrowed. If at the close of
business on any day the market value of such qualified securities so segregated,
escrowed or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the Portfolio will so segregate,
escrow or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when the Portfolio writes a call on an index which is
in-the-money at the time the call is written, the Portfolio will segregate with
its custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. However, if the Portfolio holds a call on the
same index as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the
Portfolio in cash or other liquid assets in a segregated account with its
custodian, it will not be subject to the requirements describe in this
paragraph. In instances involving the purchase of stock index futures contracts
by the Portfolio, an amount of cash or permitted securities equal to the market
value of the futures contracts will be deposited in a segregated account with
the its custodian and/or in a margin account with a broker to collateralize the
position and thereby insure that the use of such futures are unleveraged.
Stock Index Futures. The Portfolio will engage in transactions in stock
index futures contracts as a hedge against changes resulting from market
conditions in the values of securities which are held in the Portfolio's
portfolio or which it intends to purchase. The Portfolio will engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Portfolio. The Portfolio may not
purchase or sell stock index futures if, immediately thereafter, more than
one-third of its net assets would be hedged and, in addition, except as
described above in the case of a call written and held on the same index, will
write call options on indices or sell stock index futures only if the amount
resulting from the multiplication of the then current level of the index (or
indices) upon which the option or future contract(s) is based, the applicable
multiplier(s), and the number of futures or options contracts which would be
outstanding, would not exceed one-third of the value of the Portfolio's net
assets.
Limitations on Stock Options, Options on Stock Indices and Stock Index
Futures Transactions. The Portfolio may write put and call options on stocks
only if they are covered, and such options must remain covered so long as the
Portfolio is obligated as a writer. The Portfolio will not (a) write puts having
an aggregate exercise price greater than 25% of the Portfolio's total net
assets; or (b) purchase (i) put options on stocks not held in the Portfolio's
portfolio, (ii) put options on stock indices, or (iii) call options on stocks or
stock indices if, after any such purchase, the aggregate premiums paid for such
options would exceed 20% of the Portfolio's total net assets.
Special Risks of Writing Calls on Indices. Because exercises of index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific stocks,
cannot provide in advance for, or cover, its potential settlement obligations by
acquiring and holding the underlying securities. However, the Portfolio will
write call options on indices only under the circumstances described above under
"Limitations on Stock Options, Options on Stock Indices and Stock Index Futures
Transactions."
.........Unless the Portfolio has other liquid assets that are sufficient to
satisfy the exercise of a call, the Portfolio would be required to liquidate
portfolio securities in order to satisfy the exercise. Because an exercise must
be settled within hours after receiving the notice of exercise, if the Portfolio
fails to anticipate an exercise, it may have to borrow (in amounts not exceeding
20% of the Portfolio's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Portfolio has written a call, there is also a risk that the market
may decline between the time the call is written and the time the Portfolio is
able to sell stocks in its portfolio. As with stock options, the Portfolio will
not learn that an index option has been exercised until the day following the
exercise date but, unlike a call on stock where the Portfolio would be able to
deliver the underlying securities in settlement, the Series may have to sell
part of its stock portfolio in order to make settlement in cash, and the price
of such stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky with
index options than with stock options. For example, even if an index call which
the Portfolio has written is "covered" by an index call held by the Portfolio
with the same strike price, the Portfolio will bear the risk that the level of
the index may decline between the close of trading on the date the exercise
notice is filed with the clearing corporation and the close of trading on the
date the Portfolio exercises the call it holds or the time the Portfolio sells
the call which in either case would occur no earlier than the day following the
day the exercise notice was filed.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the Lord Abbett Small Cap Value
Portfolio. The limitations are not "fundamental" restrictions and may be changed
by the Trustees without shareholder approval. The Portfolio will not:
1. Pledge its assets (other than to secure borrowings or to the extent
permitted by the Portfolio's investment policies as permitted by applicable
law);
2. Make short sales of securities or maintain a short position except to
the extent permitted by applicable law;
3. Invest knowingly more than 15% of its net assets (at the time of
investment) in illiquid securities, except for securities qualifying for resale
under Rule 144A of the Securities Act of 1933, deemed to be liquid by the Board
of Trustees;
4. Invest in the securities of other investment companies except as
permitted by applicable law;
5. Invest in real estate limited partnership interests or interests in oil,
gas or other mineral leases, or exploration or other development programs,
except that the Portfolio may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or other development activities;
or
6. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in this Statement and the
Trust's Prospectus, as they may be amended from time to time.
JanCap Growth Portfolio:
Investment Objective: The investment objective of the 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 may, as a fundamental policy, invest all of its assets in
the securities of a single open-end management investment company with
substantially the same fundamental investment objectives, policies and
restrictions as the Portfolio subject to the prior approval of the Investment
Manager. The Investment Manager will not approve such investment unless: (a) the
Investment Manager believes, on the advice of counsel, that such investment will
not have an adverse effect on the tax status of the annuity contracts and/or
life insurance policies supported by the separate accounts of the Participating
Insurance Companies which purchase shares of the Trust; (b) the Investment
Manager has given prior notice to the Participating Insurance Companies that it
intends to permit such investment and has determined whether such Participating
Insurance Companies intend to redeem any shares and/or discontinue the purchase
of shares because of such investment; (c) the Trustees have determined that the
fees to be paid by the Trust for administrative, accounting, custodial and
transfer agency services for the Portfolio subsequent to such an investment are
appropriate, or the Trustees have approved changes to the agreements providing
such services to reflect a reduction in fees; (d) the Sub-advisor for the
Portfolio has agreed to reduce its fee by the amount of any investment advisory
fees paid to the investment manager of such open-end management investment
company; and (e) shareholder approval is obtained if required by law. The
Portfolio will apply for such exemptive or other relief under the provisions of
the Investment Company Act of 1940 (the "1940 Act") and the rules thereunder as
may be necessary regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may
enter into futures contracts on securities, financial indices, and foreign
currencies and options on such contracts, and may invest in options on
securities, financial indices and foreign currencies, forward contracts and
swaps. The Portfolio will not enter into any futures contracts or options on
futures contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contract positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency
contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by the Sub-advisor, and only pursuant to procedures adopted by the
Sub-advisor for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by the Portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the Portfolio's
obligations under an option written by the Portfolio, as the case may be, will
be subject to the Portfolio's limitation on illiquid investments. In the case of
illiquid options, it may not be possible for the Portfolio to effect an
offsetting transaction at a time when the Sub-advisor believes it would be
advantageous for the Portfolio to do so. For a description of these strategies
and instruments and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Portfolio, in order to
attempt to protect the value of its investments from interest rate or currency
exchange rate fluctuations, may enter into interest rate swaps and may buy or
sell interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its investments. The Portfolio also may enter into these
transactions to protect against any increase in the price of securities the
Portfolio may consider buying at a later date. The Portfolio does not intend to
use these transactions as speculative investments. Interest rate swaps involve
the exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The exchange commitments can involve payments to be made in
the same currency or in different currencies. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a contractually based principal amount from the party selling the
interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be calculated on a daily basis and an amount of cash or other liquid assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or other liquid assets having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that the Portfolio contractually is entitled
to receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above. For
an additional discussion of these strategies, see this Statement under "Certain
Risk Factors and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may
enter into repurchase agreements. The Portfolio may also enter into reverse
repurchase agreements. For a description of these investment techniques, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the JanCap Growth Portfolio. These
limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval.
1. The Portfolio will not purchase a security if as a result, more than
15% of its net assets in the aggregate, at market value, would be invested in
securities which cannot be readily resold because of legal or contractual
restrictions on resale or for which there is no readily available market, or
repurchase agreements maturing in more than seven days or securities used as a
cover for written over-the-counter options, if any. The Trustees, or the
Investment Manager or the Sub-advisor acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, and therefore that such securities are not
subject to the foregoing limitation.
2. The Portfolio may borrow money for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation. Under such a circumstance, the Portfolio may have to liquidate
securities at a time when it is disadvantageous to do so. This policy shall not
prohibit reverse repurchase agreements or deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or the
segregation of assets in connection with such contracts.
3. The Portfolio will not enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions (as
defined by the CFTC) if as a result the sum of the initial margin deposits and
premium required to establish positions in futures contracts and related options
that do not fall within the definition of bona fide hedging transactions would
exceed 5% of the fair market value of the Portfolio's net assets.
4. The Portfolio will not enter into any futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions of the Portfolio would exceed the market value of the total
assets of the Portfolio.
5. The Portfolio will not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, swaps and forward futures
contracts are not deemed to constitute selling securities short.
6. The Portfolio will not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital. This is a fundamental objective of the Portfolio.
Investment Policies:
The portfolio pursues its objective by investing primarily in common
stocks of foreign issuers of any size. The Portfolio normally invests at least
65% of its total assets in issuers from at least five different countries
excluding the United States. The Portfolio may invest all of its assets in the
securities of a single open-end management investment company with substantially
the same fundamental investment objectives, policies and restrictions as the
Portfolio subject to the prior approval of the Investment Manager. The
Investment Manager will not approve such investment unless: (a) the Investment
Manager believes, on the advice of counsel, that such investment will not have
an adverse effect on the tax status of the annuity contracts and/or life
insurance policies supported by the separate accounts of the Participating
Insurance Companies which purchase shares of the Trust; (b) the Investment
Manager has given prior notice to the Participating Insurance Companies that it
intends to permit such investment and has determined whether such Participating
Insurance Companies intend to redeem any shares and/or discontinue the purchase
of shares because of such investment; (c) the Trustees have determined that the
fees to be paid by the Trust for administrative, accounting, custodial and
transfer agency services for the Portfolio subsequent to such an investment are
appropriate, or the Trustees have approved changes to the agreements providing
such services to reflect a reduction in fees; (d) the Sub-advisor has agreed to
reduce its fee by the amount of any investment advisory fees paid to the
investment manager of such open-end management investment company; and (e)
shareholder approval is obtained if required by law. The Portfolio will apply
for such exemptive relief under the provisions of the 1940 Act, or other such
relief as may be necessary under the then governing rules and regulations of the
1940 Act, regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The Portfolio may
enter into futures contracts on securities, financial indices, and foreign
currencies and options on such contracts, and may invest in options on
securities, financial indices and foreign currencies, forward contracts and
swaps. The Portfolio will not enter into any futures contracts or options on
futures contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contracts positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio (i.e., no leveraging). The Portfolio may invest in forward currency
contracts with stated values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted, by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the Portfolio's obligations under an
option written by the Portfolio, as the case may be, will be subject to the
Portfolio's limitation on illiquid investments. In the case of illiquid options,
it may not be possible for the Portfolio to effect an offsetting transaction at
a time when the Sub-advisor believes it would be advantageous for the Portfolio
to do so. For a description of these strategies and instruments and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Eurodollar Instruments. The Portfolio may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Swaps and Swap-Related Products. The Portfolio may enter into interest
rate swaps, caps and floors on either an asset-based or liability-based basis,
depending upon whether it is hedging its assets or its liabilities, and will
usually enter into interest rate swaps on a net basis (i.e., the two payment
streams are netted out, with the Portfolio receiving or paying, as the case may
be, only the net amount of the two payments). The net amount of the excess, if
any, of the Portfolio's obligations over its entitlement with respect to each
interest rate swap will be calculated on a daily basis and an amount of cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the custodian
of the Portfolio. If the Portfolio enters into an interest rate swap on other
than a net basis, it would maintain a segregated account in the full amount
accrued on a daily basis of its obligations with respect to the swap. The
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will segregate cash or
high-grade liquid assets having an aggregate net asset value at least equal to
the full amount, accrued on a daily basis, of its obligations with respect to
any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that it contractually is entitled to receive.
The Portfolio may buy and sell (i.e., write) caps and floors without limitation,
subject to the segregation requirement described above. For an additional
discussion of these strategies, see this Statement under "Certain Risk Factors
and Investment Methods."
Illiquid Investments. 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 investments (i.e., securities that are not readily marketable). The
Sub-advisor will make liquidity determinations with respect to the Portfolio
securities, including Rule 144A Securities, commercial paper and municipal lease
obligations. Under the guidelines established by the Trustees, the Sub-advisor
will consider the following factors: 1) the frequency of trades and quoted
prices for the obligation; 2) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; 3) the willingness of
dealers to undertake to make a market in the security; and 4) the nature of the
security and the nature of marketplace trades, including the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer. In the case of commercial paper, the Sub-advisor will also
consider whether the paper is traded flat or in default as to principal and
interest and any ratings of the paper by an NRSRO.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Zero-Coupon, Pay-In-Kind and Step Coupon Securities. The Portfolio may
invest up to 10% of its assets in zero-coupon, pay-in-kind and step coupon
securities. For a discussion of zero-coupon debt securities and the risks
involved therein, see this Statement under "Certain Risk Factors and Investment
Methods."
Pass-Through Securities. The Portfolio may invest in various types of
pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a bank or broker-dealer. The purchaser of a
pass-through security receives an undivided interest in the underlying pool of
securities. The issuers of the underlying securities make interest and principal
payments to the intermediary which are passed through to purchasers, such as the
Portfolio. For an additional discussion of pass-through securities and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Depositary Receipts. The Portfolio may invest in sponsored and
unsponsored American Depositary Receipts ("ADRs"), which are receipts issued by
an American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. ADRs, in registered form, are designed for use in
U.S. securities markets. Unsponsored ADRs may be created without the
participation of the foreign issuer. Holders of these ADRs generally bear all
the costs of the ADR facility, whereas foreign issuers typically bear certain
costs in a sponsored ADR. The bank or trust company depositary of an unsponsored
ADR may be under no obligation to distribute shareholder communications received
from the foreign issuer or to pass through voting rights. The Portfolio may also
invest in European Depositary Receipts ("EDRs"), receipts issued by a European
financial institution evidencing an arrangement similar to that of ADRs, Global
Depositary Receipts ("GDRs") and in other similar instruments representing
securities of foreign companies. EDRs, in bearer form, are designed for use in
European securities markets. GDRs are securities convertible into equity
securities of foreign issuers.
Other Income-Producing Securities. Other types of income producing
securities that the Portfolio may purchase include, but are not limited to, the
following types of securities:
Variable and Floating Rate Obligations. These types of
securities are relatively long-term instruments that often carry demand features
permitting the holder to demand payment of principal at any time or at specified
intervals prior to maturity.
Standby Commitments. These instruments, which are similar to a
put, give the Portfolio the option to obligate a broker, dealer or bank to
repurchase a security held by that Portfolio at a specified price.
Tender Option Bonds. Tender option bonds are relatively
long-term bonds that are coupled with the agreement of a third party (such as a
broker, dealer or bank) to grant the holders of such securities the option to
tender the securities to the institution at periodic intervals.
Inverse Floaters. Inverse floaters are debt instruments whose
interest bears an inverse relationship to the interest rate on another security.
The Portfolio will not invest more than 5% of its assets in inverse floaters.
The Portfolio will purchase standby commitments, tender option bonds and
instruments with demand features primarily for the purpose of increasing the
liquidity of the Portfolio.
Repurchase and Reverse Repurchase Agreements. Subject to guidelines
promulgated by the Board of Trustees of the Trust, the Portfolio may enter into
repurchase agreements. Repurchase agreements that mature in more than seven days
will be subject to the 15% limit on illiquid investments. While it is not
possible to eliminate all risks from these transactions, it is the policy of the
Sub-advisor to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by Sub-advisor. The
Portfolio may also enter into reverse repurchase agreements. While a reverse
repurchase agreement is outstanding, the Portfolio will maintain cash and
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Portfolio will enter into reverse repurchase
agreements only with parties that Sub-advisor deems creditworthy. For an
additional description of these investment techniques, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Janus Overseas Growth
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval:
1. The Portfolio will not (i) enter into any futures contracts and
related options for purposes other than bona fide hedging transactions within
the meaning of Commodity Futures Trading Commission ("CFTC") regulations if the
aggregate initial margin and premiums required to establish positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions will exceed 5% of the fair market value of the
Portfolio's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and (ii) enter into
any futures contracts if the aggregate amount of the Portfolio's commitments
under outstanding futures contracts positions would exceed the market value of
its total assets.
2. The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
3. The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities on
margin.
4. The Portfolio does not currently intend to purchase securities of
other investment companies, except in compliance with the 1940 Act.
5. The Portfolio may not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements, deposits of assets to margin, guarantee positions
in futures, options, swaps or forward contracts, or the segregation of assets in
connection with such contracts.
6. The Portfolio does not currently intend to purchase any security or
enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. The Trustees, or the Investment Manager acting
pursuant to authority delegated by the Trustees, may determine that a readily
available market exists for securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"), or any successor to
such rule, and Section 4(2) commercial paper. Accordingly, such securities may
not be subject to the foregoing limitation.
7. The Portfolio may not invest in companies for the purpose of
exercising control of management.
AST Money Market Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
high current income and maintain high levels of liquidity. This is a fundamental
objective of the Portfolio.
Investment Policies:
Bank Obligations. The Portfolio will not invest in bank obligations for
which any affiliate of the Sub-advisor is the ultimate obligor or accepting
bank.
Asset-Backed Securities. The asset-backed securities in which the
Portfolio may invest are subject to the Portfolio's overall credit requirements.
However, asset-backed securities, in general, are subject to certain risks. Most
of these risks are related to limited interests in applicable collateral. For
example, credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts on
credit card debt thereby reducing the balance due. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized. Because asset-backed securities are relatively new,
the market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
For a discussion of asset-backed securities and the risks involved therein see
the Trust's Prospectus and this Statement under "Certain Risk Factors and
Investment Methods."
Synthetic Instruments. As may be permitted by current laws and regulations
and if expressly permitted by the Board of Trustees of the Trust, the Portfolio
may invest in certain synthetic instruments. Such instruments generally involve
the deposit of asset-backed securities in a trust arrangement and the issuance
of certificates evidencing interests in the trust. The certificates are
generally sold in private placements in reliance on Rule 144A of the Securities
Act of 1933 (without registering the certificates under such Act).
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The repurchase agreements into which the Portfolio may enter will usually be
short, from overnight to one week, and at no time will the Portfolio invest in
repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. For a
discussion of repurchase agreements and certain risks involved therein, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio invests the proceeds of
borrowings under reverse repurchase agreements. The Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. The Portfolio will establish and maintain with its custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. If
interest rates rise during the term of a reverse repurchase agreement, such
reverse repurchase agreement may have a negative impact on the Portfolio's
ability to maintain a net asset value of $1.00 per share.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depositary receipts and the risks
involved in investing in foreign securities, see the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Loans will be subject to termination by
the Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. The Portfolio may pay reasonable finders'
and custodial fees in connection with a loan. In making a loan, the Portfolio
will consider all facts and circumstances surrounding the making of the loan,
including the creditworthiness of the borrowing financial institution. The
Portfolio will not make any loans in excess of one year. The Portfolio will not
lend its securities to any officer, employee or Trustee of the Trust, the
Investment Manager, any Sub-advisor of the Trust, or the Administrator unless
otherwise permitted by applicable law.
Federated Utility Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to achieve
high current income and moderate capital appreciation by investing primarily in
equity and debt securities of utility companies. This is a fundamental objective
of the Portfolio.
Investment Policies:
U.S. Government Securities. The Portfolio may invest in U.S. government
obligations which generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by the full faith and credit of the U.S. Treasury; the issuer's right
to borrow from the U.S. Treasury; the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations. Examples of
instrumentalities and agencies which may not always receive support from the
U.S. government are: Federal Land Banks; Central Bank for Cooperatives; Federal
Intermediate Credit Banks; Federal Home Loan Banks; Farmers Home Administration;
and Federal National Mortgage Association.
Convertible Securities. Convertible securities include a spectrum of
securities which can be exchanged for or converted into common stock of the
issuer or a related financial entity (for example, a merged or acquired company
or partner). Convertible securities may include but are not limited to:
convertible bonds or debentures; convertible preferred stock; units consisting
of usable bonds and warrants; or securities which cap or otherwise limit returns
to the convertible security holder, like DECS (Dividend Enhanced Convertible
Stock, or Debt Exchangeable for Common Stock when issued as a debt security.
DECS offer a substantial dividend advantage with the possibility of unlimited
upside potential if the price of the underlying common stock exceeds a certain
level. DECS convert to common stock at maturity. The amount received is
dependent on the price of the common at the time of maturity. DECS contain two
call options at different strike prices. The DECS participate with the common up
to the first call price. They are effectively capped at that point unless the
common rises above a second price point at which time they participate with
unlimited upside potential.); LYONS (Liquid Yield Option Notes. A corporate bond
which is purchased at a price below par with no coupon, and is convertible into
stock.); PERCS (Preferred Equity Redeemable Preferred Stock. An equity issue
that pays a high cash dividend, has a cap price and mandatory conversion to
common stock at maturity. PERCS offer a substantial dividend advantage, but
capital appreciation potential is limited to a predetermined level. PERCS are
less risky and less volatile than the underlying common stock because their
superior income mitigates declines when the common falls, while the cap price
limits gains when the common rises.); PRIDES (Preferred Redeemable Increased
Dividend Securities. Essentially the same as DECS; the difference is little more
than who initially underwrites the issue). Convertible securities are often
rated below investment grade or are not rated because they fall below straight
debt obligations and just above common equity in order of preference or priority
on the issuer's balance sheet. Hence, an issuer with investment grade senior
debt may issue convertible securities with ratings less than investment grade or
unrated. The Fund does not limit convertible securities by rating.
As with all securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of nonconvertible debt of similar
quality, often called "investment value," and may not experience the same
decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion
values (i.e., the number of shares of common stock to be received upon
conversion multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not realized,
the premium may not be recovered.
When-Issued and Delayed Delivery Transactions. These transactions are
made to secure what is considered to be an advantageous price and yield for the
Portfolio. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of the Portfolio sufficient to make
payment for the securities purchased are segregated on the Portfolio's records
at the trade date. These securities are marked to market daily and maintained
until the transaction is settled. For a discussion of when-issued securities and
certain risks involved therein see this Statement under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. The collateral received when the
Portfolio lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Portfolio. During the time Portfolio securities are on loan,
the borrower pays the Portfolio any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Portfolio or
the Borrower. The Portfolio may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
The Portfolio does not have the right to vote the securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important by the Investment Manager with respect to the investment.
Reverse Repurchase Agreements. The use of reverse repurchase agreements
may allow the Portfolio to avoid selling Portfolio instruments at a time when a
sale may be deemed to be disadvantageous, but the ability to enter into a
reverse repurchase agreement does not ensure that the Portfolio will be able to
avoid selling Portfolio instruments at a disadvantageous time. For a discussion
of reverse repurchase agreements, see the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Investment Policy Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the Federated Utility Income
Portfolio. The limitation is not a "fundamental" restriction and may be changed
by the Trustees without shareholder approval.
The Portfolio will not write call options on securities unless the
securities are held in the Portfolio or unless the Portfolio is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment. The Portfolio will not purchase options on
securities unless the securities are held in the Portfolio.
Federated High Yield Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income by investing primarily in a diversified portfolio of fixed income
securities. The fixed income securities in which the Portfolio intends to invest
are lower-rated corporate debt obligations. This is a fundamental objective of
the Portfolio.
Investment Policies:
Corporate Debt Securities. The Portfolio invests primarily in corporate
debt securities. The corporate debt obligations in which the Portfolio intends
to invest are expected to be lower-rated. For a discussion of the special risks
associated with lower-rated securities, see the Trust's Prospectus and this
Statement under "Certain Risk Factors and Investment Methods." Corporate debt
obligations in which the Portfolio invests may bear fixed, floating, floating
and contingent, or increasing rates of interest. They may involve equity
features such as conversion or exchange rights, warrants for the acquisition of
common stock of the same or a different issuer, participations based on
revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
U.S. Government Obligations. The types of U.S. government obligations in
which the Portfolio may invest include, but are not limited to, direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds)
and obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. For an additional discussion of the types of U.S.
government obligations in which the Portfolio may invest, see the Trust's
Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Portfolio expects that any restricted
securities would be acquired either from institutional investors who originally
acquired the securities in private placements or directly from the issuers of
the securities in private placements. Restricted securities are generally
subject to legal or contractual delays on resale. Restricted securities and
securities that are not readily marketable may sell at a discount from the price
they would bring if freely marketable. For a discussion of illiquid and
restricted securities and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase fixed-income securities on a when-issued or delayed delivery basis. The
Portfolio may engage in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Portfolio's
investment objective and policies, not for investment leverage. These
transactions are arrangements in which the Portfolio purchases securities with
payment and delivery scheduled for a future time. Settlement dates may be a
month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. These transactions
are made to secure what is considered to be an advantageous price and yield for
the Portfolio.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment for
the securities to be purchased are segregated at the trade date. These
securities are marked to market daily and will maintain until the transaction is
settled. For an additional discussion of when-issued securities and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. The Portfolio will require its custodian to take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Portfolio, the Portfolio
could receive less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Portfolio might be delayed
pending court action. The Portfolio believes that under the regular procedures
normally in effect for custody of the Portfolio's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in favor
of the Portfolio and allow retention or disposition of such securities. The
Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Sub-advisor to be creditworthy, pursuant to guidelines established by the Board
of Trustees. For an additional discussion of repurchase agreements and certain
risks involved therein, see the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Portfolio may lend its securities to brokers/dealers, banks, or other
institutional borrowers of securities. The Portfolio will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
Sub-advisor has determined are creditworthy under guidelines established by the
Trustees. The collateral received when the Portfolio lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Portfolio.
During the time portfolio securities are on loan, the borrower pays the
Portfolio any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Portfolio or the borrower. The Portfolio may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or cash
equivalent collateral to the borrower or placing broker. The Portfolio does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
Reverse Repurchase Agreements. The Portfolio may also enter into
reverse repurchase agreements. When effecting reverse repurchase agreements,
liquid assets of the Portfolio, in a dollar amount sufficient to make payment
for the obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and are maintained until the transaction
is settled. During the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to ensure completion of the reverse repurchase
agreements, the Portfolio will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements. For a discussion of reverse repurchase agreements
and certain risks involved therein, see the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may experience greater portfolio turnover
than would be expected with a portfolio of higher-rated securities. For an
additional discussion of portfolio turnover, see this Statement and the Trust's
Prospectus under "Portfolio Turnover."
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which disposed of a substantial portion of lower-rated
bonds held by failed savings and loan associations. The reduction of the number
of institutions empowered to purchase and hold lower-rated bonds, and the
divestiture of bonds by these institutions and the RTC, have had an adverse
impact on the overall liquidity of the market for such bonds. Federal and state
legislatures and regulators have and may continue to propose new laws and
regulations designed to limit the number or type of institutions that may
purchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, or
otherwise adversely impact the liquidity of such bonds. The Portfolio cannot
predict the likelihood that any of these proposals will be adopted, or their
potential impact on the liquidity of lower-rated bonds.
Foreign Securities. For a discussion of certain risks involved with
investing in foreign securities, including currency risks, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Federated High Yield Portfolio.
The limitations are not "fundamental" restrictions and may be changed by the
Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the value of its net
assets in securities that are not readily marketable;
2. The Portfolio will not purchase the securities of any issuer (other
than the U.S. government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements) if as a
result more than 5% of the value of its total assets would be invested in the
securities of such issuer. For these purposes, the Portfolio takes all common
stock and all preferred stock of an issuer each as a single class, regardless of
priorities, series designations or other differences.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a
high level of total return by investing primarily in a diversified group of
fixed-income and equity securities. This is a fundamental objective of the
Portfolio.
Investment Policies: The Portfolio's share price will fluctuate with changing
market conditions and interest rate levels and your investment may be worth more
or less when redeemed than when purchased. The Portfolio should not be relied
upon for short-term financial needs, nor used to play short-term swings in the
stock or bond markets. The Portfolio cannot guarantee that it will achieve its
investment objectives. Fixed income securities in which the Portfolio may invest
include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury, and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus. For
a discussion of mortgage-backed securities and certain risks involved therein,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the
Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in the Sub-advisor's opinion, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objectives. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in the exercise of the put, can
not benefit from appreciation, if any, with respect to such specific securities
or currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies. For a discussion of options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Purchasing Put Options. The Portfolio may purchase American or European
style put options. The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums
when purchasing call and put options. The Portfolio may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may also
be purchased at times to avoid realizing losses.
Purchasing Call Options. The Portfolio may purchase American or
European call options. The Portfolio may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. The
Portfolio may purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its current return. The
Portfolio may also purchase call options in order to acquire the underlying
securities or currencies. Examples of such uses of call options are provided
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio will not commit more than 5% of its assets to premiums
when purchasing call and put options. The Portfolio may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may also
be purchased at times to avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction. For a discussion of dealer options, see this
Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts").
Stock index futures contracts may be used to attempt to provide a hedge
for a portion of the Portfolio's portfolio, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Portfolio may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Portfolio's portfolio successfully, the Portfolio
must sell futures contacts with respect to indices or subindexes whose movements
will have a significant correlation with movements in the prices of the
Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas. For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Portfolio would comply with such new
restrictions.
Risks of Transactions in Futures Contracts. See this Statement
and the Trust's Prospectus under "Certain Risks and Investment Methods" for an
additional description of certain risks involved in futures contracts.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by the Sub-advisor or Rowe Price-Fleming International, Inc. Such
aggregated orders would be allocated among the Portfolio and such other mutual
funds or portfolios of mutual funds in a fair and non-discriminatory manner. See
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks involved in options on
futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in financial futures or options transactions other
than those described above, it reserves the right to do so. Such futures or
options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to enter into
foreign futures and options transactions. See this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods" for a description
of certain risks involved in foreign futures and options.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers in developed
countries. Because the Portfolio may invest in foreign securities, investment in
the Portfolio involves risks that are different in some respects from an
investment in a Portfolio which invests only in securities of U.S. domestic
issuers. Foreign investments may be affected favorably or unfavorably by changes
in currency rates and exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing, and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. There may be less governmental supervision of securities markets,
brokers and issuers of securities. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the U.S. For an additional discussion of
certain risks involved in investing in foreign securities, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when the Sub-advisor believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Portfolio's securities denominated in such
foreign currency. Alternatively, where appropriate, the Portfolio may hedge all
or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Portfolio may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Portfolio. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Other than as set forth above,
and immediately below, the Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. The Portfolio, however, in order to avoid excess
transactions and transaction costs, may maintain a net exposure to forward
contracts in excess of the value of the Portfolio's securities or other assets
to which the forward contracts relate (including accrued interest to the
maturity of the forward on such securities) provided the excess amount is
"covered" by liquid, high-grade debt securities, denominated in any currency, at
least equal at all times to the amount of such excess. For these purposes "the
securities or other assets to which the forward contracts relate may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risks involved in foreign currency transactions, see this Statement and
the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in investing in hybrid instruments, see this Statement under
"Certain Risk Factors and Investment Methods."
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may invest in illiquid
securities. The Portfolio may invest in illiquid securities including repurchase
agreements which do not provide for payment within seven days, but will not
acquire such securities if, as a result, they would comprise more than 15% of
the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Trustees. If through the appreciation of restricted
securities or the depreciation of unrestricted securities or the depreciation of
liquid securities, the Portfolio should be in a position where more than 15% of
the value of its net assets are invested in illiquid assets, including
restricted securities, the Portfolio will take appropriate steps to protect
liquidity.
The Portfolio may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Portfolio, to trade
in privately placed securities even though such securities are not registered
under the 1933 Act. Sub-advisor, under the supervision of the Trust's Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Portfolio's restriction of investing no more
than 15% of its assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, Sub-advisor could consider the (1) frequency of trades
and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored, and if as a result of changed conditions it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Portfolio's assets invested in
illiquid securities if qualified institutional buyers are unwilling to purchase
such securities.
Repurchase Agreements. Subject to the guidelines promulgated by the
Board of Trustees of the Trust, the Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank which is a member of the Federal Reserve System. Any such
dealer or bank will be on Sub-advisor's approved list and have a credit rating
with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
Sub-advisor. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
considered illiquid. The Portfolio will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding maturity
limitations) which the Portfolio's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Portfolio could experience
both delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of Portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
fundamental policy. Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by the
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow Portfolios from,
other mutual funds or portfolios of mutual funds sponsored or advised by the
Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no
current intention of engaging in these practices at this time.
When-Issued Securities. The Portfolio may from time to time purchase
securities on a "when-issued" basis. At the time the Portfolio makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Portfolio does not believe that its net asset value or income will be
adversely affected by its purchase of securities on a when-issued basis. The
Portfolio will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. For a
discussion of when-issued securities, see this Statement under "Certain Risk
Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable only to the T. Rowe Price Asset Allocation
Portfolio. These limitations are not fundamental restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its
net assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
5. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
6. Invest in puts, calls, straddles, spreads, or any combination
thereof to the extent permitted by the Trust's Prospectus and this Statement;
7. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
8. Invest in warrants if, as a result thereof, more than 10% of the
value of the total assets of the Portfolio would be invested in warrants,
provided that this restriction does not apply to warrants acquired as the result
of the purchase of another security. For purposes of these percentage
limitations, the warrants will be valued at the lower of cost or market;
9. Effect short sales of securities; or
10. Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the 1940 Act, or other such relief as may be necessary under the
then governing rules and regulations of the 1940 Act, regarding investments in
such investment companies.
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek a
total return on its assets from long-term growth of capital and income
principally through investments in common stocks of established, non-U.S.
companies. Investments may be made solely for capital appreciation or solely for
income or any combination of both for the purpose of achieving a higher overall
return. This is a fundamental objective of the Portfolio.
Investment Policies: The Sub-advisor regularly analyzes a broad range of
international equity and fixed-income markets in order to assess the degree of
risk and level of return that can be expected from each market. Based upon its
current assessment, Sub-advisor believes long-term growth of capital may be
achieved by investing in marketable securities of non-U.S. companies which have
the potential for growth of capital. Of course, there can be no assurance that
the Sub-advisor's forecasts of expected return will be reflected in the actual
returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the stock or
foreign exchange markets. The Portfolio is subject to risks unique to
international investing. Further, there is no assurance that the favorable
trends discussed below will continue, and the Portfolio cannot guarantee it will
achieve its objective.
It is the present intention of the Sub-advisor to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Netherlands, France, Spain, and Switzerland), South Africa, Australia,
Canada, and such other areas and countries as the Sub-advisor may determine from
time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, the Sub-advisor ordinarily considers
the following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor ordinarily
looks for one or more of the following characteristics: an above-average
earnings growth per share; high return on invested capital; healthy balance
sheet; sound financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase.
It is expected that the Portfolio's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
funds is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment funds, the Portfolio's shareholders will
bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment funds. In
addition, the securities of these investment funds may trade at a premium over
their net asset value.
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe. The
Portfolio will only invest in a company located in, or a government of, Eastern
Europe or Russia, if the Sub-advisor believes the potential return justifies the
risk. To the extent any securities issued by companies in Eastern Europe and
Russia are considered illiquid, the Portfolio will be required to include such
securities within its 15% restriction on investing in illiquid securities.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund; others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Portfolio for writing covered
call options will be recorded as a liability of the Portfolio. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Portfolio is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
call or put options exceeds 25% of the market value of the Portfolio's net
assets. In calculating the 25% limit, the Portfolio will offset, against the
value of assets covering written calls and puts, the value of purchased calls
and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio's portfolio at a price lower than the current
market price of the security or currency. In such event the Portfolio would
write a put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. Since the
Portfolio would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk in
such a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the
Portfolio. In addition, the Portfolio, because it does not own the specific
securities or currencies which it may be required to purchase in exercise of the
put, cannot benefit from appreciation, if any, with respect to such specific
securities or currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period (American style) or at the expiration of the
option (European style). The Portfolio may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. The
Portfolio may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its securities or currencies. An
example of such use of put options is provided in this Statement under "Certain
Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to perform would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Portfolio may,
however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas. For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash or other liquid assets equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Portfolio's custodian to
cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by the Sub-Advisor or T. Rowe Price Associates, Inc. Such
aggregated orders would be allocated among the Portfolio and such other
portfolios in a fair and non-discriminatory manner. See this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a
description of certain risks involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when the Sub-advisor believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Portfolio's securities denominated in such
foreign currency. Alternatively, where appropriate, the Portfolio may hedge all
or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Portfolio may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Portfolio. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Other than as set forth above
and immediately below, the Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. The Portfolio, however, in order to avoid excess
transactions and transaction costs, may maintain a net exposure to forward
contracts in excess of the value of the Portfolio's securities or other assets
to which the forward contracts relate (including accrued interest to the
maturity of the forward on such securities) provided the excess amount is
"covered" by liquid, high-grade debt securities, denominated in any currency, at
least equal at all times to the amount of such excess. For these purposes "the
securities or other assets to which the forward contracts relate" may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For an additional
discussion of certain risks involved in foreign investing, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain option,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a
credit rating with respect to its short-term debt of at least A1 by Standard &
Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent
rating by T. Rowe Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. Repurchase agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Portfolio will only enter into
repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Portfolio seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. The Portfolio may not invest in
illiquid securities including repurchase agreements which do not provide for
payment within seven days, if as a result, they would comprise more than 15% of
the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its assets in illiquid securities.
A determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination Sub-advisor will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition, Sub-advisor could consider the (1) frequency
of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of a Portfolio's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by the
Sub-advisor to be of good standing and will not be made unless, in the judgment
of the Sub-advisor, the consideration to be earned from such loans would justify
the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price
Associates, Inc. The Portfolio has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover its commitments with respect to these securities by
maintaining cash and/or other liquid assets with its custodian bank equal in
value to these commitments during the time between the purchase and the
settlement. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. For a discussion of these securities and
the risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price International Equity
Portfolio. These limitations are not "fundamental" restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets.
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities if, as a result, more than 15% of its
net assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
5. Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Trust's Prospectus and this
Statement;
6. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts and
other permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as a security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Effect short sales of securities;
9. Invest in warrants if, as a result thereof, more than 10% of the
value of the total assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market; or
10. Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the 1940 Act, or other such relief as may be necessary under the
then governing rules and regulations of the 1940 Act, regarding investments in
such investment companies.
In addition to the restrictions described above, some foreign
countries limit, or prohibit, all direct foreign investment in the securities of
their companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Portfolio is subject to certain percentage
limitations under the 1940 Act relating to the purchase of securities of
investment companies, and may be subject to the limitation that no more than 10%
of the value of the Portfolio's total assets may be invested in such securities.
T. Rowe Price Natural Resources Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital through investment primarily in common stocks of
companies which own or develop natural resources and other basic commodities.
Current income is not a factor in the selection of stocks for investment by the
Portfolio. Total return will consist primarily of capital appreciation (or
depreciation).
Investment Policies: The Portfolio will normally have primarily all of its
assets in equity securities (e.g., common stocks). This portion of the
Portfolio's assets will be subject to all of the risks of investing in the stock
market. There is risk in all investment. The value of the portfolio securities
of the Portfolio will fluctuate based upon market conditions. Although the
Portfolio seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. The fixed-income securities in
which the Portfolio may invest include, but are not limited to, those described
below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Debt Obligations. Although primarily all of the Portfolio's assets are
invested in common stocks, the Portfolio may invest in convertible securities,
corporate debt securities and preferred stocks. See this Statement under
"Certain Risk Factors and Investment Methods," for a discussion of debt
obligations.
The Portfolio's investment program permits it to purchase below
investment grade securities. Since investors generally perceive that there are
greater risks associated with investment in lower quality securities, the yields
from such securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default -- that is, the nonpayment of
interest and principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below. Although the
Portfolio seeks to reduce risk by portfolio diversification, credit analysis,
and attention to trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no assurance that
the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus.
Risks of Low-Rated Debt Securities. The Portfolio may invest in low
quality bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-medium
quality bonds involves greater investment risk, to the extent the Portfolio
invests in such bonds, achievement of its investment objective will be more
dependent on Sub-advisor's credit analysis than would be the case if the
Portfolio was investing in higher quality bonds. For a discussion of the special
risks involved in low-rated bonds, see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus. For
a discussion of mortgage-backed securities and certain risks involved therein,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Portfolio.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Portfolio will treat IOs and POs, other than government-issued IOs
or POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Portfolio's net assets. Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Portfolio will treat
non-government-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the Securities and Exchange Commission
modifies its position.
Writing Covered Call Options. The Portfolio may write (sell) American
or European style "covered" call options and purchase options to close out
options previously written by a Portfolio. In writing covered call options, the
Portfolio expects to generate additional premium income which should serve to
enhance the Portfolio's total return and reduce the effect of any price decline
of the security or currency involved in the option. Covered call options will
generally be written on securities or currencies which, in Sub-advisor is
opinion, are not expected to have any major price increases or moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio at a price lower than the current market price of
the security or currency. In such event the Portfolio would write a put option
at an exercise price which, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the Portfolio would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European
style put options. As the holder of a put option, the Portfolio has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Portfolio would look to a clearing corporation to exercise
exchange-traded options, if the Portfolio were to purchase a dealer option, it
would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction. For a discussion of dealer options, see this Statement under
"Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Portfolio may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion
of the Portfolio, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Portfolio may purchase
or sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Portfolio successfully, the Portfolio must sell futures contacts with
respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Portfolio's objectives in these
areas.
Regulatory Limitations. The Portfolio will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC.
The Portfolio may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Portfolio after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Trustees of the Trust without a shareholder vote and
does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the
Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover (such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Portfolio's assets
to cover or identified accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Portfolio would comply with such
new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell
options on the same types of futures in which it may invest. As an alternative
to writing or purchasing call and put options on stock index futures, the
Portfolio may write or purchase call and put options on stock indices. Such
options would be used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Portfolio and other
mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe
Price-Fleming International, Inc. Such aggregated orders would be allocated
among such portfolios in a fair and non-discriminatory manner.
See this Statement and Trust's Prospectus under "Certain Risk Factors
and Investment Methods" for a description of certain risks in options and future
contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of
purposes in connection with the management of the foreign securities portion of
its portfolio. The Portfolio's use of such contracts would include, but not be
limited to, the following. First, when the Portfolio enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. Second, when the
Sub-advisor believes that one currency may experience a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Portfolio's securities denominated in such
foreign currency. Alternatively, where appropriate, the Portfolio may hedge all
or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Portfolio may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Portfolio. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, Sub-advisor believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose
consistent with the Portfolio's investment objective and policies. However, the
Portfolio will not enter into a forward contract, or maintain exposure to any
such contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid, high-grade debt
securities and currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Portfolio may net
offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risk factors involved in foreign currency transactions, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts) beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Sub-advisor will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, Sub-advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchasers,
(3) dealer undertakings to make a market, and (4) the nature of the security and
of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Portfolio does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments. Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into a repurchase agreement
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as illiquid
securities. The Portfolio will only enter into repurchase agreements where (i)
the underlying securities are of the type (excluding maturity limitations) which
the Portfolio's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Portfolio could experience both delays in liquidating
the underlying security and losses, including: (a) possible decline in the value
of the underlying security during the period while the Portfolio seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Portfolio reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Portfolio is the seller
of, rather than the investor in, securities, and agrees to repurchase them at an
agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain
risks involved therein, see this Statement under "Certain Risk Factor and
Investment Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Portfolio will not have the right
to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed by Sub-advisor to be of good standing and will
not be made unless, in the judgment of Sub-advisor, the consideration to be
earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission and certain state regulatory agencies, the Portfolio may
make loans to, or borrow funds from, other mutual funds sponsored or advised by
the Sub-advisor or Rowe Price-Fleming International, Inc. The Portfolio has no
current intention of engaging in these practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover its commitments with respect to these securities by
maintaining cash and/or liquid, high-grade debt securities with its custodian
bank equal in value to these commitments during the time between the purchase
and the settlement. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date. For a discussion of these
securities and the risks involved therein, see this Statement under "Certain
Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price Natural Resources
Portfolio. These limitations are not "fundamental" restrictions and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its
net assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act.
6. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Trust's Prospectus and this
Statement;
9. Effect short sales of securities; or
10. Invest in warrants if, as a result thereof, more than 10% of the
value of the net assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market.
T. Rowe Price International Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide
high current income and capital appreciation by investing in high-quality, non
dollar-denominated government and corporate bonds outside the United States.
This is a fundamental objective of the Portfolio.
Investment Policies: The Portfolio also seeks to moderate price fluctuation by
actively managing its maturity structure and currency exposure. The Portfolio's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or bank holding company debt securities and other debt
securities including those convertible into common stock. The Portfolio will
invest at least 65% of its assets in high-quality bonds but may invest up to 20%
of assets in below investment-grade, high-risk bonds, including bonds in default
or those with the lowest rating.
Sub-advisor regularly analyzes a broad range of international equity
and fixed-income markets in order to assess the degree of risk and level of
return that can be expected from each market. Of course, there can be no
assurance that Sub-advisor's forecasts of expected return will be reflected in
the actual returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the global
bond or foreign exchange markets. The Portfolio is subject to risks unique to
international investing.
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
portfolios is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment portfolios, the Portfolio's shareholders
will bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment portfolios.
In addition, the securities of these investment portfolios may trade at a
premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe,
Russia or certain Latin American countries. The Portfolio will only invest in a
company located in, or a government of, Eastern Europe, Russia or Latin America,
if the Sub-advisor believes the potential return justifies the risk.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
call or put options exceeds 25% of the market value of the Portfolio's net
assets. In calculating the 25% limit, the Portfolio will offset, against the
value of assets covering written calls and puts, the value of purchased calls
and puts on identical securities or currencies with identical maturity dates.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase put options for defensive purposes in order
to protect against an anticipated decline in the value of its securities or
currencies. An example of such use of put options is provided in this Statement
under "Certain Risk Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided below.
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio's portfolio, as a cash management tool, or
as an efficient way for Sub-advisor to implement either an increase or decrease
in portfolio market exposure in response to changing market conditions. Stock
index futures contracts are currently traded with respect to the S&P 500 Index
and other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Portfolio
may, however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas. For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash or other liquid assets equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Portfolio's custodian to
cover the position, or alternative cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by the Sub-advisor or T. Rowe Price Associates, Inc. Such
aggregated orders would be allocated among the Portfolio and such other
portfolios in a fair and non-discriminatory manner. See this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a
description of certain risks involved in options and futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. Second, when the Sub-advisor believes that the currency
of a particular foreign country may suffer or enjoy a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Portfolio's securities denominated in such
foreign currency. Alternatively, where appropriate, the Portfolio may hedge all
or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Portfolio may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Portfolio. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Other than as set forth above,
and immediately below, the Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation of
the contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. The Portfolio, however, in order to avoid excess
transactions and transaction costs, may maintain a net exposure to forward
contracts in excess of the value of the Portfolio's securities or other assets
to which the forward contracts relate (including accrued interest to the
maturity of the forward on such securities) provided the excess amount is
"covered" by liquid, high-grade debt securities, denominated in any currency, at
least equal at all times to the amount of such excess. For these purposes "the
securities or other assets to which the forward contracts relate may be
securities or assets denominated in a single currency, or where proxy forwards
are used, securities denominated in more than one currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For an additional
discussion of certain risks involved in foreign investing, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain options,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a
credit rating with respect to its short-term debt of at least A1 by Standard &
Poor's Corporation, P1 by Moody's Investors Service, Inc., or the equivalent
rating by T. Rowe Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. Repurchase agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Portfolio will only enter into
repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Portfolio seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
Illiquid and Restricted Securities. Subject to guidelines promulgated
by the Board of Trustees of the Trust, the Portfolio may invest in illiquid
securities. The Portfolio may invest in illiquid securities, including
restricted securities and repurchase agreements which do not provide for payment
within seven days, but will not acquire such securities if, as a result, they
would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Sub-advisor will consider
the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Sub-advisor could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Portfolio's holdings of illiquid securities would be reviewed
to determine what, if any, steps are required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Investing in
Rule 144A securities could have the effect of increasing the amount of the
Portfolio's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Debt Securities. The Portfolio's investment program permits it to
purchase below investment grade securities. Since investors generally perceive
that there are greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those obtainable
from higher quality securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher quality securities.
Lower quality investments entail a higher risk of default -- that is, the
nonpayment of interest and principal by the issuer than higher quality
investments. Such securities are also subject to special risks, discussed below.
Although the Portfolio seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate all risk. There can, of course, be no
assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus. The Portfolio may invest up to
20% of its total assets in securities rated below BBB or Baa, including bonds in
default or those with the lowest rating. See the Appendix to this Statement for
a more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
High Yield, High Risk Securities. Below investment grade securities
(rated below Baa by Moody's and below BBB by S&P) or unrated securities of
equivalent quality in the Sub-advisor's judgment, carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are considered speculative. The lower the ratings of such debt
securities, the greater their risks render them like equity securities. For an
additional discussion of certain risks involved in investing in lower-rated debt
securities, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Zero-Coupon Securities. The Portfolio may invest in zero-coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. For a discussion of zero-coupon securities and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by the
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by the Sub-advisor or T. Rowe Price
Associates, Inc. The Portfolio has no current intention of engaging in these
practices at this time.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price International Bond
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its total assets;
2. Purchase securities on margin, unless, by virtue of its ownership of
other securities, it has the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale is made
upon the same conditions, except in connection with arbitrage transactions and
except that the Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities;
3. Purchase illiquid securities if, as a result, more than 15% of its net
assets would be invested in such securities;
4. Buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Portfolio at any time do
not exceed 20% of its net assets; or sell put options on securities if, as a
result, the aggregate value of the obligations underlying such put options would
exceed 50% of the Portfolio's net assets;
5. Enter into futures contracts or purchase options thereon which do
not represent bona fide hedging unless immediately after the purchase, the value
of the aggregate initial margin with respect to all such futures contracts
entered into on behalf of the Portfolio and the premiums paid for such options
on futures contracts does not exceed 5% of the Portfolio's total assets,
provided that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing the 5% limit;
6. Purchase warrants if as a result warrants taken at the lower of cost
or market value would represent more than 10% of the value of the Portfolio's
total net assets, except that this restriction does not apply to warrants
acquired as a result of the purchase of another security;
7. Make securities loans if the value of such securities loaned exceeds
30% of the value of the Portfolio's total assets at the time any loan is made;
all loans of portfolio securities will be fully collateralized and marked to
market daily. The Portfolio has no current intention of making loans of
portfolio securities that would amount to greater than 5% of the Portfolio's
total assets; or
8. Purchase or sell real estate limited partnership interests.
9. Purchase securities which are not bonds denominated in foreign
currency ("international bonds") if, immediately after such purchase, less than
65% of its total assets would be invested in international bonds, except that
for temporary defensive purposes the Portfolio may purchase securities which are
not international bonds without limitation;
10. Borrow money in excess of 5% of its total assets (taken at market
value) or borrow other than from banks; however, in the case of reverse
repurchase agreements, the Portfolio may invest in such agreements with other
than banks subject to total asset coverage of 300% for such agreements and all
borrowings;
11. Invest more than 20% of its total assets in below investment grade,
high-risk bonds, including bonds in default or those with the lowest rating;
12. Invest in companies for the purpose of exercising management or
control;
13. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act; or
14. Effect short sales of securities.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Portfolio is subject to certain percentage limitations
under the 1940 Act relating to the purchase of securities of investment
companies, and may be subject to the limitation that no more than 10% of the
value of the Portfolio's total assets may be invested in such securities.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Portfolio's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Investment Policies" above is
adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of Portfolio's assets will
not be considered a violation of the restriction.
T. Rowe Price Small Company Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to
provide long-term capital appreciation by investing primarily in
small-capitalization stocks that appear to be undervalued. This is a fundamental
objective of the Portfolio.
Investment Policies:
Although primarily all of the Portfolio's assets are invested in common
stocks, the Portfolio may invest in convertible securities, corporate debt
securities and preferred stocks. The fixed-income securities in which the
Portfolio may invest include, but are not limited to, those described below. See
this Statement under "Certain Risk Factors and Investment Methods," for an
additional discussion of debt obligations.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Entities. The Portfolio may also invest in the securities of
certain supranational entities, such as the International Development Bank.
Lower-Rated Debt Securities. The Portfolio's investment program permits
it to purchase below investment grade securities, commonly referred to as "junk
bonds." Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will fluctuate
more widely than higher quality securities. Lower quality investments entail a
higher risk of default -- that is, the nonpayment of interest and principal by
the issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Portfolio seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
risk. There can, of course, be no assurance that the Portfolio will achieve its
investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, the Sub-advisor will consider such event in its determination of
whether the Portfolio should continue to hold the security. To the extent that
the ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the Trust's Prospectus.
Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. Because
investment in low and lower-medium quality bonds involves greater investment
risk, to the extent the Portfolio invests in such bonds, achievement of its
investment objective will be more dependent on the Sub-advisor's credit analysis
than would be the case if the Portfolio was investing in higher quality bonds.
For a discussion of the special risks involved in low-rated bonds, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interests in a pool of mortgages. After purchase by the Portfolio,
a security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Trust's Prospectus. For
a discussion of mortgage-backed securities and certain risks involved therein,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
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
the Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities. For an additional
discussion of CMOs and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code of 1986, as amended, POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Portfolio.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Portfolio will treat IOs and POs, other than government-issued IOs
or POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Portfolio's net assets. The Sub-advisor will determine
the liquidity of these investments based on the following guidelines: the type
of issuer; type of collateral, including age and prepayment characteristics;
rate of interest on coupon relative to current market rates and the effect of
the rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Portfolio will treat
non-government-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the Securities and Exchange Commission
modifies its position.
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Call Options. The Portfolio may write (sell) American
or European style "covered" call options and purchase options to close out
options previously written by a Portfolio. In writing covered call options, the
Portfolio expects to generate additional premium income which should serve to
enhance the Portfolio's total return and reduce the effect of any price decline
of the security or currency involved in the option. Covered call options will
generally be written on securities or currencies which, in the Sub-advisor's
opinion, are not expected to have any major price increases or moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash or other liquid assets having a value equal to the
fluctuating market value of the optioned securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Sub-advisor,
in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Portfolio for writing covered
call options will be recorded as a liability of the Portfolio. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Portfolio is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio at a price lower than the current market price of
the security or currency. In such event the Portfolio would write a put option
at an exercise price which, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the Portfolio would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European
style put options. As the holder of a put option, the Portfolio has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
The premium paid by the Portfolio when purchasing a put option will be
recorded as an asset of the Portfolio. This asset will be adjusted daily to the
option's current market value, which will be the latest sale price at the time
at which the net asset value per share of the Portfolio is computed (close of
New York Stock Exchange), or, in the absence of such sale, the latest bid price.
This asset will be terminated upon expiration of the option, the selling
(writing) of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Portfolio would look to a clearing corporation to exercise
exchange-traded options, if the Portfolio were to purchase a dealer option, it
would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction. For a discussion of dealer options, see this Statement under
"Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Portfolio may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion
of the Portfolio, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Portfolio may purchase
or sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Portfolio successfully, the Portfolio must sell futures contacts with
respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Portfolio's objectives in these
areas.
Regulatory Limitations. The Portfolio will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC.
The Portfolio may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Portfolio after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Trustees of the Trust without a shareholder vote and
does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the
Portfolio, an amount of cash or other liquid assets equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified in an account with the Portfolio's custodian to cover the
position, or alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account cannot be sold
while the position in the corresponding option or future is open, unless they
are replaced with similar assets. As a result, the commitment of a large portion
of the Portfolio's assets to cover or identified accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Portfolio would comply with such
new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell
options on the same types of futures in which it may invest. As an alternative
to writing or purchasing call and put options on stock index futures, the
Portfolio may write or purchase call and put options on stock indices. Such
options would be used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Portfolio and other
mutual funds or portfolios of mutual funds managed by the Sub-advisor or Rowe
Price-Fleming International, Inc. Such aggregated orders would be allocated
among the Portfolio and such other portfolios in a fair and non-discriminatory
manner. See this Statement and Trust's Prospectus under "Certain Risk Factors
and Investment Methods" for a description of certain risks in options and future
contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers. There are special
risks in foreign investing. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East. For an additional
discussion of certain risks involved in investing in foreign securities, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
The Portfolio may enter into forward contracts for a variety of
purposes in connection with the management of the foreign securities portion of
its portfolio. The Portfolio's use of such contracts would include, but not be
limited to, the following. First, when the Portfolio enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. Second, when the
Sub-advisor believes that one currency may experience a substantial movement
against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating
the value of some or all of the Portfolio's securities denominated in such
foreign currency. Alternatively, where appropriate, the Portfolio may hedge all
or part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currency or currencies act as an
effective proxy for other currencies. In such a case, the Portfolio may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Portfolio. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, Sub-advisor believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Portfolio will be served.
The Portfolio may enter into forward contracts for any other purpose
consistent with the Portfolio's investment objective and policies. However, the
Portfolio will not enter into a forward contract, or maintain exposure to any
such contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid assets and currency
available for cover of the forward contract(s). In determining the amount to be
delivered under a contract, the Portfolio may net offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risk factors involved in foreign currency transactions, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts) beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Illiquid and Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Sub-advisor will consider
the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Sub-advisor could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Portfolio's holdings of illiquid securities would be reviewed
to determine what, if any, steps are required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Investing in
Rule 144A securities could have the effect of increasing the amount of the
Portfolio's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments). Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this Statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into a repurchase agreement
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
that is a member of the Federal Reserve System. Any such dealer or bank will be
on the Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by the Sub-advisor. At that
time, the bank or securities dealer agrees to repurchase the underlying security
at the same price, plus specified interest. Repurchase agreements are generally
for a short period of time, often less than a week. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Portfolio will only enter into repurchase agreements where (i)
the underlying securities are of the type (excluding maturity limitations) which
the Portfolio's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book- entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Portfolio could experience both delays in liquidating
the underlying security and losses, including: (a) possible decline in the value
of the underlying security during the period while the Portfolio seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements. Although the Portfolio has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Portfolio reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller of,
rather than the investor in, securities, and agrees to repurchase them at an
agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of certain
risks involved therein, see this Statement under "Certain Risk Factor and
Investment Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Portfolio will not have the right
to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed by the Sub-advisor to be of good standing and
will not be made unless, in the judgment of the Sub-advisor, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow funds from,
other mutual funds sponsored or advised by the Sub-advisor or Rowe Price-Fleming
International, Inc. The Portfolio has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio may
purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover its commitments with respect to these securities by
maintaining cash and/or other liquid assets with its custodian bank equal in
value to these commitments during the time between the purchase and the
settlement. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. For a discussion of these securities and
the risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price Small Company Value
Portfolio. These limitations are not "fundamental" restrictions, and can be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Portfolio's net asset value;
4. Purchase illiquid securities if, as a result, more than 15% of its
net assets would be invested in such securities. Securities eligible for resale
under Rule 144A of the Securities Act of 1933 may be subject to this 15%
limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the 1940 Act;
6. Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the Trust's Prospectus and this
Statement;
9. Effect short sales of securities; or
10. Invest in warrants if, as a result thereof, more than 10% of the
value of the net assets of the Portfolio would be invested in warrants, except
that this restriction does not apply to warrants acquired as a result of the
purchase of another security. For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or market.
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Portfolio is capital
appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options On Stock Indices and Stocks. 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. In addition, the Portfolio may purchase options on securities. The
Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Portfolio's assets
is invested in securities with respect to which options may be written. 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.
When the Portfolio purchases a security with respect to which it
intends to write an option, it is likely that the option will be written
concurrently with or shortly after purchase. The Portfolio will write an option
on a particular security only if the Sub-advisor believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Portfolio to enter into a closing purchase transaction and close
out its position. If the Portfolio desires to sell a particular security on
which it has written an option, it will effect a closing purchase transaction
prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce
the percentage of its assets against which options are written, to realize a
profit on a previously written option, or to enable it to write another option
on the underlying security with either a different exercise price or expiration
time or both.
Options written by the Portfolio will normally have expiration dates
between three and nine months from the date written. The exercise prices of
options may be below, equal to or above the current market values of the
underlying securities at the times the options are written. From time to time
for tax and other reasons, the Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice assigned to it, rather than
delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Portfolio
purchases put options on stock indices to protect the portfolio against decline
in value. The Portfolio purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Portfolio. Any gain in the price of a
call option is likely to be offset by higher prices the Portfolio must pay in
rising markets, as cash reserves are invested. In declining markets, any
increase in the price of a put option is likely to be offset by lower prices of
stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are
listed on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Portfolio may utilize either broadly based or market
segment indices in seeking a better correlation between the indices and the
Portfolio.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Portfolio may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this Statement, the Sub-advisor believes that these limitations will not affect
the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Portfolio. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Portfolio may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Portfolio will lose the right to appreciation of
the stock for the duration of the option. For an additional discussion of
options on stock indices and stocks and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Portfolio held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
could sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby prevent the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market.
The Portfolio may also enter into interest rate and foreign currency
futures contracts. Interest rate futures contracts currently are traded on a
variety of fixed-income securities, including long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
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. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Portfolio may use futures and options thereon solely for
bona fide hedging or for other non-speculative purposes. As to long positions
which are used as part of the Portfolio's strategies and are incidental to its
activities in the underlying cash market, the "underlying commodity value" of
the Portfolio's futures and options thereon must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other dollar-denominated high-quality, short-term money instruments so set
aside, plus sums deposited on margin; (ii) cash proceeds from existing
investments due in 30 days; and (iii) accrued profits held at the futures
commission merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the future.
For an option on a future, that value is the underlying commodity value of the
future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Instead, the Portfolio is required to deposit in a
segregated asset account an amount of cash or qualifying securities (currently
U.S. Treasury bills), currently in a minimum amount of $15,000. This is called
"initial margin." Such initial margin is in the nature of a performance bond or
good faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of a
contract to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Portfolio,
there was a general increase in interest rates, thereby making the Portfolio's
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Portfolio, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Portfolio to enter into new positions or close out existing positions.
If the secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Portfolio would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets held
to cover its futures positions also could be impaired. For an additional
discussion of futures contracts and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Options on Futures Contracts. The Portfolio may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Portfolio would be able to buy a put option on a
futures contract to hedge its portfolio against the risk of falling prices. For
an additional discussion of options on futures contracts and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options
on foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio could buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio would have the right to sell such currency for a fixed amount in U.S.
dollars and would thereby offset, in whole or in part, the adverse effect on the
Portfolio which otherwise would have resulted. Conversely, when a rise is
projected in the U.S. dollar value of a currency in which securities to be
acquired are denominated, thereby increasing the cost of such securities, the
Portfolio could buy call options thereon. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Portfolio invests.
Should interest or exchange rates or the prices of securities or financial
indices move in an unexpected manner, the Portfolio may not achieve the desired
benefits of futures and options or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio and the possible need to defer
closing out positions in certain instruments to avoid adverse tax consequences.
As a result, no assurance can be given that the Portfolio will be able to use
those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The
Portfolio generally conducts its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When the Portfolio purchases or sells a security denominated in
a foreign currency, it may enter into a forward foreign currency contract
("forward contract") for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security transaction.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. In this manner, the Portfolio may obtain protection against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date the security
is purchased or sold and the date upon which payment is made or received.
Although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Portfolio may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Portfolio's securities denominated in that currency. The
Portfolio will not enter into such 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
portfolio securities or other assets denominated in that currency. Forward
contracts may, from time to time, be considered illiquid, in which case they
would be subject to the Portfolio's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Portfolio
of a foreign currency, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver the foreign currency
by purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the
transactions described above. Of course, the Portfolio is not required to enter
into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Sub-advisor. It
also should be realized that this method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to the decline in the value of the hedged currency, at the same time they
tend to limit any potential gain which might result should the value of such
currency increase. For an additional discussion of forward foreign currency
contracts and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Trust's Prospectus, the
Portfolio may invest up to 15% of the value of its net assets, measured at the
time of investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Portfolio from disposing of such a
security at the time desired or at a reasonable price. In addition, in order to
resell a restricted security, the Portfolio might have to bear the expense and
incur the delays associated with effecting registration. In purchasing illiquid
securities, the Portfolio does not intend to engage in underwriting activities,
except to the extent the Portfolio may be deemed to be a statutory underwriter
under the Securities Act in purchasing or selling such securities. Illiquid
securities will be purchased for investment purposes only and not for the
purpose of exercising control or management of other companies. For an
additional discussion of illiquid or restricted securities and certain risks
involved therein, see the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Portfolio may invest in Rule 144A securities
which, as disclosed in the Trust's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Portfolio could affect
adversely the marketability of the security. In such an instance, the Portfolio
might be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the
Portfolio's limitations on investing in securities that are not readily
marketable. The Sub-advisor will consider the following factors, among others,
in making this determination: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
additional potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of market place
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Portfolio may
invest up to 5% of its total assets in fixed-income securities which are unrated
or are rated below investment grade either at the time of purchase or as a
result of reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this
Statement. The lower the rating given a security by a rating service, the
greater the credit risk such rating service perceives to exist with respect to
the security. Increasing the amount of the Portfolio's assets invested in
unrated or lower grade securities, while intended to increase the yield produced
by those assets, will also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher rated securities
and may have speculative characteristics. In order to decrease the risk in
investing in debt securities, in no event will the Portfolio ever invest in a
debt security rated below B by Moody's or by S&P. Of course, relying in part on
ratings assigned by credit agencies in making investments will not protect the
Portfolio from the risk that the securities in which they invest will decline in
value, since credit ratings represent evaluations of the safety of principal,
dividend, and interest payments on debt securities, and not the market values of
such securities, and such ratings may not be changed on a timely basis to
reflect subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Portfolio's investment objective may be
more dependent on the Sub-advisor's own credit analysis than is the case for
funds that do not invest in such securities. In addition, the share price and
yield of the Portfolio may fluctuate more than in the case of funds investing in
higher quality, shorter term securities. Moreover, a significant economic
downturn or major increase in interest rates may result in issuers of
lower-rated securities experiencing increased financial stress, which would
adversely affect their ability to service their principal, dividend, and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield debt securities has been in existence for many years and from time to time
has experienced economic downturns in recent years, this market has involved a
significant increase in the use of high yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not,
therefore, provide an accurate indication of future performance of the high
yield debt securities market, particularly during periods of economic recession.
Furthermore, expenses incurred in recovering an investment in a defaulted
security may adversely affect the Portfolio's net asset value. Finally, while
the Sub-advisor attempts to limit purchases of medium and lower-rated securities
to securities having an established secondary market, the secondary market for
such securities may be less liquid than the market for higher quality
securities. The reduced liquidity of the secondary market for such securities
may adversely affect the market price of, and ability of the Portfolio to value,
particular securities at certain times, thereby making it difficult to make
specific valuation determinations. The Portfolio does not invest in any medium
and lower-rated securities which present special tax consequences, such as
zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain
risks involved in lower-rated securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Portfolio's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to money market instruments eligible for investment by the
Portfolio with member banks of the Federal Reserve system, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. Repurchase
agreements maturing in more than seven days are considered illiquid and will be
subject to the Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. The Portfolio may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Portfolio may buy securities convertible
into common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Portfolio; consequently, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Founders Capital Appreciation
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the market value of its net assets in
securities which are not readily marketable, including repurchase agreements
maturing in over seven days;
2. Purchase more than 10% of any class of securities of any single issuer
or purchase more than 10% of the voting securities of any single issuer;
3. Purchase securities of other investment companies except in
compliance with the 1940 Act;
4. Invest in companies for purposes of exercising control or management;
5. Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of the Portfolio's assets would be
invested in securities of that issuer.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Portfolio may depart from its basic
investment objective and assume a defensive position with up to 100% of its
assets temporarily invested in high quality corporate bonds or notes and
government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
Founders Passport Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options On Stock Indices and Stocks. 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. In addition, the Portfolio may purchase options on securities. The
Portfolio may also purchase put and call options on stock indices.
The Portfolio may write ("sell") options on any or all of its portfolio
securities and at such time and from time to time as the Sub-advisor shall
determine to be appropriate. No specified percentage of the Portfolio's assets
is invested in securities with respect to which options may be written. 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.
When the Portfolio purchases a security with respect to which it
intends to write an option, it is likely that the option will be written
concurrently with or shortly after purchase. The Portfolio will write an option
on a particular security only if the Sub-advisor believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Portfolio to enter into a closing purchase transaction and close
out its position. If the Portfolio desires to sell a particular security on
which it has written an option, it will effect a closing purchase transaction
prior to or concurrently with the sale of the security.
The Portfolio may enter into closing purchase transactions to reduce
the percentage of its assets against which options are written, to realize a
profit on a previously written option, or to enable it to write another option
on the underlying security with either a different exercise price or expiration
time or both.
Options written by the Portfolio will normally have expiration dates
between three and nine months from the date written. The exercise prices of
options may be below, equal to or above the current market values of the
underlying securities at the times the options are written. From time to time
for tax and other reasons, the Portfolio may purchase an underlying security for
delivery in accordance with an exercise notice assigned to it, rather than
delivering such security from its portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the stocks included in the index. The Portfolio
purchases put options on stock indices to protect the portfolio against decline
in value. The Portfolio purchases call options on stock indices to establish a
position in equities as a temporary substitute for purchasing individual stocks
that then may be acquired over the option period in a manner designed to
minimize adverse price movements. Purchasing put and call options on stock
indices also permits greater time for evaluation of investment alternatives.
When the Sub-advisor believes that the trend of stock prices may be downward,
particularly for a short period of time, the purchase of put options on stock
indices may eliminate the need to sell less liquid stocks and possibly
repurchase them later. The purpose of these transactions is not to generate
gain, but to "hedge" against possible loss. Therefore, successful hedging
activity will not produce net gain to the Portfolio. Any gain in the price of a
call option is likely to be offset by higher prices the Portfolio must pay in
rising markets, as cash reserves are invested. In declining markets, any
increase in the price of a put option is likely to be offset by lower prices of
stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are
listed on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers, Inc. ("NASDAQ"). Options traded on
stock exchanges are either broadly based, such as the Standard & Poor's 500
Stock Index and 100 Stock Index, or involve stocks in a designated industry or
group of industries. The Portfolio may utilize either broadly based or market
segment indices in seeking a better correlation between the indices and the
portfolio.
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Portfolio may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this Statement, the Sub-advisor believes that these limitations will not affect
the purchase of stock index options by the Portfolio.
One risk of holding a put or a call option is that if the option is not
sold or exercised prior to its expiration, it becomes worthless. However, this
risk is limited to the premium paid by the Portfolio. Other risks of purchasing
options include the possibility that a liquid secondary market may not exist at
a time when the Portfolio may wish to close out an option position. It is also
possible that trading in options on stock indices might be halted at a time when
the securities markets generally were to remain open. In cases where the market
value of an issue supporting a covered call option exceeds the strike price plus
the premium on the call, the Portfolio will lose the right to appreciation of
the stock for the duration of the option. For an additional discussion of
options on stock indices and stocks and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts. The Portfolio may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission and must be executed through a futures commission merchant
(an "FCM") or brokerage firm which is a member of the relevant contract market.
Although futures contracts by their terms call for the delivery or acquisition
of the underlying commodities or a cash payment based on the value of the
underlying commodities, in most cases the contractual obligation is offset
before the delivery date of the contract by buying, in the case of a contractual
obligation to sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a transaction
cancels the obligation to make or take delivery of the commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Portfolio held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
could sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby prevent the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market.
The Portfolio may also enter into interest rate and foreign currency
futures contracts. Interest rate futures contracts currently are traded on a
variety of fixed-income securities, including long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
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. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Portfolio may use futures and options thereon solely for
bona fide hedging or for other non-speculative purposes. As to long positions
which are used as part of the Portfolio's strategies and are incidental to its
activities in the underlying cash market, the "underlying commodity value" of
the Portfolio's futures and options thereon must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other dollar-denominated high-quality, short-term money instruments so set
aside, plus sums deposited on margin; (ii) cash proceeds from existing
investments due in 30 days; and (iii) accrued profits held at the futures
commission merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the future.
For an option on a future, that value is the underlying commodity value of the
future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Instead, the Portfolio is required to deposit in a
segregated asset account an amount of cash or qualifying securities (currently
U.S. Treasury bills), currently in a minimum amount of $15,000. This is called
"initial margin." Such initial margin is in the nature of a performance bond or
good faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of a
contract to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Portfolio,
there was a general increase in interest rates, thereby making the Portfolio's
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Portfolio, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of three business
days for most types of securities, the futures markets can provide superior
liquidity to the securities markets. Nevertheless, there is no assurance a
liquid secondary market will exist for any particular futures contract at any
particular time. In addition, futures exchanges may establish daily price
fluctuation limits for futures contracts and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it would be impossible
for the Portfolio to enter into new positions or close out existing positions.
If the secondary market for a futures contract were not liquid because of price
fluctuation limits or otherwise, the Portfolio would not promptly be able to
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until the delivery date, regardless of
changes in its value. As a result, the Portfolio's access to other assets held
to cover its futures positions also could be impaired. For an additional
discussion of futures contracts and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Options on Futures Contracts. The Portfolio may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance. The purchase of a put option on a futures contract is similar
in some respects to the purchase of protective put options on portfolio
securities. For example, the Portfolio would be able to buy a put option on a
futures contract to hedge the Portfolio against the risk of falling prices. For
an additional discussion of options on futures contracts and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risks Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may buy and sell options
on foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio could buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio would have the right to sell such currency for a fixed amount in U.S.
dollars and would thereby offset, in whole or in part, the adverse effect on the
Portfolio which otherwise would have resulted. Conversely, when a rise is
projected in the U.S. dollar value of a currency in which securities to be
acquired are denominated, thereby increasing the cost of such securities, the
Portfolio could buy call options thereon. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Portfolio invests.
Should interest or exchange rates or the prices of securities or financial
indices move in an unexpected manner, the Portfolio may not achieve the desired
benefits of futures and options or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio and the possible need to defer
closing out positions in certain instruments to avoid adverse tax consequences.
As a result, no assurance can be given that the Portfolio will be able to use
those instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume. For an additional discussion of
certain risks involved in investing in futures and options, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
certain risks involved in foreign investing, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Forward Contracts for Purchase or Sale of Foreign Currencies. The
Portfolio generally conducts its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When the Portfolio purchases or sells a security denominated in
a foreign currency, it may enter into a forward foreign currency contract
("forward contract") for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security transaction.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. In this manner, the Portfolio may obtain protection against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date the security
is purchased or sold and the date upon which payment is made or received.
Although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
The Portfolio will not speculate in forward contracts.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar (or sometimes against another
currency), the Portfolio may enter into a forward contract to sell, for a fixed
dollar or other currency amount, foreign currency approximating the value of
some or all of the Portfolio's securities denominated in that currency. The
Portfolio will not enter into such 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
portfolio securities or other assets denominated in that currency. Forward
contracts may, from time to time, be considered illiquid, in which case they
would be subject to the Portfolio's limitation on investing in illiquid
securities.
At the consummation of a forward contract for delivery by the Portfolio
of a foreign currency, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver the foreign currency
by purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Portfolio assets into such currency.
Dealings in forward contracts by the Portfolio will be limited to the
transactions described above. Of course, the Portfolio is not required to enter
into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Sub-advisor. It
also should be realized that this method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to the decline in the value of the hedged currency, at the same time they
tend to limit any potential gain which might result should the value of such
currency increase. For an additional discussion of forward foreign currency
contracts and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Illiquid Securities. As discussed in the Prospectus, the Portfolio may
invest up to 15% of the value of its net assets, measured at the time of
investment, in investments which are not readily marketable. Restricted
securities are securities that may not be resold to the public without
registration under the Securities Act of 1933 (the "1933 Act"). Restricted
securities (other than Rule 144A securities deemed to be liquid, discussed
below) and securities which, due to their market or the nature of the security,
have no readily available markets for their disposition are considered to be not
readily marketable or "illiquid." These limitations on resale and marketability
may have the effect of preventing the Portfolio from disposing of such a
security at the time desired or at a reasonable price. In addition, in order to
resell a restricted security, the Portfolio might have to bear the expense and
incur the delays associated with effecting registration. In purchasing illiquid
securities, the Portfolio does not intend to engage in underwriting activities,
except to the extent the Portfolio may be deemed to be a statutory underwriter
under the Securities Act in purchasing or selling such securities. Illiquid
securities will be purchased for investment purposes only and not for the
purpose of exercising control or management of other companies. For an
additional discussion of illiquid or restricted securities and certain risks
involved therein, see the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Rule 144A Securities. In recent years, a large institutional market has
developed for certain securities that are not registered under the 1933 Act.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can readily be resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. The Portfolio may invest in Rule 144A securities
which, as disclosed in the Trust's Prospectus, are restricted securities which
may or may not be readily marketable. Rule 144A securities are readily
marketable if institutional markets for the securities develop pursuant to Rule
144A which provide both readily ascertainable values for the securities and the
ability to liquidate the securities when liquidation is deemed necessary or
advisable. However, an insufficient number of qualified institutional buyers
interested in purchasing a Rule 144A security held by the Portfolio could affect
adversely the marketability of the security. In such an instance, the Portfolio
might be unable to dispose of the security promptly or at reasonable prices.
The Sub-advisor will determine that a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933 Act, or any
successor to such rule, and that such securities are not subject to the
Portfolio's limitations on investing in securities that are not readily
marketable. The Sub-advisor will consider the following factors, among others,
in making this determination: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
additional potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of market place
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfers).
Lower-Rated or Unrated Fixed-Income Securities. The Portfolio may
invest up to 5% of its total assets in fixed-income securities which are unrated
or are rated below investment grade either at the time of purchase or as a
result of reduction in rating after purchase. (This limitation does not apply to
convertible securities and preferred stocks.) Investments in lower-rated or
unrated securities are generally considered to be of high risk. These debt
securities, commonly referred to as junk bonds, are generally subject to two
kinds of risk, credit risk and market risk. Credit risk relates to the ability
of the issuer to meet interest or principal payments, or both, as they come due.
The ratings given a security by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's ("S&P") provide a generally useful guide as to such credit
risk. For a description of securities ratings, see the Appendix to this
Statement. The lower the rating given a security by a rating service, the
greater the credit risk such rating service perceives to exist with respect to
the security. Increasing the amount of the Portfolio's assets invested in
unrated or lower grade securities, while intended to increase the yield produced
by those assets, will also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium and lower-rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher rated securities
and may have speculative characteristics. In order to decrease the risk in
investing in debt securities, in no event will the Portfolio ever invest in a
debt security rated below B by Moody's or by S&P. Of course, relying in part on
ratings assigned by credit agencies in making investments will not protect the
Portfolio from the risk that the securities in which they invest will decline in
value, since credit ratings represent evaluations of the safety of principal,
dividend, and interest payments on debt securities, and not the market values of
such securities, and such ratings may not be changed on a timely basis to
reflect subsequent events.
Because investment in medium and lower-rated securities involves
greater credit risk, achievement of the Portfolio's investment objective may be
more dependent on the Sub-advisor's own credit analysis than is the case for
funds that do not invest in such securities. In addition, the share price and
yield of the Portfolio may fluctuate more than in the case of funds investing in
higher quality, shorter term securities. Moreover, a significant economic
downturn or major increase in interest rates may result in issuers of
lower-rated securities experiencing increased financial stress, which would
adversely affect their ability to service their principal, dividend, and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield debt securities has been in existence for many years and from time to time
has experienced economic downturns in recent years, this market has involved a
significant increase in the use of high yield debt securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not,
therefore, provide an accurate indication of future performance of the high
yield debt securities market, particularly during periods of economic recession.
Furthermore, expenses incurred in recovering an investment in a defaulted
security may adversely affect the Portfolio's net asset value. Finally, while
the Sub-advisor attempts to limit purchases of medium and lower-rated securities
to securities having an established secondary market, the secondary market for
such securities may be less liquid than the market for higher quality
securities. The reduced liquidity of the secondary market for such securities
may adversely affect the market price of, and ability of the Portfolio to value,
particular securities at certain times, thereby making it difficult to make
specific valuation determinations. The Portfolio does not invest in any medium
and lower-rated securities which present special tax consequences, such as
zero-coupon bonds or pay-in-kind bonds. For an additional discussion of certain
risks involved in lower-rated securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Sub-advisor seeks to reduce the overall risks associated with the
Portfolio's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Portfolio will achieve its investment objective.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to money market instruments eligible for investment by the
Portfolio with member banks of the Federal Reserve system, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. Repurchase
agreements maturing in more than seven days are considered illiquid and will be
subject to the Portfolio's limitation with respect to illiquid securities.
The Portfolio has not adopted any limits on the amounts of its total
assets that may be invested in repurchase agreements which mature in less than
seven days. The Portfolio may invest up to 15% of the market value of its net
assets, measured at the time of purchase, in securities which are not readily
marketable, including repurchase agreements maturing in more than seven days.
For an additional discussion of repurchase agreements and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Convertible Securities. The Portfolio may buy securities convertible
into common stock if, for example, the Sub-advisor believes that a company's
convertible securities are undervalued in the market. Convertible securities
eligible for purchase include convertible bonds, convertible preferred stocks,
and warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specific amount of the corporation's capital
stock at a set price for a specified period of time. Warrants do not represent
ownership of the securities, but only the right to buy the securities. The
prices of warrants do not necessarily move parallel to the prices of underlying
securities. Warrants may be considered speculative in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of a
corporation issuing them. Warrant positions will not be used to increase the
leverage of the Portfolio; consequently, warrant positions are generally
accompanied by cash positions equivalent to the required exercise amount.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the Founders Passport Portfolio.
These limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the market value of its net assets in
securities which are not readily marketable, including repurchase agreements
maturing in over seven days;
2. Purchase securities of other investment companies except in
compliance with the 1940 Act;
3. Invest in companies for the purpose of exercising control or
management.
4. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions (and provided that
margin payments and other deposits in connection with transactions in options,
futures and forward contracts shall not be deemed to constitute purchasing
securities on margin); or
5. Sell securities short.
In addition, in periods of uncertain market and economic conditions, as
determined by the Sub-advisor, the Portfolio may depart from its basic
investment objective and assume a defensive position with up to 100% of its
assets temporarily invested in high quality corporate bonds or notes and
government issues, or held in cash.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit that results
from a change in values or net assets will not be considered a violation.
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income while following sound investment practices. This is a fundamental
objective of the Portfolio. Capital growth potential is an additional, but
secondary, consideration in the selection of portfolio securities.
Investment Policies:
The Portfolio will pursue its objective by investing its assets in
securities which will provide a relatively high-yield and stable return and
which, over a period of years, may also provide capital appreciation. Capital
growth potential is an additional consideration in the selection of portfolio
securities. The Portfolio invests in common stocks, as well as convertible bonds
and preferred stocks.
In pursuing its investment objective, the Portfolio normally invests at
least 65% of its total assets in dividend paying common stocks. Up to 10% of the
Portfolio's assets may be invested in equity securities that do not pay regular
dividends. The remaining assets are invested in other income-producing
securities, such as corporate bonds. Sometimes warrants are acquired when
offered with income-producing securities, but the warrants are disposed of at
the first favorable opportunity. Acquiring warrants involves a risk that the
Portfolio will lose the premium it pays to acquire warrants if the Portfolio
does not exercise a warrant before it expires. The major portion of the
investment portfolio normally consists of common stocks, convertible bonds and
debentures, and preferred stocks; however, there may also be substantial
holdings of debt securities, including non-investment grade and unrated debt
securities.
Debt Securities. The debt securities in which the Portfolio invests are
generally subject to two kinds of risk, credit risk and market risk. The ratings
given a debt security by Moody's and Standard & Poor's ("S&P") provide a
generally useful guide as to such credit risk. The lower the rating given a debt
security by such rating service, the greater the credit risk such rating service
perceives to exist with respect to such security. Increasing the amount of
Portfolio assets invested in unrated or lower grade (Ba or less by Moody's, BB
or less by S&P) debt securities, while intended to increase the yield produced
by the Portfolio's debt securities, will also increase the credit risk to which
those debt securities are subject.
Lower-rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Portfolio may invest in debt securities assigned lower grade
ratings by S&P or Moody's, the Portfolio's investments have generally been
limited to debt securities rated B or higher by either S&P or Moody's. Debt
securities rated lower than B by either S&P or Moody's may be highly
speculative. The Sub-advisor intends to limit such portfolio investments to debt
securities which are not believed by the Sub-advisor to be highly speculative
and which are rated at least CCC or Caa, respectively, by S&P or Moody's. In
addition, a significant economic downturn or major increase in interest rates
may well result in issuers of lower-rated debt securities experiencing increased
financial stress which would adversely affect their ability to service their
principal and interest obligations, to meet projected business goals, and to
obtain additional financing. While the Sub-advisor attempts to limit purchases
of lower-rated debt securities to securities having an established retail
secondary market, the market for such securities may not be as liquid as the
market for higher rated debt securities. For an additional discussion of certain
risks involved in lower-rated or unrated securities, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. As discussed in the Trust's Prospectus, the
Portfolio may enter into repurchase agreements with respect to debt instruments
eligible for investment by the Portfolio, with member banks of the Federal
Reserve System, registered broker-dealers, and registered government securities
dealers. A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Portfolio and is unrelated to the
interest rate on the underlying instrument. In these transactions, the
securities acquired by the Portfolio (including accrued interest earned thereon)
must have a total value in excess of the value of the repurchase agreement, and
are held by the Portfolio's Custodian Bank until repurchased. For an additional
discussion of repurchase agreements and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Lending Portfolio Securities. The Portfolio may lend its securities to
qualified brokers, dealers, banks, or other financial institutions. While voting
rights may pass with the loaned securities, if a material event (e.g., proposed
merger, sale of assets, or liquidation) is to occur affecting an investment on
loan, the loan must be called and the securities voted. Loans of securities made
by the Portfolio will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange and the requirements of the
1940 Act and the Rules of the Securities and Exchange Commission thereunder.
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the 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:
Borrowing. The Portfolio may borrow for temporary administrative
purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio
to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell some of its
holdings within three days to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the
Portfolio. Money borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. The Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
In addition to the above, the Portfolio may enter into reverse
repurchase agreements and "mortgage dollar rolls." A reverse repurchase
agreement involves the sale of a portfolio-eligible security by the Portfolio,
coupled with its agreement to repurchase the instrument at a specified time and
price. In a "dollar roll" transaction the Portfolio sells a mortgage-related
security (such as a GNMA security) to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which the Portfolio pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the Portfolio enters into a
dollar roll transaction is not obligated to return the same securities as those
originally sold by the Portfolio, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to the Portfolio generally must: (1) be collateralized by the same types of
underlying mortgages; (2) be issued by the same agency and be part of the same
program; (3) have a similar original stated maturity; (4) have identical net
coupon rates; (5) have similar maturity: (4) have identical net coupon rates;
(5) have similar market yields (and therefore price); and (6) satisfy "good
delivery" requirements, meaning that the aggregate principal amounts of the
securities delivered and received back must be within 2.5% of the initial amount
delivered. The Portfolio's obligations under a dollar roll agreement must be
covered by cash or other liquid assets equal in value to the securities subject
to repurchase by the Portfolio, maintained in a segregated account.
Both dollar roll and reverse repurchase agreements will be subject to
the 1940 Act's limitations on borrowing, as discussed above. Furthermore,
because dollar roll transactions may be for terms ranging between one and six
months, dollar roll transactions may be deemed "illiquid" and subject to the
Portfolio's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio will be required to permit the
issuer to redeem the security and convert it to underlying common stock, or will
sell the convertible security to a third party. The Portfolio generally would
invest in convertible securities for their favorable price characteristics and
total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P) are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Portfolio may incur additional
expenses to seek recovery. In the case of high yield securities structured as
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Portfolio could sell a high yield security, and could adversely affect
the daily net asset value of the shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities especially in a thinly-traded
market. When secondary markets for high yield securities are less liquid than
the market for higher grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available. The Sub-advisor seeks to minimize the risks
of investing in all securities through diversification, in-depth credit analysis
and attention to current developments in interest rates and market conditions.
For an additional discussion of certain risks involved in lower-rated debt
securities, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Objectives."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio will
participate on such committees only when the Sub-advisor believes that such
participation is necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in
mortgage-backed securities. Mortgage-related securities are interests in pools
of mortgage loans made to residential home buyers, including mortgage loans made
by savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (see
"Mortgage Pass-Through Securities"). The Portfolio may also invest in debt
securities which are secured with collateral consisting of mortgage-related
securities (see "Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Portfolio may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. The Portfolio will not purchase mortgage-related securities or any
other assets which in the Sub-advisor's opinion are illiquid if, as a result,
more than 15% of the value of the Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolio's industry concentration restrictions, set forth in this Statement
under "Investment Restrictions," by virtue of the exclusion from that test
available to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by a portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default that other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
For an additional discussion of mortgage-backed securities and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, which the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities may be offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods." Consistent with the Portfolio's investment
objectives and policies, the Sub-advisor also may invest in other types of
asset-backed securities.
Foreign Securities. The Portfolio may invest in corporate debt
securities of foreign issuers (including preferred or preference stock), certain
foreign bank obligations (see "Bank Obligations") and U.S. dollar- or foreign
currency-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. The Portfolio will concentrate
its foreign investments in securities of issuers based in developed countries.
The Portfolio may invest up to 10% of its assets in securities of issuers based
in emerging market countries. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of certain risks involved in
foreign investments, in general, and the special risks of investing in
developing countries, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see ""Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the tine of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Trust's custodian of cash or other
liquid assets and are marked to market daily. Although such contracts are
intended to minimize the risk of loss due to a decline on the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including in Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future, including Panama and Peru.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolios invest
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligations of United States bank (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are member of the Federal Reserve System, are examined by the Comptroller of the
Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Portfolio's limitation on concentration of no more than 25% of its assets in
the securities of issuers in particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part
of their overall portfolio management strategies involving the use of derivative
instruments and to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline.
When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time and the Portfolio replaces the borrowed security,
the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. The successful use of short
selling may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will
provide collateral to the broker-dealer and (except in the case of short sales
"against the box") will maintain additional asset coverage in the form of cash
or other liquid assets in a segregated account. The Portfolio does not intend to
enter into short sales (other than those "against the box") if immediately after
such sale the aggregate of the value of all collateral plus the amount in such
segregated account exceeds one-third of the value of the Portfolio's net assets.
This percentage may be varied by action of the Trust's Board of Trustees. A
short sale is "against the box" to the extent that the Portfolio
contemporaneously owns, or has the right to obtain at no added cost, securities
identical to those sold short. The Portfolio will engage in short selling to the
extent permitted by the 1940 Act and rules and interpretations thereunder.
Derivative Instruments. In pursuing its individual objective, the
Portfolio may, as described in the Prospectus, purchase and sell (write) both
put options and call options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("future
options") for hedging purposes. The Portfolio also may enter into swap
agreements with respect to foreign currencies, interest rates and indexes of
securities. If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the future, the
Portfolio may also use those instruments, provided that the Trust's Board of
Trustees determines that their use is consistent with the Portfolio's investment
objective, and provided that their use is consistent with restrictions
applicable to options and futures contracts currently eligible for use by the
Trust (i.e., that written call or put options will be "covered" or "secured" and
that futures and futures options will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for a option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts, as specified in
the Trust's Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect or expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, each Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolio intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Portfolio may "cover" its position by purchasing a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to market on a daily basis) cash or other
liquid assets that equal the purchase price of the futures contract, less any
margin on deposit. Alternatively, the Portfolio may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Portfolio.
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Portfolio) and
any accrued but unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of a segregated account consisting of cash or other liquid
assets to avoid any potential leveraging of the Portfolio's portfolio. The
Portfolio will not enter into a swap agreement with any single party if the net
amount owned or to be received under existing contracts with that party would
exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterpart. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the 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.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants." To be eligible,
natural persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets exceeding
$5 million. In addition, an eligible swap transaction must meet three
conditions. First, the swap agreement may not be part of a fungible class of
agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Portfolio invests in these
securities, however, the Sub-advisor analyzes these securities in its overall
assessment of the effective duration of the Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Foreign Currency Exchange-Related Securities. The Portfolio may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this
Statement under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the PIMCO Total Return Bond
Portfolio. These limitations are not "fundamental" restrictions, and may be
changed by the Trustees without shareholder approval.
1. The Portfolio will not invest more than 15% of the assets of the
Portfolio (taken at market value at the time of the investment) in "illiquid
securities," illiquid securities being defined to include securities subject to
legal or contractual restrictions on resale (which may include private
placements), repurchase agreements maturing in more than seven days, certain
options traded over the counter that the Portfolio has purchased, securities
being used to cover options a Portfolio has written, securities for which market
quotations are not readily available, or other securities which legally or in
the Sub-advisor's option may be deemed illiquid.
2. The Portfolio will not purchase securities for the Portfolio from,
or sell portfolio securities to, any of the officers and directors or Trustees
of the Trust or of the Investment Manager or of the Sub-advisor.
3. The Portfolio will not invest more than 5% of the assets of the
Portfolio (taken at market value at the time of investment) in any combination
of interest only, principal only, or inverse floating rate securities.
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
to maximize total return, consistent with preservation of capital and prudent
investment management. This is a fundamental objective of the Portfolio.
Investment Policies:
Borrowing. The Portfolio may borrow for temporary administrative
purposes. This borrowing may be unsecured. The 1940 Act requires the Portfolio
to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities exclusive of borrowings) of 300% of the amount
borrowed. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate
the effect on net asset value of any increase or decrease in the market value of
the Portfolio's securities. Money borrowed will be subject to interest costs
which may or may not be recovered by appreciation of the securities purchased.
The Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Among the forms of borrowing in which the Portfolio may engage is the
entry into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of the Portfolio-eligible security by the Portfolio, coupled
with its agreement to repurchase the instrument at a specified time and price.
The Portfolio will maintain a segregated account with its Custodian consisting
of cash or other liquid assets equal (on a daily mark-to-market basis) to its
obligations under reverse repurchase agreements with broker-dealers (but not
banks). However, reverse repurchase agreements involve the risk that the market
value of securities retained by the Portfolio may decline below the repurchase
price of the securities sold by the Portfolio which it is obligated to
repurchase. To the extent that the Portfolio collateralizes its obligations
under a reverse repurchase agreement, the asset coverage requirements of the
1940 Act will not apply.
In addition to the above, the Portfolio may enter into reverse
repurchase agreements and "mortgage dollar rolls." A reverse repurchase
agreement involves the sale of a portfolio-eligible security by the Portfolio,
coupled with its agreement to repurchase the instrument at a specified time and
price. In a "dollar roll" transaction the Portfolio sells a mortgage-related
security (such as a GNMA security) to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which the Portfolio pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the Portfolio enters into a
dollar roll transaction is not obligated to return the same securities as those
originally sold by the Portfolio, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to the Portfolio generally must: (1) be collateralized by the same types of
underlying mortgages; (2) be issued by the same agency and be part of the same
program; (3) have a similar original stated maturity; (4) have identical net
coupon rates; (5) have similar market yields (and therefore price); and (6)
satisfy "good delivery" requirements, meaning that the aggregate principal
amounts of the securities delivered and received back must be within 2.5% of the
initial amount delivered. The Portfolio's obligations under a dollar roll
agreement must be covered by cash or other liquid assets equal in value to the
securities subject to repurchase by the Portfolio, maintained in a segregated
account.
Both dollar roll and reverse repurchase agreements will be subject to
the 1940 Act's limitations on borrowing, as discussed above. Furthermore,
because dollar roll transactions may be for terms ranging between one and six
months, dollar roll transactions may be deemed "illiquid" and subject to the
Portfolio's overall limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio would be required to permit
the issuer to redeem the security and convert it to underlying common stock, or
would sell the convertible security to a third party. The Portfolio generally
would invest in convertible securities for their favorable price characteristics
and total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P), are described as "speculative" by both Moody's and S&P. Investment in
lower-rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. The market for these securities
is relatively new, and many of the outstanding high yield securities have not
endured a major business recession. A long-term track record on default rates,
such as that for investment grade corporate bonds, does not exist for this
market. Analysis of the creditworthiness of issuers of debt securities that are
high yield may be more complex than for issuers of higher quality debt
securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of high yield securities have been found to be less
sensitive to interest-rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Portfolio
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Sub-advisor seeks to minimize the risks of investing in all securities
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions. For a discussion of the
risks involved in lower-rated debt securities, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio would
participate on such committees only when the Adviser believed that such
participation was necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related Securities. The Portfolio may invest in
mortgage-backed securities. Mortgage-related securities are interests in pools
of residential or commercial mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (see
"Mortgage Pass-Through Securities"). The Portfolio may also invest in debt
securities which are secured with collateral consisting of mortgage-related
securities (see "Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Fixed-Income
Portfolio may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Adviser determines that the securities
meet the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. No Portfolio will purchase mortgage-related
securities or any other assets which in the Adviser's opinion are illiquid if,
as a result, more than 15% of the value of the Portfolio's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Portfolio'
industry concentration restrictions, set forth in this Statement under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities, the Portfolio takes the position that
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by the Portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults. For an additional discussion of
mortgage-backed securities and certain risks involved therein, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the U.S. Government or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, homebuilders, mortgage banks, commercial banks, investment
banks and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities maybe offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in corporate debt
securities of foreign issuers (including preferred or preference stock), certain
foreign bank obligations (see "Bank Obligations") and U.S. dollar- or foreign
currency-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. The Portfolio will concentrate
its foreign investments in securities of issuers based in developed countries.
The Portfolio may invest up to 5% of its assets in securities of issuers based
in emerging market countries. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of certain risks involved in
foreign investments, in general, and the special risks of investing in
developing countries, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see "Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Trust's custodian of cash or other
liquid assets and are marked to market daily. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in a number of countries, including in Argentina, Bolivia,
Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,
Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazil
has concluded a Brady-like plan. It is expected that other countries will
undertake a Brady Plan in the future, including Panama and Peru.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolio invests
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System, are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess of $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (I) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Trust's limitation on concentration of no more than 25% of its assets in the
securities of issuers in a particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or because the
accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable to
United States banks. Foreign banks are not generally subject to examination by
any United States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part
of their overall portfolio management strategies involving the use of derivative
instruments and to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline.
When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time and the Portfolio replaces the borrowed security,
the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. The successful use of short
selling may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will
provide collateral to the broker-dealer and (except in the case of short sales
"against the box") will maintain additional asset coverage in the form of cash
or other liquid assets in a segregated account. The Portfolio does not intend to
enter into short sales (other than those "against the box") if immediately after
such sale the aggregate of the value of all collateral plus the amount in such
segregated account exceeds one-third of the value of the Portfolio's net assets.
This percentage may be varied by action of the Trust's Board of Trustees. A
short sale is "against the box" to the extent that the Portfolio
contemporaneously owns, or has the right to obtain at no added cost, securities
identical to those sold short. The Portfolio will engage in short selling to the
extent permitted by the 1940 Act and rules and interpretations thereunder.
Derivative Instruments. In pursuing its objective, the Portfolio may,
as described in the Prospectus, purchase and sell (write) both put options and
call options on securities, securities indexes, and foreign currencies, and
enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging purposes. The Portfolio also may purchase and sell foreign currency
options for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. The
Portfolio also may enter into swap agreements with respect to foreign
currencies, interest rates and indexes of securities. If other types of
financial instruments, including other types of options, futures contracts, or
futures options are traded in the future, the Portfolio may also use those
instruments, provided that the Trust's Board of Trustees determines that their
use is consistent with the Portfolio's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (I) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for an option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts, as specified in
the Trust's Prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect of expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, the Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolio intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total net assets. A call option is "in-the-money" if the value of
the futures contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price exceeds the value of
the futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash or other liquid assets
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Portfolio may "cover" its position by purchasing a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Portfolio may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Portfolio to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash or other
liquid assets that equal the purchase price of the futures contract, less any
margin on deposit. Alternatively, the Portfolio may cover the position either by
entering into a short position in the same futures contract, or by owning a
separate put option permitting it to sell the same futures contract so long as
the strike price of the purchased put option is the same or higher than the
strike price of the put option sold by the Portfolio. For a discussion of the
risks involved in futures contracts and related options, see the Trust's
Prospectus and this Statement under "Certain Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). The Portfolio's obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
other liquid assets to avoid any potential leveraging of the Portfolio's
portfolio. The Portfolio will not enter into a swap agreement with any single
party if the net amount owed or to be received under existing contracts with
that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterpart. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the 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.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which includes the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Structured Notes. Structured notes are derivative debt securities, the
interest rate or principal of which is determined by an unrelated indicator.
Indexed securities include structured notes as well as securities other than
debt securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent the Portfolio invests in these
securities, however, the Sub-advisor analyzes these securities in its overall
assessment of the effective duration of the Portfolio's portfolio in an effort
to monitor the Portfolio's interest rate risk.
Foreign Currency Exchange Related Securities. The Portfolio may also
invest in foreign currency warrants, principal exchange rate linked securities
and performance indexed paper. For a discussion of these, see this Statement
under "Certain Risk Factors and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed-income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the PIMCO Limited Maturity Bond
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of the assets of the Portfolio (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include securities subject to legal or contractual
restrictions on resale (which may include private placements), repurchase
agreements maturing in more than seven days, certain options traded over the
counter that a Portfolio has purchased, securities being used to cover such
options a Portfolio has written, securities for which market quotations are not
readily available, or other securities which legally or in the Sub-advisor's
opinion may be deemed illiquid.
2. Invest more than 5% of the assets of the Portfolio (taken at market
value at the time of investment) in any combination of interest only, principal
only, or inverse floating rate securities.
The Staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Portfolio has adopted an
investment policy pursuant to which the Portfolio will not purchase or sell OTC
options if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Portfolio, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Portfolio and margin deposits on the Portfolio's existing
OTC options on futures contracts exceeds 15% of the total assets of the
Portfolio, taken at market value, together with all other assets of the
Portfolio which are illiquid or are otherwise not readily marketable. However,
if an OTC option is sold by the Portfolio to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Portfolio has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Portfolio will treat as
illiquid such amount of the underlying securities equal to the repurchase price
less the amount by which the option is "in-the-money" (i.e., current market
value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money."
Berger Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is
long-term capital appreciation. The Portfolio seeks to achieve this objective by
investing primarily in common stocks of established companies which the
Sub-advisor believes offer favorable growth prospects. Current income is not an
investment objective of the Portfolio, and any income produced will be a
by-product of the effort to achieve the Portfolio's objective.
Investment Policies:
Index Options. An option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index on which the option is based is less than (in the case of a put)
or a greater than (in the case of a call) the exercise price of the options.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The writer of the option is obligated, in
return for the purchase price (the "premium") paid to him, to make delivery of
this amount. Options are traded on a number of different indices.
Hedging. The Portfolio will purchase put and call options on stock
indices for the purpose of hedging and not for speculation. Hedging may be
employed to cushion the Portfolio against possible declines in the market value
of its securities, or to establish a position in an equity equivalent as a
temporary substitute for the purchase of individual stocks. To hedge a Portfolio
against a decline in value, the Portfolio may buy a put on a stock index. To
protect the Portfolio against an increase in the price of equities at a time
when the Portfolio has a substantial cash equivalent position, the Portfolio may
buy a call on a stock index pending investment in equities.
When the Sub-advisor believes the trend of stock prices may be
downward, particularly over a short period of time, the Portfolio may hedge
through the purchase of a put on a stock index to cushion the anticipated
decline in value of the Portfolio's holdings. This is an alternative to the sale
and possible subsequent repurchase of stocks, which might involve significant
transaction costs. Conversely, the purchase of a call option on a stock index
may allow the Portfolio to quickly obtain exposure to common stock equivalents
in a rising market, thus permitting the Portfolio to purchase stocks gradually
over the option period in a manner designed to minimize adverse price movements,
and with more thorough evaluation of investment alternatives. The purpose of
purchasing put and call options on stock indices is therefore not to generate
gains, but to hedge. Successful hedging activities are not designed to produce a
net gain to a Portfolio. Any gain in the price of a put option is likely to be
offset by lower prices of stocks owned by the Portfolio and any gain in the
price of a call option is likely to be offset by the higher prices the Portfolio
must pay in rising markets as it increases its holdings of common stocks.
Restricted Securities. The Portfolio may purchase securities that are
subject to legal or contractual restrictions on resale ("restricted
securities"), including securities that may be purchased from or sold to certain
institutional investors under Rule 144A under the Securities Act of 1933. The
Sub-advisor, under the supervision of the Board of Trustees, will consider
whether securities purchased under Rule 144A are illiquid and thus subject to
the Portfolio's restrictions on investing no more than 15% of its net assets in
illiquid securities. In making this determination, the Sub-advisor will consider
the trading markets for each such security taking into account the unregistered
nature of a Rule 144A security. Specifically, the Sub-advisor will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wanting to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of the transfer).
Restricted securities and securities that are not readily marketable may sell at
a discount from the price they would bring if freely marketable. For a
discussion of illiquid and restricted securities and certain risks involved
therein, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements
through which an investor (such as the Portfolio) purchases a security (known as
the "underlying security") from a well-established securities dealer or a bank
which is a member of the Federal Reserve System. Any such dealer or bank will be
on Sub-advisor's approved list and have a credit rating with respect to its
short-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by Sub-advisor. At that time,
the bank or securities dealer agrees to repurchase the underlying security at
the same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be considered illiquid. The
Portfolio will only enter into repurchase agreements where (i) the underlying
securities are of the type (excluding maturity limitations) which the
Portfolio's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be at
all times equal to or exceed the value of the repurchase agreement, and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book-entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Portfolio could experience both delays in liquidating
the underlying securities and losses, including: (a) possible decline in the
value of the underlying security during the period while the Portfolio seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its rights.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Berger Capital Growth Portfolio.
These limitations are not "fundamental" restrictions and may be changed by the
Trustees without shareholder approval:
1. The Portfolio may purchase put and call options on stock indexes for
the purpose of hedging, but no more than 1% of the Portfolio's total net assets
at the time of purchase of such an option may be invested in put and call
options;
2. The Portfolio may not purchase or sell any interest in an oil, gas
or mineral development or exploration program, including investments in oil, gas
or mineral leases;
3. The Portfolio does not currently intend to purchase any security,
including any repurchase agreement maturing in more than seven days, which is
not readily marketable, if more than 15% of the net assets of the Portfolio
taken at market value at the time of purchase would be invested in such
securities.
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
Options. The Portfolio may purchase and sell put and call options on its
securities to enhance performance and to protect against changes in market
prices.
Covered Call Options. The Portfolio may write covered call
options on its securities to realize a greater current return through the
receipt of premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a decline in
the price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, the Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
The Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Covered Put Options. The Portfolio may write covered put
options in order to enhance its current return. Such options transactions may
also be used as a limited form of hedging against an increase in the price of
securities that the Portfolio plans to purchase. A put option gives the holder
the right to sell, and obligates the writer to buy, a security at the exercise
price at any time before the expiration date. A put option is "covered" if the
writer segregates cash and high-grade short-term debt obligations or other
permissible collateral equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
The Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing Put and Call Options. The Portfolio may also
purchase put options to protect portfolio holdings against a decline in market
value. This protection lasts for the life of the put option because the
Portfolio, as a holder of the option, may sell the underlying security at the
exercise price regardless of any decline in its market price. In order for a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs that the Portfolio must pay. These costs will reduce any
profit the Portfolio might have realized had it sold the underlying security
instead of buying the put option.
The Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
The Portfolio may also purchase put and call options to attempt to
enhance its current return.
Options on Foreign Securities. The Portfolio may purchase and
sell options on foreign securities if the Sub-advisor believes that the
investment characteristics of such options, including the risks of investing in
such options, are consistent with the Portfolio's investment objectives. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
Risks Associated with Options. See this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a
description of certain risks involved in options transactions.
Special Expiration Price Options. The Portfolio may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Portfolio in effect
may create a custom index relating to a particular industry or sector that the
Sub-advisor believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed by a
broker-dealer, agrees to purchase (or sell) a specified number of shares of a
particular stock at a specified price and further agrees to cancel the option at
a specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value of
the underlying security increases (or decreases) by a prenegotiated amount, the
special expiration price option is canceled and becomes worthless. A portion of
the dividends during the term of the option are applied to reduce the exercise
price if the options are exercised. Brokerage commissions and other transaction
costs will reduce the Portfolio's profits if the special expiration price
options are exercised. The Portfolio will not purchase special expiration price
options with respect to more than 25% of the value of its net assets.
LEAPs and BOUNDs. The Portfolio may purchase certain long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount. The
Portfolio will not purchase these options with respect to more than 25% of the
value of its net assets.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
BOUNDs are long-term options which are expected to have the same
economic characteristics as covered call options, with the added benefits that
BOUNDs can be traded in a single transaction and are not subject to early
exercise. Covered call writing is a strategy by which an investor sells a call
option while simultaneously owning the number of shares of the stock underlying
the call. BOUND holders are able to participate in a stock's price appreciation
up to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at expiration
the underlying stock closes above the strike price, the BOUND holder will
receive a payment equal to a multiple of the BOUND's strike price for each BOUND
held. The terms of a BOUND are not adjusted because of cash distributions to the
shareholders of the underlying security. BOUNDs are subject to the position
limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that
of the corresponding LEAPs. For example, if at expiration the underlying stock
closes at or below the strike price, the LEAP will expire worthless, and the
holder of a corresponding BOUND will receive a specified number of shares of
stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a specified
number of shares of the underlying stock from the LEAP writer upon payment of
the strike price, and the holder of a BOUND on such stock is entitled to the
cash equivalent of a multiple of the strike price from the writer of the BOUND.
An investor holding both a LEAP and a corresponding BOUND, where the underlying
stock closes above the strike price at expiration, would be entitled to receive
a multiple of the strike price from the writer of the BOUND and, upon exercise
of the LEAP, would be obligated to pay the same amount to receive shares of the
underlying stock. LEAPs are American-style options (exercisable at any time
prior to expiration), whereas BOUNDs are European-style options (exercisable
only on the expiration date).
Futures Contracts.
Index Futures Contracts and Options. The Portfolio may buy and
sell futures contracts and related options for hedging purposes or to attempt to
increase investment return. The Portfolio currently expects that it will only
purchase and sell stock index futures contracts and related options. A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Portfolio enters into a futures contract to
buy 100 units of the S&P 100 Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into
a futures contract to sell 100 units of the stock index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $182 on that future
date, the Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to
any securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge its investments successfully using futures contracts
and related options, the Portfolio must invest in futures contracts with respect
to indexes or sub-indexes the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Portfolio's
securities.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, the Portfolio may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount." This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier."
The Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options plus
transactions costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When the Portfolio purchases or sells a
futures contract, it is required to deposit with its custodian an amount of
cash, U.S. Treasury bills, or other permissible collateral equal to a small
percentage of the amount of the futures contract. This amount is known as
"initial margin." The nature of initial margin is different from that of margin
in security transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Portfolio upon termination of the
contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Portfolio sells a futures contract and the price of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the value of the index underlying the futures contract. Conversely, if the price
of the underlying index falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
See this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods" for a description of certain risks involved in
transactions in futures contracts and related options.
Indexed Securities. The Portfolio may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers which the
Sub-advisor deems to be creditworthy, pursuant to guidelines established by the
Trust's Board of Trustees, and only with respect to obligations of the U.S.
government or its agencies or instrumentalities or other high-quality,
short-term debt obligations. Repurchase agreements may also be viewed as loans
made by the Portfolio which are collateralized by the securities subject to
repurchase. The Sub-advisor will monitor such transactions to ensure that the
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. For a
discussion of repurchase agreements and the risks involved therein, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Portfolio Securities Lending. The Portfolio may lend its securities,
provided: (1) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash, or cash equivalents adjusted daily to have market
value at least equal to the current market value of the securities loaned; (2)
the Portfolio may at any time call the loan and regain the securities loaned;
(3) the Portfolio will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third (or such other limit as the Trust's Board of Trustees
may establish) of the total assets of the Portfolio. In addition, it is
anticipated that the Portfolio may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan.
Before the Portfolio enters into a loan, the Sub-advisor considers all
relevant facts and circumstances, including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Portfolio if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Portfolio will not
lend portfolio securities to borrowers affiliated with the Portfolio.
Short Sales. The Portfolio may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed by purchasing it at the market price
at or prior to the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, the Portfolio is required to repay the lender any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker (or by the Portfolio's custodian in a special custody
account), to the extent necessary to meet margin requirements, until the short
position is closed out. The Portfolio also will incur transaction costs in
effecting short sales.
The Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Portfolio replaces the borrowed security. The Portfolio will
realize a gain if the security declines in price between those dates. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of the premium, dividends, interest or expenses the Portfolio may be
required to pay in connection with a short sale.
Foreign Investments. The Portfolio may invest in foreign securities,
securities denominated in or indexed to foreign currencies, and certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks. For a discussion of the risks involved in foreign
currency fluctuations and investing in foreign securities, in general, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The considerations associated with foreign investments generally are
intensified for investments in developing countries. For a discussion of the
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in currency
exchange transactions to protect against uncertainty in the level of future
foreign currency exchange rates and to increase current return. The Portfolio
may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Portfolio enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. The Portfolio will engage in transaction hedging when
it desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging, the Portfolio will
attempt to protect against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold or
on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (i.e.,
cash) basis at the prevailing spot rate in connection with transaction hedging.
The Portfolio may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and purchase and sell foreign
currency futures contracts.
For transaction hedging purposes, the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Portfolio the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. The Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which the Portfolio expects to purchase. In connection
with position hedging, the Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities of the Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
The Portfolio may also seek to increase its current return by
purchasing and selling foreign currency on a spot basis, by purchasing and
selling options on foreign currencies and on foreign currency futures contracts,
and by purchasing and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Sub-advisor believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Portfolio
may invest in zero-coupon securities. Zero-coupon securities allow an issuer to
avoid the need to generate cash to meet current interest payments. For a
discussion of zero-coupon debt securities and the risks involved therein, see
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase pay-in-kind securities. Pay-in-kind
securities pay all or a portion of their interest or dividends in the form of
additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Robertson Stephens Value +
Growth Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Portfolio's net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b), and (c) above;
2. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions;
3. Invest in securities of other registered investment companies,
except in compliance with the 1940 Act;
4. Invest in real estate limited partnerships;
5. Acquire more than 10% of the voting securities of any issuer;
6. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although it may purchase and sell securities which
are secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.);
7. Make investments for the purpose of exercising control or management;
8. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs.
In addition, the Portfolio will only sell short securities that are
traded on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
Robertson Stephens Contrarian Portfolio:
Investment Objective: The investment objective of the Robertson Stephens
Contrarian Portfolio is maximum long-term growth.
Investment Policies:
Lower-Rated Debt Securities. The Portfolio may purchase lower-rated
debt securities, sometimes referred to as "junk bonds" (those rated BB or lower
by Standard & Poor's ("S&P") or Ba or lower by Moody's Investor Service, Inc.
("Moody's"). See APPENDIX A for a description of these ratings. The Portfolio
does not intend, under current circumstances, to purchase such securities if, as
a result, more than 35% of the Portfolio's assets would be invested in
securities rated below BB or Ba.
The lower ratings of certain securities held by the Portfolio reflect a
greater possibility that adverse changes in the financial condition of the
issuer, or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by the Portfolio more volatile and could limit the Portfolio's
ability to sell its securities at prices approximating the values the Portfolio
had placed on such securities. In the absence of a liquid trading market for
securities held by it, the Portfolio may be unable at times to establish the
fair market value of such securities. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or of the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates generally will result in an increase in the value of the
Portfolio's fixed-income securities. Conversely, during periods of rising
interest rates, the value of the Portfolio's fixed-income securities generally
will decline. In addition, the values of such securities are also affected by
changes in general economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer to
make payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities generally will not
affect cash income derived from such securities, but will affect the Portfolio's
net asset value. A Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Certain of the lower-rated securities in which the Portfolio may invest
are issued to raise funds in connection with the acquisition of a company, in
so-called "leveraged buy-out" transactions. The highly leveraged capital
structure of such issuers may make them especially vulnerable to adverse changes
in economic conditions.
For an additional discussion of lower-rated debt securities and their
risks, see the Trust's Prospectus and this SAI under "Certain Risks Factors and
Investment Methods."
Options. The Portfolio may purchase and sell put and call options on
their portfolio securities to enhance investment performance and to protect
against changes in market prices. There is no assurance that the Portfolio's use
of put and call options will achieve its desired objective, and the Portfolio's
use of options may result in losses to the Portfolio.
Writing Covered Call Options. A Portfolio may write covered
call options on its securities to realize a greater current return through the
receipt of premiums than it would realize on its securities alone. Such option
transactions may also be used as a limited form of hedging against a decline in
the price of securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call
option, the Portfolio gives up some or all of the opportunity to profit from an
increase in the market price of the securities covering the call option during
the life of the option. The Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
A Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. A Portfolio may enter
into closing purchase transactions in order to free itself to sell the
underlying security or to write another call on the security, realize a profit
on a previously written call option, or protect a security from being called in
an unexpected market rise. Any profits from a closing purchase transaction may
be offset by a decline in the value of the underlying security. Conversely,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from a closing purchase transaction is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Portfolio.
Writing Covered Put Options. A Portfolio may write covered put
options in order to enhance its current return. Such options transactions may
also be used as a limited form of hedging against an increase in the price of
securities that the Portfolio plans to purchase. A put option gives the holder
the right to sell, and obligates the writer to buy, a security at the exercise
price at any time before the expiration date. A put option is "covered" if the
writer segregates cash or other liquid assets equal to the price to be paid if
the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio assumes the
risk that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
A Portfolio may terminate a put option that it has written before it
expires by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
Purchasing Put and Call Options. A Portfolio may also purchase
put options to protect portfolio holdings against a decline in market value.
This protection lasts for the life of the put option because the Portfolio, as a
holder of the option, may sell the underlying security at the exercise price
regardless of any decline in its market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction costs
that the Portfolio must pay. These costs will reduce any profit the Portfolio
might have realized had it sold the underlying security instead of buying the
put option.
A Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
A Portfolio may also purchase put and call options to attempt to
enhance its current return.
Options on Foreign Securities. A Portfolio may purchase and
sell options on foreign securities if the Sub-advisor believes that the
investment characteristics of such options, including the risks of investing in
such options, are consistent with the Portfolio's investment objective. It is
expected that risks related to such options will not differ materially from
risks related to options on U.S. securities. However, position limits and other
rules of foreign exchanges may differ from those in the U.S. In addition,
options markets in some countries, many of which are relatively new, may be less
liquid than comparable markets in the U.S.
For an additional discussion of options transactions and the risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Special Expiration Price Options. The Portfolio may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Portfolio in effect
may create a custom index relating to a particular industry or sector that the
Sub-advisor believes will increase or decrease in value generally as a group. In
exchange for a premium, the counterparty, whose performance is guaranteed by a
broker-dealer, agrees to purchase (or sell) a specified number of shares of a
particular stock at a specified price and further agrees to cancel the option at
a specified price that decreases straight line over the term of the option.
Thus, the value of the special expiration price option is comprised of the
market value of the applicable underlying security relative to the option
exercise price and the value of the remaining premium. However, if the value of
the underlying security increases (or decreases) by a prenegotiated amount, the
special expiration price option is canceled and becomes worthless. A portion of
the dividends during the term of the option are applied to reduce the exercise
price if the options are exercised. Brokerage commissions and other transaction
costs will reduce the Portfolio's profits if the special expiration price
options are exercised. The Portfolio will not purchase special expiration price
options with respect to more than 25% of the value of its net assets.
Futures Contracts.
Index Futures Contracts and Options. The Portfolio may buy and
sell stock index futures contracts and related options for hedging purposes or
to attempt to increase investment return. A stock index futures contract is a
contract to buy or sell units of a stock index at a specified future date at a
price agreed upon when the contract is made. A unit is the current value of the
stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Portfolio enters into a futures contract to
buy 100 units of the S&P 100 Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $184 on that future date, the
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio enters into
a futures contract to sell 100 units of the stock index at a specified future
date at a contract price of $180 and the S&P 100 Index is at $182 on that future
date, the Portfolio will lose $200 (100 units x loss of $2).
In order to hedge its investments successfully using futures contracts
and related options, the Portfolio must invest in futures contracts with respect
to indexes or sub-indexes the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Portfolio's
securities.
Options on index futures contracts give the purchaser the right, in
return for the premium paid, to assume a position in an index futures contract
(a long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the holder would assume the underlying futures
position and would receive a variation margin payment of cash or securities
approximating the increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on
index futures contracts, the Portfolio may purchase and sell call and put
options on the underlying indexes themselves to the extent that such options are
traded on national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount." This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier."
The Portfolio may purchase or sell options on stock indices in order to
close out its outstanding positions in options on stock indices which it has
purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on an index involves less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options plus
transaction costs. The writing of a put or call option on an index involves
risks similar to those risks relating to the purchase or sale of index futures
contracts.
Margin Payments. When the Portfolio purchases or sells a
futures contract, it is required to deposit with its custodian an amount of
cash, U.S. Treasury bills, or other permissible collateral equal to a small
percentage of the amount of the futures contract. This amount is known as
"initial margin." The nature of initial margin is different from that of margin
in security transactions in that it does not involve borrowing money to finance
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit that is returned to the Portfolio upon termination of the
contract, assuming the Portfolio satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Portfolio sells a futures contract and the price of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio then pays the broker a variation margin payment
equal to the difference between the delivery price of the futures contract and
the value of the index underlying the futures contract. Conversely, if the price
of the underlying index falls below the delivery price of the contract, the
Portfolio's futures position increases in value. The broker then must make a
variation margin payment equal to the difference between the delivery price of
the futures contract and the value of the index underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
For an additional discussion of futures contracts and related options
and the risks involved therein, see the Trust's Prospectus and this Statement
under "Certain Risk Factors and Investment Methods."
Indexed Securities. The Portfolio may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals, or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. A repurchase agreement is a contract under which the Portfolio
acquires a security for a relatively short period (usually not more than one
week) subject to the obligation of the seller to repurchase and the Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). Under guidelines adopted by the Board of Trustees of the
Trust, the Portfolio may enter into repurchase agreements only with banks and
securities dealers meeting certain criteria as to creditworthiness and financial
condition. It is the Sub-advisor's present intention that the Portfolio enter
into repurchase agreements only with respect to obligations of the U.S.
Government or its agencies or instrumentalities or other high-quality,
short-term debt obligations. Repurchase agreements may be viewed as loans made
by the Portfolio which are collateralized by the securities subject to
repurchase. The Sub-advisor will monitor such transactions to ensure that the
value of the underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. For an
additional discussion of repurchase agreements and the risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Leverage. Leveraging the Portfolio creates an opportunity for increased
net income but, at the same time, creates special risks. For example, leveraging
may exaggerate changes in the net asset value of the Portfolio's shares and in
the yield on the Portfolio's portfolio. Although the principal of such
borrowings will be fixed, the Portfolio's assets may change in value during the
time the borrowing is outstanding. Since any decline in value of the Portfolio's
investments will be borne entirely by the Portfolio's shareholders (and not by
those persons providing the leverage to the Portfolio), the effect of leverage
in a declining market would be a greater decrease in net asset value than if the
Portfolio were not so leveraged. Leveraging will create interest expenses for
the Portfolio, which can exceed the investment return from the borrowed funds.
Therefore, if the investment return from the assets retained with borrowed funds
is not sufficient to cover the cost of leveraging, the investment return of the
Portfolio will be less than if leveraging were not used.
Reverse Repurchase Agreements. In connection with its leveraging
activities, the Portfolio may enter into reverse repurchase agreements, in which
the Portfolio sells securities and agrees to repurchase them at a mutually
agreed date and price. A reverse repurchase agreement may be viewed as a
borrowing by the Portfolio, secured by the security which is the subject of the
agreement. In addition to the general risks involved in leveraging, reverse
repurchase agreements involve the risk that, in the event of the bankruptcy or
insolvency of the Portfolio's counterparty, the Portfolio would be unable to
recover the security which is the subject of the agreement, that the amount of
cash or other property transferred by the counterparty to the Portfolio under
the agreement prior to such insolvency or bankruptcy is less than the value of
the security subject to the agreement, or that the Portfolio may be delayed or
prevented, due to such insolvency or bankruptcy, from using such cash or
property or may be required to return it to the counterparty or its trustee or
receiver.
Short Sales. The Portfolio may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Portfolio sells a security it does not own, in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed by purchasing it at the market price
at or prior to the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, the Portfolio is required to repay the lender any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The net proceeds of the short sale will
be retained by the broker (or by the Portfolio's custodian in a special custody
account), to the extent necessary to meet margin requirements, until the short
position is closed out. A Portfolio also will incur transaction costs in
effecting short sales.
A Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Portfolio replaces the borrowed security. A Portfolio will realize
a gain if the security declines in price between those dates. The amount of any
income or gain will be decreased, and the amount of any loss increased, by the
amount of the premium, dividends, interest or expenses the Portfolio may be
required to pay in connection with a short sale.
Foreign Investments. Investments in foreign securities may involve
considerations different from investments in domestic securities. For an
additional discussion of the risks involved in investing in foreign securities,
see the Trust's Prospectus and this SAI under "Certain Risk Factors and
Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in currency
exchange transactions to protect against uncertainty in the level of future
foreign currency exchange rates and to increase current return. The Portfolio
may engage in both "transaction hedging" and "position hedging."
When it engages in transaction hedging, the Portfolio enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. The Portfolio will engage in transaction hedging when
it desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging, the Portfolio will
attempt to protect against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold or
on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (i.e.,
cash) basis at the prevailing spot rate in connection with transaction hedging.
A Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes, the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Portfolio the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. A Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity are satisfactory and the
participants are responsible parties likely to meet their contractual
obligations.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which the Portfolio expects to purchase. In connection
with position hedging, the Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Portfolio may also purchase
or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the
Portfolio's portfolio securities at the expiration or maturity of a forward or
futures contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities of the Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio may write covered call
options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
the value of such currency.
A Portfolio may also seek to increase its current return by purchasing
and selling foreign currency on a spot basis, by purchasing and selling options
on foreign currencies and on foreign currency futures contracts, and by
purchasing and selling foreign currency forward contracts.
Currency Forward and Futures Contracts. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract as agreed by the parties, at a price set at the time of the contract.
In the case of a cancelable forward contract, the holder has the unilateral
right to cancel the contract at maturity by paying a specified fee. The
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may
either accept or make delivery of the currency specified in the contract, or at
or prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may
be closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
Foreign Currency Options. Options on foreign currencies operate
similarly to options on securities, and are traded primarily in the
over-the-counter market, although options on foreign currencies have recently
been listed on several exchanges. Such options will be purchased or written only
when the Sub-advisor believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
Precious Metals. The value of the investments of the Portfolio may be
affected by changes in the price of gold and other precious metals. Gold has
been subject to substantial price fluctuations over short periods of time and
may be affected by unpredictable international monetary and other governmental
policies, such as currency devaluations or revaluations; economic and social
conditions within a country; trade imbalances; or trade or currency restrictions
between countries. Because much of the world's known precious metal reserves are
located in foreign countries, political and social conditions in these countries
may pose special risks to investments in precious metals.
In addition to its investments in securities, the Portfolio may, as
described from time to time in the Prospectus, invest a portion of its assets in
precious metals, such as gold, silver, platinum, and palladium, and precious
metal options and futures. The prices of precious metals are affected by broad
economic and political conditions, but are less subject to local and
company-specific factors than securities of individual companies. As a result,
precious metals and precious metal options and futures may be more or less
volatile in price than securities of companies engaged in precious
metals-related businesses. Precious metals may be purchased in any form,
including bullion and coins, provided that the Sub-advisor intends to purchase
only those forms of precious metals that are readily marketable and that can be
stored in accordance with custody regulations applicable to mutual funds. A
Portfolio may incur higher custody and transaction costs for precious metals
than for securities. Also, precious metals investments do not pay income.
Under current federal income tax law, gains from selling precious
metals (and certain other assets) may not exceed 10% of the Portfolio's annual
gross income. This tax requirement could force the Portfolio to hold or sell
precious metals, securities, options, or futures when it would not otherwise do
so.
Zero-Coupon Debt Securities and Pay-In-Kind Securities. The Portfolio
may invest in zero-coupon securities. Zero-coupon securities are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Zero-coupon securities allow an issuer to avoid the need to generate
cash to meet current interest payments. For a discussion of zero-coupon
securities and the risks involved therein, see this Statement under "Certain
Risk Factors and Investment Methods."
Even though zero-coupon securities do not pay current interest in cash,
the Portfolio is nonetheless required to accrue interest income on them and to
distribute the amount of that interest at least annually to shareholders. Thus,
the Portfolio could be required at times to liquidate other investments in order
to satisfy its distribution requirement.
A Portfolio also may purchase pay-in-kind securities. Pay-in-kind
securities pay all or a portion of their interest or dividends in the form of
additional securities.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the Robertson Stephens Contrarian
Portfolio. This limitation is not a "fundamental' restriction and may be changed
by the Trustees without shareholder approval.
The Portfolio will not mortgage, hypothecate, or pledge any of its
assets as security for any of its obligations, except as required for otherwise
permissible borrowings (including reverse repurchase agreements), short sales,
financial options and other hedging activities.
Twentieth Century International Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. This is a fundamental objective of the Portfolio.
Investment Policies:
In general, within the restrictions outlined herein, the Portfolio has
broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the Sub-advisor's policy to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held, subject to the investment
restrictions described below. It is the Sub-advisor's intention that the
Portfolio will generally consist of common stocks. However, the Sub-advisor may
invest the assets of the Portfolio in varying amounts in other instruments and
in senior securities, such as bonds, debentures, preferred stocks and
convertible issues, when such a course is deemed appropriate in order to attempt
to attain its financial objective.
Forward Currency Exchange Contracts. The Portfolio conducts 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 currency exchange contracts to purchase or sell foreign currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade
for the purchase or sale of a security denominated in a foreign currency, it may
be desirable to establish (lock in) the U.S. dollar cost or proceeds. By
entering into forward contracts in U.S. dollars for the purchase or sale of a
foreign currency involved in an underlying security transaction, the Portfolio
will be able to protect itself against a possible loss between trade and
settlement dates resulting from the adverse change in the relationship between
the U.S. dollar and the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Portfolio could enter into a forward contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Portfolio will place cash or high-grade
liquid securities in a separate account with its custodian in an amount
sufficient to cover its obligation under the contract entered into under the
second circumstance. If the value of the securities placed in the separate
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account equals the amount of the
Portfolio's commitments with respect to such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. Normally, consideration of the prospect for currency
parities will be incorporated into the long-term investment decisions made with
respect to overall diversification strategies. However, the Sub-advisor believes
that it is important to have flexibility to enter into such forward contracts
when it determines that the Portfolio's best interests may be served.
Generally, the Portfolio will not enter into a forward contract with a
term of greater than one year. At the maturity of the forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Portfolio to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the forward contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency the Portfolio is obligated to deliver. For an
additional discussion of forward currency exchange contracts and the risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Portfolio engages in a short sale the collateral account will be
maintained by the Portfolio's custodian. While the short sale is open the
Portfolio will maintain in a segregated custodial account an amount of
securities convertible into or exchangeable for such equivalent securities at no
additional cost. These securities would constitute the Portfolio's long
position.
The Portfolio may make a short sale, as described above, when it wants
to sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Portfolio's long position should be reduced by a gain in the short position.
The extent to which such gains or losses are reduced would depend upon the
amount of the security sold short relative to the amount the Portfolio owns.
There will be certain additional transaction costs associated with short sales,
but the Portfolio will endeavor to offset these costs with income from the
investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the
Portfolio, even if the same security has only recently been sold. The Portfolio
will sell a given security, no matter for how long or for how short a period it
has been held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that such security is not fulfilling its purpose, either
because, among other things, it did not live up to the Sub-advisor's
expectations, or because it may be replaced with another security holding
greater promise, or because it has reached its optimum potential, or because of
a change in the circumstances of a particular company or industry or in general
economic conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the Portfolio
may decrease or eliminate entirely its equity position and increase its cash
position, and when a rise in price levels is anticipated, the Portfolio may
increase its equity position and decrease its cash position. However, it should
be expected that the Portfolio will, under most circumstances, be essentially
fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates
should not be considered as a representation of the rates that will be attained
in the future.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Twentieth Century International
Growth Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns or by virtue
of its ownership of other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Portfolio
may make margin deposits in connection with the use of any financial instrument
or any transaction in securities permitted under its investment policies;
4. Invest in oil, gas or other mineral leases;
5. Invest for control or for management.
Twentieth Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth and current income. This is a fundamental objective of the
Portfolio.
Investment Policies:
In general, within the restrictions outlined herein, the Sub-advisor
has broad powers with respect to investing funds or holding them uninvested.
Investments are varied according to what is judged advantageous under changing
economic conditions. It will be the policy of the Sub-advisor to retain maximum
flexibility in management without restrictive provisions as to the proportion of
one or another class of securities that may be held subject to the investment
restrictions described below. However, the Sub-advisor may invest the assets of
the Portfolio in varying amounts in other instruments and in senior securities,
such as bonds, debentures, preferred stocks and convertible issues, when such a
course is deemed appropriate in order to attempt to attain its financial
objectives. Senior securities that, in the opinion of the Sub-advisor, are
high-grade issues may also be purchased for defensive purposes.
The above statement of investment policy gives the Sub-advisor
authority to invest in securities other than common stocks and traditional debt
and convertible issues. The Sub-advisor may invest in master limited
partnerships (other than real estate partnerships) and royalty trusts which are
traded on domestic stock exchanges when such investments are deemed appropriate
for the attainment of the Portfolio's investment objectives.
The Sub-advisor will invest approximately 60% of the Portfolio in
common stocks and the balance in fixed income securities. Common stock
investments are described above. The fixed income assets will be invested
primarily in investment grade securities. The Portfolio may invest in securities
of the United States government and its agencies and instrumentalities,
corporate, sovereign government, municipal, mortgage-backed, and other
asset-backed securities. It can be expected that the Sub-advisor will invest
from time to time in bonds and preferred stock convertible into common stock.
Forward Currency Exchange Contracts. The Portfolio conducts 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 foreign currency exchange contracts to purchase or sell foreign
currencies.
The Portfolio expects to use forward contracts under two circumstances:
(1) when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security
when the Portfolio is purchasing or selling a security denominated in a foreign
currency, the Portfolio would be able to enter into a forward contract to do so;
(2) when the Sub-advisor believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, the Portfolio
would be able to enter into a forward contract to sell foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of the
Portfolio's securities either denominated in, or whose value is tied to, such
foreign currency.
As to the first circumstance, when the Portfolio enters into a trade
for the purchase or sale of a security denominated in a foreign currency, it may
be desirable to establish (lock in) the U.S. dollar cost or proceeds. By
entering into forward contracts in U.S. dollars for the purchase or sale of a
foreign currency involved in an underlying security transaction, the Portfolio
will be able to protect itself against a possible loss between trade and
settlement dates resulting from the adverse change in the relationship between
the U.S. dollar at the subject foreign currency.
Under the second circumstance, when the Sub-advisor believes that the
currency of a particular country may suffer a substantial decline relative to
the U.S. dollar, the Portfolio could enter into a foreign contract to sell for a
fixed dollar amount the amount in foreign currencies approximating the value of
some or all of its portfolio securities either denominated in, or whose value is
tied to, such foreign currency. The Portfolio will place cash or high-grade
liquid securities in a separate account with its custodian in an amount
sufficient to cover its obligation under the contract. If the value of the
securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account equals the amount of the Portfolio's commitments with respect to
such contracts.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Portfolio 's best interests may be
served.
Generally, the Portfolio will not enter into a forward contract with a
term of greater than one year. At the maturity of the forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Portfolio to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Portfolio's securities at the expiration of the forward contract.
Accordingly, it may be necessary for the Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency the Portfolio is obligated to deliver.
For an additional discussion of forward currency exchange contracts and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Futures Contracts. As described in the Prospectus, the Portfolio may
enter into futures contracts. Unlike when the Portfolio purchases securities, no
purchase price for the underlying securities is paid by the Portfolio at the
time it purchases a futures contract. When a futures contract is entered into,
both the buyer and seller of the contract are required to deposit with a futures
commission merchant ("FCM") cash or high-grade debt securities in an amount
equal to a percentage of the contract's value, as set by the exchange on which
the contract is traded. This amount is known as "initial margin" and is held by
the Portfolio's custodian for the benefit of the FCM in the event of any default
by the Portfolio in the payment of any future obligations.
The value of a futures contract is adjusted daily to reflect the
fluctuation of the value of the underlying securities. This is a process known
as marking the contract to market. If the value of a party's position declines,
that party is required to make additional "variation margin" payments to the FCM
to settle the change in value. The party that has a gain is generally entitled
to receive all or a portion of this amount.
The Portfolio maintains from time to time a percentage of its assets in
cash or high-grade liquid securities to provide for redemptions or to hold for
future investment in securities consistent with the Portfolio's investment
objectives. The Portfolio may enter into index futures contracts as an efficient
means to expose the Portfolio's cash position to the domestic equity market. The
Sub-advisor believes that the purchase of futures contracts is an efficient
means to effectively be fully invested in equity securities.
The principal risks generally associated with the use of futures
include: (i) the possible absence of a liquid secondary market for any
particular instrument may make it difficult or impossible to close out a
position when desired (liquidity risk); (ii) the risk that the counter party to
the contract may fail to perform its obligations or the risk of bankruptcy of
the FCM holding margin deposits (counter-party risk); (iii) the risk that the
securities to which the futures contract relates may go down in value (market
risk); and (iv) adverse price movements in the underlying securities can result
in losses substantially greater than the value of the Portfolio's investment in
that instrument because only a fraction of a contract's value is required to be
deposited as initial margin (leverage risk); provided, however, that the
Portfolio may not purchase leveraged futures, so there is no leverage risk
involved in the Portfolio's use of futures.
A liquid secondary market is necessary to close out a contract. The
Portfolio may seek to manage liquidity risk by investing in exchange-traded
futures. Exchange-traded futures pose less risk that there will not be a liquid
secondary market than privately negotiated instruments. Through their clearing
corporations, the futures exchanges guarantee the performance of the contracts.
Futures contracts are generally settled within a day from the date they
are closed out, as compared to three days for most types of equity securities.
As a result, futures contracts can provide more liquidity than an investment in
the actual underlying securities. Nevertheless, there is no assurance that a
liquid secondary market will exist for any particular futures contract at any
particular time. Liquidity may also be influenced by an exchange-imposed daily
price fluctuation limit, which halts trading if a contract's price moves up or
down more than the established limit on any given day. On volatile trading days
when the price fluctuation limit is reached, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
secondary market for a futures contract is not liquid because of price
fluctuation limits or otherwise, the Portfolio may not be able to promptly
liquidate unfavorable futures positions and potentially could be required to
continue to hold a futures position until liquidity in the market is
re-established. As a result, the Portfolio's access to other assets held to
cover its futures positions also could be impaired until liquidity in the market
is re-established.
The Portfolio manages counter-party risk by investing in
exchange-traded index futures. In the event of the bankruptcy of the FCM that
holds margin on behalf of the Portfolio, the Portfolio may be entitled to the
return of margin owed to the Portfolio only in proportion to the amount received
by the FCM's other customers. The Sub-advisor will attempt to minimize the risk
by monitoring the creditworthiness of the FCMs with which the Portfolio does
business.
Short Sales. The Portfolio may engage in short sales if, at the time of
the short sale, the Portfolio owns or has the right to acquire an equal amount
of the security being sold short at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. To make delivery to the purchaser, the executing broker borrows the
securities being sold short on behalf of the seller. While the short position is
maintained, the seller collateralizes its obligation to deliver the securities
sold short in an amount equal to the proceeds of the short sale plus an
additional margin amount established by the Board of Governors of the Federal
Reserve. If the Portfolio engages in a short sale, the collateral account will
be maintained by the Portfolio's custodian. While the short sale is open, the
Portfolio will maintain in a segregated custodial account an amount of
securities convertible into, or exchangeable for, such equivalent securities at
no additional cost. These securities would constitute the Portfolio's long
position.
The Portfolio may make a short sale, as described above, when it wants
to sell the security it owns at a current attractive price, but also wishes to
defer recognition of gain or loss for federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code. In such a case, any future losses in
the Portfolio's long position should be reduced by a gain in the short position.
The extent to which such gains or losses are reduced would depend upon the
amount of the security sold short relative to the amount the Portfolio owns.
There will be certain additional transaction costs associated with short sales,
but the Portfolio will endeavor to offset these costs with income from the
investment of the cash proceeds of short sales.
Portfolio Turnover. The Sub-advisor will purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial.
The Sub-advisor intends to purchase a given security whenever the
Sub-advisor believes it will contribute to the stated objective of the
Portfolio, even if the same security has only recently been sold. The Portfolio
will sell a given security, no matter for how long or for how short a period it
has been held, and no matter whether the sale is at a gain or at a loss, if the
Sub-advisor believes that it is not fulfilling its purpose, either because,
among other things, it did not live up to the Sub-advisor's expectations, or
because it may be replaced with another security holding greater promise, or
because it has reached its optimum potential, or because of a change in the
circumstances of a particular company or industry or in general economic
conditions, or because of some combination of such reasons.
When a general decline in security prices is anticipated, the equity
portion of the Portfolio may decrease or eliminate entirely its equity position
and increase its cash position, and when a rise in price levels is anticipated,
it may increase its equity position and decrease its cash position. However, it
should be expected that the Portfolio will, under most circumstances, be
essentially fully invested in equity securities.
Since investment decisions are based on the anticipated contribution of
the security in question to the Portfolio's objectives, the rate of portfolio
turnover is irrelevant when the Sub-advisor believes a change is in order to
achieve those objectives, and the Portfolio's annual portfolio turnover rate
cannot be anticipated and may be comparatively high. Since the Sub-advisor does
not take portfolio turnover rate into account in making investment decisions,
(1) the Sub-advisor has no intention of accomplishing any particular rate of
portfolio turnover, whether high or low, and (2) the portfolio turnover rates in
the past should not be considered as a representation of the rates which will be
attained in the future.
Interest Rate Futures Contracts and Related Options. The Portfolio may
buy and sell interest rate futures contracts relating to debt securities ("debt
futures," i.e., futures relating to debt securities, and "bond index futures,"
i.e., futures relating to indexes on types or groups of bonds) and write and buy
put and call options relating to interest rate futures contracts.
The Portfolio will not purchase or sell futures contracts and options
thereon for speculative purposes but rather only for the purpose of hedging
against changes in the market value of its portfolio securities or changes in
the market value of securities that the Sub-advisor anticipates it may wish to
include in the Portfolio. The Portfolio may sell a future or write a call or
purchase a put on a future if the Sub-advisor anticipates that a general market
or market sector decline may adversely affect the market value of any or all of
the Portfolio's holdings. The Portfolio may buy a future or purchase a call or
sell a put on a future if the Sub-advisor anticipates a significant market
advance in the type of securities it intends to purchase for the Portfolio at a
time when the Portfolio is not invested in debt securities to the extent
permitted by its investment policies. The Portfolio may purchase a future or a
call option thereon as a temporary substitute for the purchase of individual
securities which may then be purchased in an orderly fashion. As securities are
purchased, corresponding futures positions would be terminated by offsetting
sales.
The "sale" of a debt future means the acquisition by the Portfolio of
an obligation to deliver the related debt securities (i.e., those called for by
the contract) at a specified price on a specified date. The "purchase" of a debt
future means the acquisition by the Portfolio of an obligation to acquire the
related debt securities at a specified time on a specified date. The "sale" of a
bond index future means the acquisition by the Portfolio of an obligation to
deliver an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
future and the price at which the future is originally struck. No physical
delivery of the bonds making up the index is expected to be made. The "purchase"
of a bond index future means the acquisition by the Portfolio of an obligation
to take delivery of such an amount of cash.
Unlike when the Portfolio purchases or sells a bond, no price is paid
or received by the Portfolio upon the purchase or sale of the future. Initially,
the Portfolio will be required to deposit an amount of cash or securities equal
to a varying specified percentage of the contract amount. This amount is known
as initial margin. Cash held in the margin account is not income producing.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying debt securities or index
fluctuates, making the future more or less valuable, a process known as mark to
the market. Changes in variation margin are recorded by the Portfolio as
unrealized gains or losses. At any time prior to expiration of the future, the
Portfolio may elect to close the position by taking an opposite position that
will operate to terminate its position in the future. A final determination of
variation margin is then made; additional cash is required to be paid by or
released to the Portfolio and the Portfolio realizes a loss or a gain.
When the Portfolio writes an option on a futures contract it becomes
obligated, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the term of the
option. If the Portfolio has written a call, it becomes obligated to assume a
"long" position in a futures contract, which means that it is required to take
delivery of the underlying securities. If it has written a put, it is obligated
to assume a "short" position in a futures contract, which means that it is
required to deliver the underlying securities. When the Portfolio purchases an
option on a futures contract it acquires a right in return for the premium it
pays to assume a position in a futures contract.
If the Portfolio writes an option on a futures contract it will be
required to deposit initial and variation margin pursuant to requirements
similar to those applicable to futures contracts. Premiums received from the
writing of an option on a future are included in the initial margin deposit. For
options sold, the Portfolio will segregate cash or high-quality debt securities
equal to the value of securities underlying the option unless the option is
otherwise covered. The Portfolio will deposit in a segregated account with its
custodian bank cash or other liquid assets in an amount equal to the fluctuating
market value of long futures contracts it has purchased less any margin
deposited on its long position. It may hold cash or acquire such other assets
for the purpose of making these deposits.
Changes in variation margin are recorded by the Portfolio as unrealized
gains or losses. Initial margin payments will be deposited in the Portfolio's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of a futures contract or an option
thereon, the Portfolio may elect to close the position by taking an opposite
position that will operate to terminate its position in the futures contract or
option. A final determination of variation margin is made at that time;
additional cash is required to be paid by or released to it and it realizes a
loss or gain.
Although futures contracts by their terms call for the actual delivery
or acquisition of the underlying securities or cash, in most cases the
contractual obligation is so fulfilled without having to make or take delivery.
The Sub-advisor does not intend to make or take delivery of the underlying
obligation. All transactions in futures contracts and options thereon are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the instruments are traded. Although the Sub-advisor intends to buy and
sell futures contracts only on exchanges where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular future at any particular time. In such event, it may
not be possible to close a futures contract position.
Similar market liquidity risks occur with respect to options.
The use of futures contracts and options thereon to attempt to protect
against the market risk of a decline in the value of portfolio securities is
referred to as having a "short futures position." The use of futures contracts
and options thereon to attempt to protect against the market risk that the
Portfolio might not be fully invested at a time when the value of the securities
in which it invests is increasing is referred to as having a "long futures
position." The Portfolio must operate within certain restrictions as to long and
short positions in futures contracts and options thereon under a rule (CFTC
Rule) adopted by the Commodity Futures Trading Commission (CFTC) under the
Commodity Exchange Act (CEA) to be eligible for the exclusion provided by the
CFTC Rule from registration by the Portfolio with the CFTC as a "commodity pool
operator" (as defined under the CEA), and must represent to the CFTC that it
will operate within such restrictions. Under these restrictions the Portfolio
will not, as to any positions that do not qualify as "bona fide hedging" under
the CFTC Rule, whether long, short or a combination thereof, enter into futures
contracts and options thereon for which the aggregate initial margins and
premiums exceed 5% of the fair market value of the Portfolio's assets after
taking into account unrealized profits and losses on options the Portfolio has
entered into; in the case of an option that is "in-the-money" (as defined under
the CEA), the in-the-money amount may be excluded in computing such 5%. (In
general, a call option on a futures contract is in-the-money if the value of the
future exceeds the strike, i.e., exercise, price of the call; a put option on a
futures contract is in-the-money if the value of the futures contract that is
the subject of the put is exceeded by the strike price of the put.) As to its
long positions that are used as part of the Portfolio's strategy and are
incidental to the Portfolio's activities in the underlying cash market, the
"underlying commodity value" (see below) of the Portfolio's futures contract and
options thereon must not exceed the sum of (i) cash set aside in an identifiable
manner, or short-term U.S. debt obligations or other U.S. dollar-denominated,
high-quality, short-term money market instruments so set aside, plus any funds
deposited as margin; (ii) cash proceeds from existing investments due in 30
days; and (iii) accrued profits held at the futures commission merchant.
There are described above the segregated accounts that the Portfolio
must maintain with its custodian bank as to its options and futures contracts
activities due to Securities and Exchange Commission (SEC) requirements. The
Portfolio will, as to its long positions, be required to abide by the more
restrictive of these SEC and CFTC requirements. The underlying commodity value
of a futures contract is computed by multiplying the size (dollar amount) of the
futures contract by the daily settlement price of the futures contract. For an
option on a futures contract, that value is the underlying commodity value of
the future underlying the option.
Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which the Portfolio invests without the
large cash investments required for dealing in such markets, they may subject
the Portfolio to greater and more volatile risks than might otherwise be the
case. The principal risks related to the use of such instruments are (i) the
offsetting correlation between movements in the market price of the portfolio
investments (held or intended) being hedged and in the price of the futures
contract or option may be imperfect; (ii) possible lack of a liquid secondary
market for closing out futures or options positions; (iii) the need for
additional portfolio management skills and techniques; (iv) losses due to
unanticipated market price movements; and (v) the bankruptcy or failure of a
futures commission merchant holding margin deposits made by the Portfolio and
the Portfolio's inability to obtain repayment of all or part of such deposits.
For a hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being hedged. Such
equal price changes are not always possible because the investment underlying
the hedging instrument may not be the same investment that is being hedged. The
Sub-advisor will attempt to create a closely correlated hedge, but hedging
activity may not be completely successful in eliminating market value
fluctuation. The ordinary spreads between prices in the cash and futures
markets, due to the differences in the natures of those markets, are subject to
the following factors which may create distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity of the
futures market depends on participants entering into off-setting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest trends by the Sub-advisor may
still not result in a successful transaction. The Sub-advisor may be incorrect
in its expectations as to the extent of various interest rate movements or the
time span within which the movements take place.
The risk of imperfect correlation between movements in the price of a
bond index future and movements in the price of the securities that are the
subject of the hedge increases as the composition of the Portfolio diverges from
the securities included in the applicable index. The price of the bond index
future may move more than or less than the price of the securities being hedged.
If the price of the bond index future moves less than the price of the
securities that are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the futures
contract. If the price of the futures contract moves more than the price of the
security, the Portfolio will experience either a loss or a gain on the futures
contract that will not be completely offset by movements in the price of the
securities that are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of the bond index futures, the Portfolio may buy or sell
bond index futures in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the prices of such
securities being hedged is less than the historical volatility of the bond
index. It is also possible that, where the Portfolio has sold futures contracts
to hedge its securities against a decline in the market, the market may advance
and the value of securities held in the Portfolio may decline. If this occurred,
the Portfolio would lose money on the futures contract and also experience a
decline in value in its portfolio securities. However, while this could occur
for a brief period or to a very small degree, over time the value of a portfolio
of debt securities will tend to move in the same direction as the market indexes
upon which the futures contracts are based.
Where bond index futures are purchased to hedge against a possible
increase in the price of bonds before the Portfolio is able to invest in
securities in an orderly fashion, it is possible that the market may decline
instead; if the Portfolio then concludes not to invest in securities at that
time because of concern as to possible further market decline or for other
reasons, it will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities it had anticipated purchasing.
The risks of investment in options on bond indexes may be greater than
options on securities. Because exercises of bond index options are settled in
cash, when the Portfolio writes a call on a bond index it cannot provide in
advance for its potential settlement obligations by acquiring and holding the
underlying securities. The Portfolio can offset some of the risk of its writing
position by holding a portfolio of bonds similar to those on which the
underlying index is based. However, the Portfolio cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as the
underlying index and, as a result, bears a risk that the value of the securities
held will vary from the value of the index. Even if the Portfolio could assemble
a portfolio that exactly reproduced the composition of the underlying index, it
still would not be fully covered from a risk standpoint because of the "timing
risk" inherent in writing index options. When an index option is exercised, the
amount of cash that the holder is entitled to receive is determined by the
difference between the exercise price and the closing index level on the date
when the option is exercised. As with other kinds of options, the Portfolio, as
the call writer, will not learn that it has been assigned until the next
business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security because there, the writer's obligation is to deliver the
underlying security, not to pay its value as of a fixed time in the past. So
long as the writer already owns the underlying security, it can satisfy its
settlement obligations by simply delivering it, and the risk that its value may
have declined since the exercise date is borne by the exercising holder. In
contrast, even if the writer of an index call holds securities that exactly
match the composition of the underlying index, it will not be able to satisfy
its assignment obligations by delivering those securities against payment of the
exercise price. Instead, it will be required to pay cash in an amount based on
the closing index value of the exercise date; and by the time it learns that it
has been assigned, the index may have declined with a corresponding decline in
the value of its portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If the Portfolio has purchased an index option and exercises it before
the closing index value for that day is available, it runs the risk that the
level of the underlying index may subsequently change. If such a change causes
the exercised option to fall out-of-the-money, the Portfolio must pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Twentieth Century Strategic
Balanced Portfolio. These limitations are not "fundamental" restrictions and may
be changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest more than 15% of its assets in illiquid investments;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Buy securities on margin or sell short (unless it owns, or by virtue
of its ownership of, other securities has the right to obtain securities
equivalent in kind and amount to the securities sold); however, the Portfolio
may make margin deposits in connection with the use of any financial instrument
or any transaction in securities permitted under its investment policies; or
4. Invest for control or for management.
AST Putnam Value Growth & Income Portfolio:
Investment Objective: The primary investment objective of the Portfolio is
to seek capital growth. Current income is a secondary investment objective.
These are fundamental objectives of the Portfolio.
Investment Policies:
Short-Term Trading. In seeking the Portfolio's objectives, the
Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor
believes it appropriate to do so. In deciding whether to sell a portfolio
security, the Sub-advisor does not consider how long the Portfolio has owned the
security. From time to time the Sub-advisor will buy securities intending to
seek short-term trading profits. A change in the securities held by the
Portfolio is known as "portfolio turnover" and generally involves some expense
to the Portfolio. This expense may include brokerage commissions or dealer
markups and other transaction costs on both the sale of securities and the
reinvestment of the proceeds in other securities. As a result of the Portfolio's
investment policies, under certain market conditions the Portfolio turnover rate
may be higher than that of other mutual funds. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio securities excluding
securities whose maturities at acquisition were one year or less. The Portfolio
turnover rate is not a limiting factor when the Sub-advisor considers a change
in the Portfolio.
Lower-Rated Fixed-Income Securities. The Portfolio may invest in
lower-rated fixed-income securities (commonly known as "junk bonds"). The lower
ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, the Portfolio at times may be unable to establish the fair value of
such securities. For an additional discussion of certain risks involved in
lower-rated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the
Sub-advisor will monitor the investment to determine whether its retention will
assist in meeting the Portfolio's investment objective. At times, a substantial
portion of the Portfolio's assets may be invested in securities as to which the
Portfolio, by itself or together with other mutual funds and accounts managed by
the Sub-advisor and its affiliates, holds all or a major portion. Although the
Sub-advisor generally considers such securities to be liquid because of the
availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio could find it
more difficult to sell these securities when the Sub-advisor believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in the
event of a default under such securities, the Portfolio may be required to
participate in various legal proceedings or take possession of and manage assets
securing the issuer's obligations on such securities. This could increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value.
To the extent the Portfolio invests in securities in the lower rating
categories, the achievement of the Portfolio's goals is more dependent on the
Sub-advisor's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories.
Zero Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may invest
without limit in zero coupon and payment-in-kind bonds. Zero coupon bonds are
issued at a significant discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option, to
make current interest payments on the bonds either in cash or in additional
bonds. Because zero coupon and payment-in-kind bonds do not pay current interest
in cash, their value is subject to greater fluctuation in response to changes in
market interest rates than bonds that pay interest currently. Both zero coupon
and payment-in-kind bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently in cash. For an additional
discussion of zero coupon bonds and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and certain stripped mortgage-backed securities. CMOs and other
mortgage-backed securities represent a participation in, or are secured by,
mortgage loans.
Mortgage-backed securities have yield and maturity characteristics
corresponding to the underlying assets. Unlike traditional debt securities,
which may pay a fixed rate of interest until maturity, when the entire principal
amount comes due, payments on certain mortgage-backed securities include both
interest and a partial repayment of principal. Besides the scheduled repayment
of principal, repayments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. If property owners
make unscheduled prepayments of their mortgage loans, these prepayments will
result in early payment of the applicable mortgage-related securities. In that
event the Portfolio may be unable to invest the proceeds from the early payment
of the mortgage-related securities in an investment that provides as high a
yield as the mortgage-related securities. Consequently, early payment associated
with mortgage-related securities may cause these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the life
of mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, the Portfolio may not be able to realize the rate of
return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities, each having different maturities, interest rates and payment
schedules, and with the principal and interest on the underlying mortgages
allocated among the several classes in various ways. Payment of interest or
principal on some classes or series of CMOs may be subject to contingencies or
some classes or series may bear some or all of the risk of default on the
underlying mortgages. CMOs of different classes or series are generally retired
in sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
held by the Portfolio would have the same effect as the prepayment of mortgages
underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be
more volatile and less liquid than that for other mortgage-backed securities,
potentially limiting the Portfolio's ability to buy or sell those securities at
any particular time. For an additional discussion of mortgage related securities
and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in the portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a hedge
position then currently held by the Portfolio. The Portfolio may close its
positions by taking opposite positions which will operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total
assets in securities traded in foreign securities markets. American depositary
receipts and Eurodollar certificates of deposit are not included in this
limitation. For a discussion of certain risks involved in foreign investing, in
general, and the special risks involved in investing in developing countries or
"emerging markets," see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam Value Growth & Income
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
AST Putnam International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio is designed for investors seeking capital appreciation
through a diversified portfolio of equity securities of companies located in a
country other than the United States.
Short-Term Trading. In seeking the Portfolio's objectives, the
Sub-advisor will buy or sell portfolio securities whenever the Sub-advisor
believes it appropriate to do so. In deciding whether to sell a portfolio
security, the Sub-advisor does not consider how long the Portfolio has owned the
security. From time to time the Sub-advisor will buy securities intending to
seek short-term trading profits. A change in the securities held by the
Portfolio is known as "portfolio turnover" and generally involves some expense
to the Portfolio. This expense may include brokerage commissions or dealer
markups and other transaction costs on both the sale of securities and the
reinvestment of the proceeds in other securities. As a result of the Portfolio's
investment policies, under certain market conditions the Portfolio turnover rate
may be higher than that of other mutual funds. Portfolio turnover rate for a
fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio securities excluding
securities whose maturities at acquisition were one year or less. The Portfolio
turnover rate is not a limiting factor when the Sub-advisor considers a change
in the Portfolio.
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in the portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a position
then currently held by the Portfolio. The Portfolio may close its positions by
taking opposite positions which will operate to terminate the Portfolio's
position in the futures contracts. Final determinations of variation margin are
then made, additional cash is required to be paid by or released to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Index Warrants. The Portfolio may purchase put warrants and call
warrants whose values vary depending on the change in the value of one or more
specified securities indices ("index warrants"). Index warrants are generally
issued by banks or other financial institutions and give the holder the right,
at any time during the term of the warrant, to receive upon exercise of the
warrant a cash payment from the issuer based on the value of the underlying
index at the time of exercise. In general, if the value of the underlying index
rises above the exercise price of the index warrant, the holder of a call
warrant will be entitled to receive a cash payment from the issuer upon exercise
based on the difference between the value of the index and the exercise price of
the warrant; if the value of the underlying index falls, the holder of a put
warrant will be entitled to receive a cash payment from the issuer upon exercise
based on the difference between the exercise price of the warrant and the value
of the index. The holder of a warrant would not be entitled to any payments from
the issuer at any time when, in the case of a call warrant, the exercise price
is greater than the value of the underlying index, or, in the case of a put
warrant, the exercise price is less than the value of the underlying index. If
the Portfolio were not to exercise an index warrant prior to its expiration,
then the Portfolio would lose the amount of the purchase price paid by it for
the warrant.
The Portfolio will normally use index warrants in a manner similar to
its use of options on securities indices. The risks of the Portfolio's use of
index warrants are generally similar to those relating to its use of index
options. Unlike most index options, however, index warrants are issued in
limited amounts and are not obligations of a regulated clearing agency, but are
backed only by the credit of the bank or other institution which issues the
warrant. Also, index warrants generally have longer terms than index options.
Although the Portfolio will normally invest only in exchange-listed warrants,
index warrants are not likely to be as liquid as certain index options backed by
a recognized clearing agency. In addition, the terms of index warrants may limit
the Portfolio's ability to exercise the warrants at such time, or in such
quantities, as the Portfolio would otherwise wish to do.
Foreign Securities. The Portfolio will, under normal circumstances,
invest at least 65% of its total assets in issuers located in at least three
different countries other than the United States. Eurodollar certificates of
deposit are excluded for purposes of this limitation. For a discussion of
certain risks involved in foreign investing, in general, and the special risks
involved in investing in developing countries or "emerging markets," see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam International Equity
Portfolio. These limitations are not "fundamental" restrictions, and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
2. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with futures contracts and
options;
3, Make short sales of securities or maintain a short sale position for
the account of the Portfolio unless at all times when a short position is open
it owns an equal amount of such securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and at least equal in amount to, the securities sold short;
4. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
5. Make investments for the purpose of gaining control of a company's
management.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
AST Putnam Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide a
balanced investment composed of a well-diversified portfolio of stocks and bonds
which will produce both capital growth and current income. This is a fundamental
objective of the Portfolio.
Investment Policies:
Lower-Rated Fixed-Income Securities. The Portfolio may invest in
lower-rated fixed-income securities (commonly known as "junk bonds"). The lower
ratings of certain securities held by the Portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by the Portfolio more volatile and could limit the Portfolio's ability to
sell its securities at prices approximating the values the Portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, the Portfolio at times may be unable to establish the fair value of
such securities. For an additional discussion of certain risks involved in
lower-rated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
The Portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase. However, the
Sub-advisor will monitor the investment to determine whether its retention will
assist in meeting the Portfolio's investment objective. At times, a substantial
portion of the Portfolio's assets may be invested in securities as to which the
Portfolio, by itself or together with other mutual funds and accounts managed by
the Sub-advisor and its affiliates, holds all or a major portion. Although the
Sub-advisor generally considers such securities to be liquid because of the
availability of an institutional market for such securities, it is possible
that, under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the Portfolio could find it
more difficult to sell these securities when the Sub-advisor believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing the Portfolio's net asset value. In order to enforce its rights in the
event of a default under such securities, the Portfolio may be required to
participate in various legal proceedings or take possession of and manage assets
securing the issuer's obligations on such securities. This could increase the
Portfolio's operating expenses and adversely affect the Portfolio's net asset
value.
To the extent the Portfolio invests in securities in the lower rating
categories, the achievement of the Portfolio's goals is more dependent on the
Sub-advisor's investment analysis than would be the case if the Portfolio were
investing in securities in the higher rating categories
Zero Coupon Bonds. The Portfolio may invest without limit in zero
coupon bonds. Zero coupon bonds are issued at a significant discount from their
principal amount in lieu of paying interest periodically. Because zero coupon
bonds do not pay current interest in cash, their value is subject to greater
fluctuation in response to changes in market interest rates than bonds that pay
interest currently. Zero coupon bonds allow an issuer to avoid the need to
generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest currently in cash. For
an additional discussion of zero coupon bonds and certain risks involved
therein, see this Statement under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may invest in restricted securities.
For a discussion of restricted securities and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Mortgage Related Securities. The Portfolio may invest in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs") and certain stripped mortgage-backed securities. CMOs and other
mortgage-backed securities represent a participation in, or are secured by,
mortgage loans.
Mortgage-backed securities have yield and maturity characteristics
corresponding to the underlying assets. Unlike traditional debt securities,
which may pay a fixed rate of interest until maturity, when the entire principal
amount comes due, payments on certain mortgage-backed securities include both
interest and a partial repayment of principal. Besides the scheduled repayment
of principal, repayments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans. If property owners
make unscheduled prepayments of their mortgage loans, these prepayments will
result in early payment of the applicable mortgage-related securities. In that
event the Portfolio may be unable to invest the proceeds from the early payment
of the mortgage-related securities in an investment that provides as high a
yield as the mortgage-related securities. Consequently, early payment associated
with mortgage-related securities may cause these securities to experience
significantly greater price and yield volatility than that experienced by
traditional fixed-income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. During periods of falling interest rates, the rate of
mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. During periods of rising interest rates, the rate
of mortgage prepayments usually decreases, thereby tending to increase the life
of mortgage-related securities. If the life of a mortgage-related security is
inaccurately predicted, the Portfolio may not be able to realize the rate of
return it expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates.
CMOs may be issued by a U.S. government agency or instrumentality or by
a private issuer. Although payment of the principal of, and interest on, the
underlying collateral securing privately issued CMOs may be guaranteed by the
U.S. government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any other person or
entity.
Prepayments could cause early retirement of CMOs. CMOs are designed to
reduce the risk of prepayment for investors by issuing multiple classes of
securities, each having different maturities, interest rates and payment
schedules, and with the principal and interest on the underlying mortgages
allocated among the several classes in various ways. Payment of interest or
principal on some classes or series of CMOs may be subject to contingencies or
some classes or series may bear some or all of the risk of default on the
underlying mortgages. CMOs of different classes or series are generally retired
in sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
held by the Portfolio would have the same effect as the prepayment of mortgages
underlying other mortgage-backed securities.
The secondary market for stripped mortgage-backed securities may be
more volatile and less liquid than that for other mortgage-backed securities,
potentially limiting the Portfolio's ability to buy or sell those securities at
any particular time. For an additional discussion of mortgage related securities
and certain risks involved therein, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may make secured loans of
its securities, on either a short-term or long-term basis, thereby realizing
additional income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
As a matter of policy, securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by collateral
consisting of cash or short-term debt obligations at least equal at all times to
the value of the securities on loan, "marked-to-market" daily. The borrower pays
to the Portfolio an amount equal to any dividends or interest received on
securities lent. The Portfolio retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower.
Although voting rights, or rights to consent, with respect to the loaned
securities may pass to the borrower, the Portfolio retains the right to call the
loans at any time on reasonable notice, and it will do so to enable the
Portfolio to exercise voting rights on any matters materially affecting the
investment. The Portfolio may also call such loans in order to sell the
securities.
Forward Commitments. The Portfolio may enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time
("forward commitments") if the Portfolio holds, and maintains until the
settlement date in a segregated account, cash or liquid securities in an amount
sufficient to meet the purchase price, or if the Portfolio enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Portfolio enters into a
contract, with the actual principal amount being within a specified range of the
estimate. Forward commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price. Although the Portfolio will generally enter into
forward commitments with the intention of acquiring securities for the Portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement if the Sub-advisor deems it
appropriate to do so. The Portfolio may realize short-term profits or losses
upon the sale of forward commitments.
The Portfolio may enter into TBA sale commitments to hedge its
portfolio positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction. Unsettled TBA sale commitments are valued at
current market value of the underlying securities. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss on the commitment without regard to any
unrealized gain or loss on the underlying security. If the Portfolio delivers
securities under the commitment, the Portfolio realizes a gain or loss from the
sale of the securities based upon the unit price established at the date the
commitment was entered into.
Repurchase Agreements. Subject to guidelines adopted by the Board of
Trustees of the Trust, the Portfolio may enter into repurchase agreements. A
repurchase agreement is a contract under which the Portfolio acquires a security
for a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Portfolio to resell such security
at a fixed time and price (representing the Portfolio's cost plus interest). It
is the Portfolio's present intention to enter into repurchase agreements only
with commercial banks and registered broker-dealers and only with respect to
obligations of the U.S. government or its agencies or instrumentalities.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. The Sub-advisor will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. For an additional discussion of
repurchase agreements and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Writing Covered Options. The Portfolio may write covered call options
and covered put options on optionable securities held in its portfolio, when in
the opinion of the Sub-advisor such transactions are consistent with the
Portfolio's investment objective and policies. Call options written by the
Portfolio give the purchaser the right to buy the underlying securities from the
Portfolio at a stated exercise price; put options give the purchaser the right
to sell the underlying securities to the Portfolio at a stated price.
The Portfolio may write only covered options, which means that, so long
as the Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option (or comparable securities satisfying
the cover requirements of securities exchanges). In the case of put options, the
Portfolio will hold cash or other liquid assets equal to the price to be paid if
the option is exercised. In addition, the Portfolio will be considered to have
covered a put or call option if and to the extent that it holds an option that
offsets some or all of the risk of the option it has written. The Portfolio may
write combinations of covered puts and calls on the same underlying security.
If the Portfolio writes a call option but does not own the underlying
security, and when it writes a put option, the Portfolio may be required to
deposit cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Portfolio may have to deposit additional margin
with the broker. Margin requirements are complex and are fixed by individual
brokers, subject to minimum requirements currently imposed by the Federal
Reserve Board and by stock exchanges and other self-regulatory organizations.
For an additional discussion of options transactions, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase put options to
protect its holdings in an underlying security against a decline in market
value. Such protection is provided during the life of the put option since the
Portfolio, as holder of the option, is able to sell the underlying security at
the put exercise price regardless of any decline in the underlying security's
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs. By using put options in this manner,
the Portfolio will reduce any profit it might otherwise have realized from
appreciation of the underlying security by the premium paid for the put option
and by transaction costs.
Purchasing Call Options. The Portfolio may purchase call options to
hedge against an increase in the price of securities that the Portfolio wants
ultimately to buy. Such hedge protection is provided during the life of the call
option since the Portfolio, as holder of the call option, is able to buy the
underlying security at the exercise price regardless of any increase in the
underlying security's market price. In order for a call option to be profitable,
the market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs.
Risk Factors in Options Transactions. The successful use of the
Portfolio's options strategies depends on the ability of the Sub-advisor to
forecast correctly interest rate and market movements. The effective use of
options also depends on the Portfolio's ability to terminate option positions at
times when the Sub-advisor deems it desirable to do so. There is no assurance
that the Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Portfolio as a holder of an option would be able to
realize profits or limit losses only by exercising the option, and the
Portfolio, as option writer, would remain obligated under the option until
expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by the Portfolio could result in losses on the options. If
trading is interrupted in an underlying security, the trading of options on that
security is normally halted as well. As a result, the Portfolio as purchaser or
writer of an option will be unable to close out its positions until options
trading resumes, and it may be faced with considerable losses if trading in the
security reopens at a substantially different price. In addition, the Options
Clearing Corporation or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, the Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If
the Options Clearing Corporation were to determine that the available supply of
an underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Portfolio, as holder of such a put option, could
lose its entire investment if the prohibition remained in effect until the put
option's expiration.
Foreign-traded options are subject to many of the same risks presented
by internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by the Portfolio and assets
held to cover OTC options written by the Portfolio may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Portfolio's ability to invest in illiquid securities. For an additional
discussion of certain risks involved in options transactions, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts and Related Options. Subject to applicable law, the
Portfolio may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes. The
use of futures and options transactions for purposes other than hedging entails
greater risks. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The specific instruments delivered or taken, respectively, at
settlement date are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the futures
contract sale or purchase was made. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
The Portfolio may elect to close some or all of its futures positions
at any time prior to their expiration in order to reduce or eliminate a hedge
position then currently held by the Portfolio. The Portfolio may close its
positions by taking opposite positions which will operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin are then made, additional cash is required to be paid by or released to
the Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs. For an additional discussion
of futures contracts and related options, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may purchase and write call
and put options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on future contracts give the purchaser the right in return for the
premium paid to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Portfolio may
use options on futures contracts in lieu of writing or buying options directly
on the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
securities, the Portfolio may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the
Portfolio may purchase call options or write put options on futures contracts as
a substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Portfolio expects to purchase.
Such options generally operate in the same manner as options purchased or
written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected. For an additional
discussion of options on futures contracts, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Transactions in Futures Contracts and Related Options.
Successful use of futures contracts by the Portfolio is subject to the
Sub-advisor's ability to predict movements in various factors affecting
securities markets, including interest rates. Compared to the purchase or sale
of futures contracts, the purchase of call or put options on futures contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the options (plus transaction costs). However, there may
be circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Portfolio when the purchase or sale of a futures
contract would not, such as when there is no movement in the prices of the
hedged investments. The writing of an option on a futures contract involves
risks similar to those risks relating to the sale of futures contracts. For an
additional discussion of certain risks involved in futures contracts and related
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
U.S. Treasury Security Futures Contracts and Options. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right in return for the premium paid to assume
a position in a U.S. Treasury security futures contract at the specified option
exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the
Portfolio is subject to the Sub-advisor's ability to predict movements in the
direction of interest rates and other factors affecting markets for debt
securities. For example, if the Portfolio has sold U.S. Treasury security
futures contracts in order to hedge against the possibility of an increase in
interest rates which would adversely affect securities held by the Portfolio,
and the prices of the Portfolio's securities increase instead as a result of a
decline in interest rates, the Portfolio will lose part or all of the benefit of
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily maintenance margin requirements at a time when it may be disadvantageous
to do so. There is also a risk that price movements in U.S. Treasury security
futures contracts and related options will not correlate closely with price
movements in markets for particular securities.
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Portfolio may enter into stock index
futures contracts, debt index futures contracts, or other index futures
contracts appropriate to its objective. The Portfolio may also purchase and sell
options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Portfolio enters into a futures contract to buy 500 units of
the S&P 500 at a specified future date at a contract price of $150 and the S&P
500 is at $154 on that future date, the Portfolio will gain $2,000 (500 units x
gain of $4). If the Portfolio enters into a futures contract to sell 500 units
of the stock index at a specified future date at a contract price of $150 and
the S&P 500 is at $152 on that future date, the Portfolio will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by the Portfolio of
index futures. One risk arises because of the imperfect correlation between
movements in the prices of the index futures and movements in the prices of
securities which are the subject of the hedge. The Sub-advisor will, however,
attempt to reduce this risk by buying or selling, to the extent possible,
futures on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the securities sought to
be hedged.
Successful use of index futures by the Portfolio is also subject to the
Sub-advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities. It is also
possible that, if the Portfolio has hedged against the possibility of a decline
in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit of the increased value of those securities it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it is
disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the Portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures market are
less onerous than margin requirements in the securities market, and as a result
the futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Sub-advisor may still not result in a
profitable position over a short time period.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices. As an alternative to purchasing call and put
options on index futures, the Portfolio may purchase and sell call and put
options on the underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures. For an additional
discussion of options on indices and certain risks involved therein, see this
Statement under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 20% of its total
assets in securities traded in foreign securities markets. American depositary
receipts and Eurodollar certificates of deposit are not included in this
limitation. For a discussion of certain risks involved in foreign investing, in
general, and the special risks involved in investing in developing countries or
"emerging markets," see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage without limit
in currency exchange transactions, including purchasing and selling foreign
currency, foreign currency options, foreign currency forward contracts and
foreign currency futures contracts and related options, to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Portfolio may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Portfolio may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the Portfolio enters
into foreign currency transactions with respect to specific receivables or
payables, generally arising in connection with the purchase or sale of portfolio
securities. The Portfolio will engage in transaction hedging when it desires to
"lock in" the U.S. dollar price of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Portfolio will attempt to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is earned, and the date on which such payments are
made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
For transaction hedging purposes the Portfolio may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Portfolio the right to assume a short position in the futures contract
until the expiration of the option. A put option on a currency gives the
Portfolio the right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the
Portfolio the right to assume a long position in the futures contract until the
expiration of the option. A call option on a currency gives the Portfolio the
right to purchase the currency at the exercise price until the expiration of the
option.
When it engages in position hedging, the Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which its portfolio securities are denominated (or an
increase in the value of currency for securities which the Portfolio expects to
purchase). In connection with position hedging, the Portfolio may purchase put
or call options on foreign currency and on foreign currency futures contracts
and buy or sell forward contracts and foreign currency futures contracts. The
Portfolio may also purchase or sell foreign currency on a spot basis.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Portfolio owns or intends to
purchase or sell. They simply establish a rate of exchange which one can achieve
at some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency. See "Risk Factors in Options Transactions" above.
The Portfolio may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange rates by
writing covered call options and covered put options on foreign currencies. The
Portfolio receives a premium from writing a call or put option, which increases
the Portfolio's current return if the option expires unexercised or is closed
out at a net profit. The Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written.
The Portfolio's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency and may at
times not involve currencies in which its portfolio securities are then
denominated. The Sub-advisor will engage in such "cross hedging" activities when
it believes that such transactions provide significant hedging opportunities for
the Portfolio. Cross hedging transactions by the Portfolio involve the risk of
imperfect correlation between changes in the values of the currencies to which
such transactions relate and changes in the value of the currency or other asset
or liability which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic factors applicable
to the issuing country. In addition, the exchange rates of foreign currencies
(and therefore the values of foreign currency options, forward contracts and
futures contracts) may be affected significantly, fixed, or supported directly
or indirectly by U.S. and foreign government actions. Government intervention
may increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets. For an additional discussion of foreign currency
transactions and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Currency Forward and Futures Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in a given
month. Forward contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio either
may accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out
only on an exchange or board of trade which provides a secondary market in such
contracts. Although the Portfolio intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
Foreign Currency Options. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Portfolio will only purchase or write foreign currency options when
the Sub-advisor believes that a liquid secondary market exists for such options.
There can be no assurance that a liquid secondary market will exist for a
particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investments generally.
Settlement Procedures. Settlement procedures relating to the
Portfolio's investments in foreign securities and to the Portfolio's foreign
currency exchange transactions may be more complex than settlements with respect
to investments in debt or equity securities of U.S. issuers, and may involve
certain risks not present in the Portfolio's domestic investments. For example,
settlement of transactions involving foreign securities or foreign currencies
may occur within a foreign country, and the Portfolio may be required to accept
or make delivery of the underlying securities or currency in conformity with any
applicable U.S. or foreign restrictions or regulations, and may be required to
pay any fees, taxes or charges associated with such delivery. Such investments
may also involve the risk that an entity involved in the settlement may not meet
its obligations.
Foreign Currency Conversion. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Putnam Balanced Portfolio.
These limitations are not "fundamental" restrictions, and may be changed by the
Trustees without shareholder approval. The Portfolio will not:
1. Invest for the purpose of exercising control or management;
2. Invest in the securities of other investment companies except in
compliance with the 1940 Act;
3. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily marketable,
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Portfolio's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above;
4. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with financial futures contracts
or options;
5. Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Cohen & Steers Real Estate Investment Portfolio:
Investment Objective: The investment objective of Cohen & Steers Real
Estate Investment Portfolio. (the "Portfolio") is to maximize total return
through investment in real estate securities. This is a fundamental objective of
the Portfolio.
Investment Policies:
Illiquid Securities. The Portfolio will not invest in illiquid
securities if immediately after such investment more than 15% of the Portfolio's
net assets (taken at market value) would be invested in such securities. For
this purpose, illiquid securities include, among others, securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Securities that have legal or contractual
restrictions on resale but have a readily available market are not deemed
illiquid for purposes of this limitation.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act")
and securities which are otherwise not readily marketable. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities. Restricted or other illiquid securities may
be subject to the potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and the Portfolio might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. The Portfolio
might also have to register such restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
commercial paper, foreign securities, municipal securities and corporate bonds
and notes. Institutional investors depend on an efficient institutional market
in which the unregistered security can be readily resold or on an issuer's
ability to honor a demand for repayment. The fact that there are contractual or
legal restrictions on resale to the general public or to certain institutions
may not be indicative of the liquidity of such investments.
Specifically, the Securities and Exchange Commission (the "SEC") has
adopted Rule 144A which allows a broader institutional trading market for
securities otherwise subject to restrictions on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. The market for certain restricted securities has expanded, and the
Sub-advisor anticipates that it will expand further, as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers.
Subject to the guidelines promulgated by the Board of Trustees of the
Trust, the Sub-advisor will determine and monitor the liquidity of Rule 144A
securities acquired or held by the Portfolio. In reaching liquidity decisions,
the Sub-advisor will consider, among other things, the following factors: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
Repurchase Agreements. Subject to the guidelines promulgated by the
Board of Trustees of the Trust, the Portfolio may also enter into repurchase
agreements. A repurchase agreement is an instrument under which an investor such
as the Portfolio purchases a U.S. Government security from a vendor, with an
agreement by the vendor to repurchase the security at the same price, plus
interest at a specified rate. In such a case, the security is held by the
Portfolio, in effect, as collateral for the repurchase obligation. Repurchase
agreements may be entered into only with certain well-established banks and
securities dealers. Among other requirements, a bank must be a member of the
Federal Reserve System and a securities dealer must be recognized by the Federal
Reserve Bank within its reporting district as a reporting government securities
dealer. In entering into the repurchase agreement for the Portfolio, the
Sub-advisor will evaluate and monitor the creditworthiness of the vendor. For an
additional discussion of repurchase agreements and the risks associated with
them, see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Investment Techniques. The following sections provide expanded discussion
of several of the types of investments and investment techniques which may be
used by the Portfolio.
Real Estate Investment Trusts. REITs are sometimes informally
characterized as equity REITs, mortgage REITs and hybrid REITs. An equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A hybrid REIT
combines the characteristics of equity REITs and mortgage REITs, generally by
holding both ownership interests and mortgage interests in real estate. It is
anticipated, although not required, that under normal circumstances a majority
of the Portfolio's investments in REITs will consist of equity REITs.
Futures Contracts. The Portfolio may purchase and sell
financial futures contracts. A futures contract is an agreement to buy or sell a
specific security or financial instrument at a particular price on a stipulated
future date. Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual obligation
is accomplished by purchasing or selling an identical offsetting futures
contract. Other financial futures contracts by their terms call for cash
settlements.
The Portfolio may also buy and sell index futures contracts with
respect to any stock or bond index traded on a recognized stock exchange or
board of trade. An index futures contract is a contract to buy or sell units of
an index at a specified future date at a price agreed upon when the contract is
made. The stock index futures contract specifies that no delivery of the actual
stocks making up the index will take place. Instead, settlement in cash must
occur upon the termination of the contract, with the settlement being the
difference between the contract price and the actual level of the stock index at
the expiration of the contract.
At the time the Portfolio purchases a futures contract, an amount of
cash or other liquid assets equal to the market value of the futures contract
will be deposited in a segregated account with the Portfolio's custodian. When
writing a futures contract, the Portfolio will maintain with its custodian
similar liquid assets that, when added to the amounts deposited with a futures
commission merchant or broker as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, the Portfolio may "cover"
its position by owning the instruments underlying the contract (or, in the case
of an index futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is based), or holding
a call option permitting the Portfolio to purchase the same futures contract at
a price no higher than the price of the contract written by the Portfolio (or at
a higher price if the difference is maintained in liquid assets with the
Portfolio's custodian). For an additional discussion of futures contracts and
the risks associated with them, see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Options on Securities and Stock Indices. The Portfolio may
write covered call and put options and purchase call and put options on
securities or stock indices that are traded on United States exchanges.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The Portfolio may write a call or put option only if the option is
"covered." A call option on a security written by the Portfolio is covered if
the Portfolio owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also covered if the Portfolio holds a
call on the same security and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Portfolio in cash or
other liquid assets in a segregated account with its custodian. A put option on
a security written by the Portfolio is "covered" if the Portfolio maintains
similar liquid assets with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
The Portfolio will cover call options on stock indices by owning
securities whose price changes, in the opinion of the Sub-advisor are expected
to be similar to those of the index, or in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the Portfolio covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the Portfolio will not be
fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Portfolio will cover put options on stock
indices by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
The Portfolio will receive a premium from writing a put or call option,
which increases the Portfolio's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of a security or an index
on which the Portfolio has written a call option falls or remains the same, the
Portfolio will realize a profit in the form of the premium received (less
transaction costs) that could offset all or a portion of any decline in the
value of the portfolio securities being hedged. If the value of the underlying
security or index rises, however, the Portfolio will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Portfolio's stock investments. By writing a put option, the Portfolio
assumes the risk of a decline in the underlying security or index. To the extent
that the price changes of the portfolio securities being hedged correlate with
changes in the value of the underlying security or index, writing covered put
options on securities or indices will increase the Portfolio's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
The Portfolio may also purchase put options to hedge its investments
against a decline in value. By purchasing a put option, the Portfolio will seek
to offset a decline in the value of the portfolio securities being hedged
through appreciation of the put option. If the value of the Portfolio's
investments does not decline as anticipated, or if the value of the option does
not increase, the Portfolio's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will depend,
in part, on the accuracy of the correlation between the changes in value of the
underlying security or index and the changes in value of the Portfolio's
security holdings being hedged.
The Portfolio may purchase call options on individual securities to
hedge against an increase in the price of securities that the Portfolio
anticipates purchasing in the future. Similarly, the Portfolio may purchase call
options to attempt to reduce the risk of missing a broad market advance, or an
advance in an industry or market segment, at a time when the Portfolio holds
uninvested cash or short-term debt securities awaiting investment. When
purchasing call options, the Portfolio will bear the risk of losing all or a
portion of the premium paid if the value of the underlying security or index
does not rise.
There can be no assurance that a liquid market will exist when the
Portfolio seeks to close out an option position. Trading could be interrupted,
for example, because of supply and demand imbalances arising from a lack of
either buyers or sellers, or the options exchange could suspend trading after
the price has risen or fallen more than the maximum specified by the exchange.
Although the Portfolio may be able to offset to some extent any adverse effects
of being unable to liquidate an option position, the Portfolio may experience
losses in some cases as a result of such inability.
Foreign Currency Contracts and Currency Hedging Transaction. In order
to hedge against foreign currency exchange rate risks, the Portfolio may enter
into forward foreign currency exchange contracts and foreign currency futures
contracts, as well as purchase put or call options on foreign currencies, as
described below. The Portfolio may also conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
The Portfolio may enter into forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Portfolio
from adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers. The Portfolio may
enter into a forward contract, for example, when it enters into a contract for
the purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. In addition, for example, when
the Portfolio believes that a foreign currency may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
an amount of 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 portfolio securities denominated in such foreign currency. This
second investment practice is generally referred to as "cross-hedging." Because
in connection with the Portfolio's foreign currency forward transactions an
amount of the Portfolio's assets equal to the amount of the purchase will be
held aside or segregated to be used to pay for the commitment, the Portfolio
will always have cash or other liquid assets available sufficient to cover any
commitments under these contracts or to limit any potential risk. The segregated
account will be marked-to-market on a daily basis. In addition, the Portfolio
will not enter into such forward contracts if, as a result, the Portfolio will
have more than 15% of the value of its total assets committed to such contracts.
While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event, the
Portfolio's ability to utilize forward contracts in the manner set forth above
may be restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not engaged in such contracts.
The Portfolio may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the Portfolio could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuation in exchange rates
although, in the event of rate movements adverse to the Portfolio's position,
the Portfolio may forfeit the entire amount of the premium plus related
transaction costs.
The Portfolio may enter into exchange-traded contracts for the purchase
or sale for future delivery of foreign currencies ("foreign currency futures").
This investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Portfolio's portfolio securities or adversely affect the prices of
securities that the Portfolio intends to purchase at a later date. The
successful use of currency futures will usually depend on the Sub-advisor's
ability to forecast currency exchange rate movements correctly. Should exchange
rates move in an unexpected manner, the Portfolio may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Cohen & Steers Real Estate
Investment Portfolio. These limitations are not "fundamental" restrictions and
may be changed by the Trustees without shareholder approval. The Portfolio will
not:
1. Invest in illiquid securities, as defined in the prospectus under
"Investment Objective and Policies, Cohen & Steers Real Estate Investment
Portfolio" if immediately after such investment more than 15% of the Portfolio's
net assets (taken at market value) would be invested in such securities;
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings;
3. Participate on a joint or joint and several basis in any securities
trading account;
4. Invest in companies for the purpose of exercising control;
5. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), the Portfolio
would own any securities of an open-end investment company or more than 3% of
the value of the Portfolio's total assets would be invested in securities of any
closed-end investment company or more than 10% of such value in closed-end
investment companies in general; or
6. (a) invest in interests in oil, gas, or other mineral exploration or
development programs; or (b) purchase securities on margin, except for such
short-term credits as may be necessary for the clearance of transactions and
except for borrowings in an amount not exceeding 10% of the value of the
Portfolio's total assets.
Stein Roe Small Cap Blend Portfolio:
Investment Objective: The investment objective of the Stein Roe Small Cap
Blend Portfolio is long-term capital appreciation.
Investment Policies:
Derivatives. Consistent with its objective, the Portfolio may invest in
a broad array of financial instruments and securities, including conventional
exchange-traded and non-exchange-traded options, futures contracts, futures
options, securities collateralized by underlying pools of mortgages or other
receivables, floating rate instruments, and other instruments that securitize
assets of various types ("Derivatives"). In each case, the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate, or a currency.
Derivatives are most often used to manage investment risk or to create
an investment position indirectly because it is more efficient or less costly
than direct investment or because investment cannot be readily established
directly due to portfolio size, cash availability, or other factors. They also
may be used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Sub-advisor's ability
to correctly predict changes in the levels and directions of movements in
security prices, interest rates and other market factors affecting the
Derivative itself or the value of the underlying asset or benchmark. In
addition, correlations in the performance of an underlying asset to a Derivative
may not be well established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less marketable than
exchange-traded Derivatives.
The Portfolio does not currently intend to invest more than 5% of its
net assets in any type of Derivative except for options, futures contracts, and
futures options.
Some mortgage-backed debt securities are of the "modified pass-through
type," which means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining interest rates,
there is increased likelihood that mortgages will be prepaid, with a resulting
loss of the full-term benefit of any premium paid by the Portfolio on purchase
of such securities; in addition, the proceeds of prepayment would likely be
invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage obligations
("CMOs") that represent a right to interest and/or principal payments from an
underlying mortgage pool. CMOs are not guaranteed by either the U.S. Government
or by its agencies or instrumentalities, and are usually issued in multiple
classes each of which has different payment rights, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of prepayment on
the underlying mortgages at a faster or slower rate than the established
schedule. Prepayments generally increase with falling interest rates and
decrease with rising rates but they also are influenced by economic, social, and
market factors. If mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of any premium
paid by the Fund on purchase of the CMO, and the proceeds of prepayment would
likely be invested at lower interest rates.
Non-mortgage asset-backed securities usually have less prepayment risk
than mortgage-backed securities, but have the risk that the collateral will not
be available to support payments on the underlying loans that finance payments
on the securities themselves.
Floating rate instruments provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in amount and
direction of specified market interest rates. In addition, the adjusted duration
of some of these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to lifetime or periodic
interest rate caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and refers to the
approximate percentage change in price for a 1% change in yield. For example, if
interest rates decrease by 1%, a market price of a security with an adjusted
duration of 2 would increase by approximately 2%.
Foreign Securities. The Portfolio may invest up to 25% of its total
assets in foreign securities, which may entail a greater degree of risk
(including risks relating to exchange rate fluctuations, tax provisions, or
expropriation of assets) than investment in securities of domestic issuers. For
this purpose, foreign securities do not include American Depositary Receipts
(ADRs) or securities guaranteed by a United States person. ADRs are receipts
typically issued by an American bank or trust company evidencing ownership of
the underlying securities. The Portfolio may invest in sponsored or unsponsored
ADRs. In the case of an unsponsored ADR, the Portfolio is likely to bear its
proportionate share of the expenses of the depositary and it may have greater
difficulty in receiving shareholder communications than it would have with a
sponsored ADR. The Portfolio does not intend to invest more than 5% of its net
assets in unsponsored ADRs. Positions in these securities are not necessarily
denominated in the same currency as the common stocks into which they may be
converted. EDRs are European receipts evidencing a similar arrangement.
Generally, ADRs, in registered form, are designed for the U.S. securities
markets and EDRs, in bearer form, are designed for use in European securities
markets.
With respect to portfolio securities that are issued by foreign issuers
or denominated in foreign currencies, the Portfolio's investment performance is
affected by the strength or weakness of the U.S. dollar against these
currencies. For example, if the dollar falls in value relative to the Japanese
yen, the dollar value of a yen-denominated stock held in the portfolio will rise
even though the price of the stock remains unchanged. Conversely, if the dollar
rises in value relative to the yen, the dollar value of the yen-denominated
stock will fall.
Investors should understand and consider carefully the risks involved
in foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
Although the Portfolio will try to invest in companies and governments
of countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
For a further discussion of the risks involved in investing in foreign
securities, see the Trust's Prospectus and this Statement under "Certain Risk
Factors and Investment Methods."
Currency Exchange Transactions. Currency exchange transactions
may be conducted either on a spot (i.e., cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market or
through forward currency exchange contracts ("forward contracts"). Forward
contracts are contractual agreements to purchase or sell a specified currency at
a specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks and
broker-dealers, are not exchange traded, and are usually for less than one year,
but may be renewed.
The Portfolio's foreign currency exchange transactions are limited to
transaction and portfolio hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of forward
contracts with respect to specific receivables or payables of the Portfolio
arising in connection with the purchase and sale of its portfolio securities.
Portfolio hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular foreign currency.
Portfolio hedging allows the Portfolio to limit or reduce its exposure in a
foreign currency by entering into a forward contract to sell such foreign
currency (or another foreign currency that acts as a proxy for that currency) at
a future date for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately matched by a
foreign-denominated liability. The Portfolio may not engage in portfolio hedging
with respect to the currency of a particular country to an extent greater than
the aggregate market value (at the time of making such sale) of the securities
held in its portfolio denominated or quoted in that particular currency, except
that the Portfolio may hedge all or part of its foreign currency exposure
through the use of a basket of currencies or a proxy currency where such
currencies or currency act as an effective proxy for other currencies. In such a
case, the Portfolio may enter into a forward contract where the amount of the
foreign currency to be sold exceeds the value of the securities denominated in
such currency. The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for each currency
held in a Fund. The Portfolio may not engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular currency,
the Portfolio may either sell the portfolio security related to such contract
and make delivery of the currency, or it may retain the security and either
acquire the currency on the spot market or terminate its contractual obligation
to deliver the currency by purchasing an offsetting contract with the same
currency trader obligating it to purchase on the same maturity date the same
amount of the currency.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Portfolio to hedge against a devaluation that is
so generally anticipated that the Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Portfolio of engaging in currency exchange transactions varies with such factors
as the currency involved, the length of the contract period, and prevailing
market conditions. Since currency exchange transactions are usually conducted on
a principal basis, no fees or commissions are involved.
For a further discussion of forward foreign currency exchange
contracts, see the Trust's Prospectus and this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. The Portfolio may invest in repurchase
agreements, provided that it will not invest more than 15% of net assets in
repurchase agreements maturing in more than seven days and any other illiquid
securities. A repurchase agreement is a sale of securities to the Portfolio in
which the seller agrees to repurchase the securities at a higher price, which
includes an amount representing interest on the purchase price, within a
specified time. In the event of bankruptcy of the seller, the Portfolio could
experience both losses and delays in liquidating its collateral.
When-Issued and Delayed-Delivery Securities; Reverse Repurchase
Agreements. The Portfolio may purchase securities on a when-issued or
delayed-delivery basis. Although the payment and interest terms of these
securities are established at the time the Portfolio enters into the commitment,
the securities may be delivered and paid for a month or more after the date of
purchase, when their value may have changed. The Portfolio make such commitments
only with the intention of actually acquiring the securities, but may sell the
securities before settlement date if the Adviser deems it advisable for
investment reasons. The Portfolio does not currently intend to have commitments
to purchase when-issued securities in excess of 5% of its net assets.
The Portfolio may enter into reverse repurchase agreements with banks
and securities dealers. A reverse repurchase agreement is a repurchase agreement
in which the Portfolio is the seller of, rather than the investor in, securities
and agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time the Portfolio enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement,
cash or other liquid assets of the Portfolio having a value at least as great as
the purchase price of the securities to be purchased will be segregated on the
books of the Portfolio and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as borrowing under a
line of credit as described below, may increase net asset value fluctuation.
Short Sales "Against the Box." The Portfolio may sell securities short
against the box; that is, enter into short sales of securities that it currently
owns or has the right to acquire through the conversion or exchange of other
securities that it owns at no additional cost. The Portfolio may make short
sales of securities only if at all times when a short position is open the
Portfolio owns at least an equal amount of such securities or securities
convertible into or exchangeable for securities of the same issue as, and equal
in amount to, the securities sold short, at no additional cost.
In a short sale against the box, the Portfolio does not deliver from
its portfolio the securities sold. Instead, the Portfolio borrows the securities
sold short from a broker-dealer through which the short sale is executed, and
the broker-dealer delivers such securities, on behalf of the Portfolio, to the
purchaser of such securities. The Portfolio is required to pay to the
broker-dealer the amount of any dividends paid on shares sold short. Finally, to
secure its obligation to deliver to such broker-dealer the securities sold
short, the Portfolio must deposit and continuously maintain in a separate
account with the Trust's custodian an equivalent amount of the securities sold
short or securities convertible into or exchangeable for such securities at no
additional cost. The Portfolio is said to have a short position in the
securities sold until it delivers to the broker-dealer the securities sold. The
Portfolio may close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities sold short,
rather than by delivering portfolio securities.
Short sales may protect the Portfolio against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gains in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount the
Portfolio owns, either directly or indirectly, and, in the case where the
Portfolio owns convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price of the
security sold short increases between the time of the short sale and the time a
Fund replaces the borrowed security, the Portfolio will incur a loss and if the
price declines during this period, the Portfolio will realize a short-term
capital gain. Any realized short-term capital gain will be decreased, and any
incurred loss increased, by the amount of transaction costs and any premium,
dividend or interest which the Fund may have to pay in connection with such
short sale. Certain provisions of the Internal Revenue Code may limit the degree
to which the Portfolio is able to enter into short sales. There is no limitation
on the amount of the Portfolio's assets that, in the aggregate, may be deposited
as collateral for the obligation to replace securities borrowed to effect short
sales and allocated to segregated accounts in connection with short sales. The
Portfolio currently expects that no more than 5% of its total assets would be
involved in short sales against the box.
Rule 144A Securities. The Portfolio may purchase securities that have
been privately placed but that are eligible for purchase and sale under Rule
144A under the 1933 Act. That Rule permits certain qualified institutional
buyers, such as the Portfolio, to trade in privately placed securities that have
not been registered for sale under the 1933 Act. The Sub-advisor, under the
supervision of the Board of Trustees, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Portfolio's restriction of
investing no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Sub-advisor will consider the trading
markets for the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Sub-advisor could consider, among
other factors, the (1) frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market, and (4) nature
of the security and of marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
The liquidity of Rule 144A securities would be monitored and if, as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Portfolio's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Portfolio does not
invest more than 15% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of a Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. The Portfolio does not expect to invest
as much as 5% of its total assets in Rule 144A securities that have not been
deemed to be liquid by the Sub-advisor.
Line of Credit. Subject to the Portfolio's restriction on borrowing (8)
under "Investment Restrictions" in this Statement, the Portfolio may establish
and maintain a line of credit with a major bank in order to permit borrowing on
a temporary basis to meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of portfolio securities.
Interfund Borrowing and Lending Program. Pursuant to an exemptive order
issued by the Securities and Exchange Commission, the Portfolio has received
permission to lend money to, and borrow money from, other mutual funds advised
by the Adviser. The Portfolio will borrow through the program when borrowing is
necessary or appropriate and the costs are equal to or lower than the costs of
bank loans.
Portfolio Turnover. Although the Portfolio does not purchase securities
with a view to rapid turnover, there are no limitations on the length of time
that portfolio securities must be held. Portfolio turnover can occur for a
number of reasons such as general conditions in the securities markets, more
favorable investment opportunities in other securities, or other factors
relating to the desirability of holding or changing a portfolio investment. For
a further discussion of portfolio turnover and its effects, see the Trust's
Prospectus and this Statement under "Portfolio Turnover."
Options on Securities and Indices. The Portfolio may purchase and sell
put options and call options on securities, indices or foreign currencies in
standardized contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on Nasdaq. The Portfolio may purchase
agreements, sometimes called cash puts, that may accompany the purchase of a new
issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (normally not exceeding nine
months). The writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver the
underlying security or foreign currency upon payment of the exercise price or to
pay the exercise price upon delivery of the underlying security or foreign
currency. Upon exercise, the writer of an option on an index is obligated to pay
the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
economic indicators.)
The Portfolio will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if the Portfolio owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires, the Portfolio realizes a
capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
A put or call option purchased by the Portfolio is an asset of the
Portfolio, valued initially at the premium paid for the option. The premium
received for an option written by the Portfolio is recorded as a deferred
credit. The value of an option purchased or written is marked-to-market daily
and is valued at the closing price on the exchange on which it is traded or, if
not traded on an exchange or no closing price is available, at the mean between
the last bid and asked prices.
Risks Associated with Options on Securities and Indexes. There
are several risks associated with transactions in options. For example, there
are significant differences between the securities markets, the currency
markets, and the options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
For an additional discussion of options and the risks involved therein,
see the Trust's Prospectus and this Statement under "Certain Risk Factors and
Investment Methods."
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate futures contracts, index futures contracts, and foreign
currency futures contracts. An interest rate, index or foreign currency futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument or the cash value of an index
at a specified price and time. A public market exists in futures contracts
covering a number of indexes (including, but not limited to: the Standard &
Poor's 500 Index, the Value Line Composite Index, and the New York Stock
Exchange Composite Index) as well as financial instruments (including, but not
limited to: U.S. Treasury bonds, U.S. Treasury notes, Eurodollar certificates of
deposit, and foreign currencies). Other index and financial instrument futures
contracts are available and it is expected that additional futures contracts
will be developed and traded.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities, indexes and foreign currencies (discussed above). A futures option
gives the holder the right, in return for the premium paid, to assume a long
position (call) or short position (put) in a futures contract at a specified
exercise price at any time during the period of the option. Upon exercise of a
call option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option, the
opposite is true. The Portfolio might, for example, use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices, anticipated changes in interest rates or currency fluctuations that
might adversely affect either the value of the Portfolio's securities or the
price of the securities that the Portfolio intends to purchase. Although other
techniques could be used to reduce or increase that Fund's exposure to stock
price, interest rate and currency fluctuations, the Portfolio may be able to
achieve its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options that are standardized and traded on an exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities or other
securities acceptable to the broker ("initial margin"). The margin required for
a futures contract is set by the exchange on which the contract is traded and
may be modified during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract,
which is returned to the Portfolio upon termination of the contract, assuming
all contractual obligations have been satisfied. The Portfolio expects to earn
interest income on its initial margin deposits. A futures contract held by the
Portfolio is valued daily at the official settlement price of the exchange on
which it is traded. Each day the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin paid or received
by the Portfolio does not represent a borrowing or loan by the Portfolio but is
instead settlement between the Portfolio and the broker of the amount one would
owe the other if the futures contract had expired at the close of the previous
day. In computing daily net asset value, the Portfolio will mark-to-market its
open futures positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Risks Associated with Futures. There are several risks
associated with the use of futures contracts and futures options. A purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. In trying to increase or reduce market exposure, there
can be no guarantee that there will be a correlation between price movements in
the futures contract and in the portfolio exposure sought. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
transaction not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in speculative market
demand for futures, futures options and the related securities, including
technical influences in futures and futures options trading and differences
between the securities market and the securities underlying the standard
contracts available for trading. For example, in the case of index futures
contracts, the composition of the index, including the issuers and the weighting
of each issue, may differ from the composition of the Portfolio's portfolio,
and, in the case of interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the futures contract
may differ from the financial instruments held in the Portfolio's portfolio. A
decision as to whether, when and how to use futures contracts involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected stock price
or interest rate trends. Should such a decision be incorrect, the Portfolio's
return might have been better had the transaction not been attempted.
For an additional discussion of future contracts and options on futures
contracts and the risks involved therein, see the Trust's Prospectus and this
Statement under "Certain Risk Factors and Investment Methods."
Limitations on Options and Futures. If other options, futures
contracts, or futures options of types other than those described herein are
traded in the future, the Portfolio may also use those investment vehicles,
provided the Board of Trustees determines that their use is consistent with the
Portfolio's investment objective.
When purchasing a futures contract or writing a put option on a futures
contract, the Portfolio must maintain with its custodian (or broker, if legally
permitted) cash or other liquid assets (including any margin) equal to the
market value of such contract. When writing a call option on a futures contract,
the Portfolio similarly will maintain with its custodian cash or other liquid
assets (including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the Portfolio.
The Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call options written on
indexes if, in the aggregate, the market value of all such open positions
exceeds the current value of the securities in its portfolio, plus or minus
unrealized gains and losses on the open positions, adjusted for the historical
relative volatility of the relationship between the portfolio and the positions.
For this purpose, to the extent the Portfolio has written call options on
specific securities in its portfolio, the value of those securities will be
deducted from the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," the Portfolio
will use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the fair market value of the assets of the Portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into [in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount (as defined in Section 190.01(x) of the Commission
Regulations) may be excluded in computing such 5%].
Taxation of Options and Futures. If the Portfolio exercises a
call or put option that it holds, the premium paid for the option is added to
the cost basis of the security purchased (call) or deducted from the proceeds of
the security sold (put). For cash settlement options and futures options
exercised by the Portfolio, the difference between the cash received at exercise
and the premium paid is a capital gain or loss.
If a call or put option written by the Portfolio is exercised, the
premium is included in the proceeds of the sale of the underlying security
(call) or reduces the cost basis of the security purchased (put). For cash
settlement options and futures options written by the Portfolio, the difference
between the cash paid at exercise and the premium received is a capital gain or
loss.
Entry into a closing purchase transaction will result in capital gain
or loss. If an option written by the Portfolio was in-the-money at the time it
was written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss realized
as a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
If the Portfolio writes an equity call option other than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on such
option transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If the Portfolio delivers securities under a futures contract,
the Portfolio also realizes a capital gain or loss on those securities.
For federal income tax purposes, the Portfolio generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on futures, futures options and non-equity options
positions ("year-end mark-to-market"). Generally, any gain or loss recognized
with respect to such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses on
certain positions (including options, futures and futures options positions, the
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put options) that are
intended to hedge against a change in the value of securities held by the
Portfolio: (1) will affect the holding period of the hedged securities; and (2)
may cause unrealized gain or loss on such securities to be recognized upon entry
into the hedge.
If the Portfolio were to enter into a short index future, short index
futures option or short index option position and the Portfolio's portfolio were
deemed to "mimic" the performance of the index underlying such contract, the
option or futures contract position and the Portfolio's stock positions would be
deemed to be positions in a mixed straddle, subject to the above-mentioned loss
deferral rules.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income; i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement.
Swaps, Caps, Floors and Collars. The Portfolio may enter into swaps and
may purchase or sell related caps, floors and collars. The Portfolio would enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities it intends to purchase at a later date. The
Portfolio intends to use these techniques as hedges and not as speculative
investments.
A swap agreement is generally individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on its structure, a swap agreement may increase or decrease
the Portfolio's exposure to changes in the value of an index of securities in
which the Portfolio might invest, the value of a particular security or group of
securities, or foreign currency values. Swap agreements can take many different
forms and are known by a variety of names. The Portfolio may enter into any form
of swap agreement if the Sub-advisor determines it is consistent with its
investment objective and policies.
A swap agreement tends to shift the Portfolio's investment exposure
from one type of investment to another. For example, if the Portfolio agrees to
exchange payments in dollars at a fixed rate for payments in a foreign currency
the amount of which is determined by movements of a foreign securities index,
the swap agreement would tend to increase exposure to foreign stock market
movements and foreign currencies. Depending on how it is used, a swap agreement
may increase or decrease the overall volatility of the Portfolio's investments
and its net asset value.
The performance of a swap agreement is determined by the change in the
specific currency, market index, security, or other factors that determine the
amounts of payments due to and from the Portfolio. If a swap agreement calls for
payments by the Portfolio, the Portfolio must be prepared to make such payments
when due. If the counterparty's creditworthiness declines, the value of a swap
agreement would be likely to decline, potentially resulting in a loss. The
Portfolio will not enter into any swap, cap, floor or collar transaction unless,
at the time of entering into such transaction, the unsecured long-term debt of
the counterparty, combined with any credit enhancements, is rated at least A by
Standard & Poor's Corporation or Moody's or has an equivalent rating from a
nationally recognized statistical rating organization or is determined to be of
equivalent credit quality by the Sub-advisor.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and floor that preserves a certain return within a predetermined range
of interest rates or values.
At the time the Portfolio enters into swap arrangements or purchases or
sells caps, floors or collars, liquid assets of the Portfolio having a value at
least as great as the commitment underlying the obligations will be segregated
on the books of the Portfolio and held by the custodian throughout the period of
the obligation.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable only to the Stein Roe Small Cap Blend
Portfolio. These limitations are not "fundamental" restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. invest in interests in oil, gas, or other mineral leases or
exploration or development programs (except readily marketable securities,
including but not limited to master limited partnership interests, that may
represent indirect interests in oil, gas, or other mineral exploration or
development programs);
2. invest in companies for the purpose of exercising control or management;
3. purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of its total
assets (valued at time of purchase) in the case of any one other investment
company and 10% of such assets (valued at time of purchase) in the case of all
other investment companies in the aggregate; any such purchases are to be made
in the open market where no profit to a sponsor or dealer results from the
purchase, other than the customary broker's commission, except for securities
acquired as part of a merger, consolidation or acquisition of assets;
4. invest more than 25% of its total assets (valued at time of
purchase) in securities of foreign issuers (other than securities represented by
American Depositary Receipts (ADRs) or securities guaranteed by a U.S. person);
5. purchase securities on margin (except for use of short-term credits
as are necessary for the clearance of transactions), or sell securities short
unless (i) it owns or has the right to obtain securities equivalent in kind and
amount to those sold short at no added cost or (ii) the securities sold are
"when issued" or "when distributed" securities which it expects to receive in a
recapitalization, reorganization, or other exchange for securities it
contemporaneously owns or has the right to obtain and provided that transactions
in options, futures, and options on futures are not treated as short sales;
6. invest more than 15% of its net assets (taken at market value at the
time of a particular investment) in illiquid securities, including repurchase
agreements maturing in more than seven days.
Bankers Trust Enhanced 500 Index Portfolio:
Investment Objective: The investment objective of the Bankers Trust Enhanced 500
Index Portfolio (the "Portfolio") is to outperform the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500(R) Index") through stock selection
resulting in different weightings of common stocks relative to the index.
Investment Policies:
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of discount for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the 1933 Act are referred to as private placements or
restricted securities. Restricted or other illiquid securities may be subject to
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
commercial paper, foreign securities, municipal securities and corporate bonds
and notes. Institutional investors depend on an efficient institutional market
in which the unregistered security can be readily resold or on an issuer's
ability to honor a demand for repayment. The fact that there are contractual or
legal restrictions on resale of such investments to the general public or to
certain institutions may not be indicative of their liquidity.
Specifically, the Securities and Exchange Commission (the "SEC") has
adopted Rule 144A, which allows a broader institutional trading market for
securities otherwise subject to restrictions on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act of resales of certain securities to qualified institutional
buyers. The Sub-advisor anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Subject to guidelines promulgated by the Board of Trustees of the
Trust, the Sub-advisor will monitor the liquidity of Rule 144A securities in the
Portfolio's portfolio. In reaching liquidity decisions, the Sub-advisor will
consider, among other things, the following factors: (i) the frequency of trades
and quotes for the security; (ii) the number of dealers and other potential
purchasers wishing to purchase or sell the security; (iii) dealer undertakings
to make a market in the security and (iv) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Short-Term Instruments. When the Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities that are
consistent with the Fund's investment objective are unavailable in sufficient
quantities or at attractive prices, the Portfolio may hold short-term
investments for a limited time pending availability of such equity securities.
Short-term instruments consist of: (i) short-term obligations issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities or
by any of the states; (ii) other short-term debt securities rated AA or higher
by S&P or Aa or higher by Moody's or, if unrated, of comparable quality in the
opinion of the Sub-advisor; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Portfolio invests in
commercial paper, bank obligations or repurchase agreements, the issuer of the
issuer's parent must have outstanding debt rated AA or higher by S&P or Aa or
higher by Moody's or outstanding commercial paper or bank obligations rated A-1
by S&P or Prime-1 by Moody's; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of the Sub-advisor.
Additional U.S. Government Obligations. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value of such securities in determining its net asset value each day
thereafter and, if applicable, calculate the maturity for the purposes of
average maturity from the commitment date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, the Portfolio will maintain with its custodian a
segregated account consisting of cash or other liquid assets in an amount at
least equal to such commitments. On delivery dates for such transactions, the
Portfolio will meet its obligations from maturities or sales of the securities
held in the segregated account and/or from cash flow. If the Portfolio chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other obligation, incur a
gain or loss due to market fluctuation. It is the current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets, less liabilities other
than the obligations created by when-issued commitments.
Equity Investments. The Portfolio may invest in equity securities
listed on any domestic securities exchange or traded in the over-the-counter
market as well as certain restricted or unlisted securities. They may or may not
pay dividends or carry voting rights. Common stock occupies the most junior
position in a company's capital structure.
Reverse Repurchase Agreements. The Portfolio may borrow funds for
temporary or emergency purposes, such as meeting larger than anticipated
redemption requests, and not for leverage, by among other things, agreeing to
sell portfolio securities to financial institutions such as banks and
broker-dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). At the time the Portfolio enters into a reverse
repurchase agreement it will place in a segregated custodial account cash or
other liquid assets having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Portfolio may decline below the repurchase
price of those securities. Reverse repurchase agreements are considered to be
borrowings by the Portfolio.
Warrants. Warrants entitle the holder to buy common stock from the
issuer at a specific price (the strike price) for a specific period of time. The
strike price of warrants sometimes is much lower than the current market price
of the underlying securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be debt securities
or preferred stocks that may be converted into common stock or that carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts.
Futures Contracts. The Portfolio may enter into securities
index futures contracts. U.S. futures contracts have been designed by exchanges
which have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
These investments will be made by the Portfolio solely for cash management
purposes. Such investments will be made only if they are economically
appropriate to the reduction of risks involved in the management of the
Portfolio. In this regard, the Portfolio may enter into futures contracts or
options on futures related to the S&P 500.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts. The liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion.
In addition, futures contracts entail other risks. The Sub-advisor
believes that use of such contracts will benefit the Portfolio. The successful
use of futures contracts, however, depends on the degree of correlation between
the futures and securities markets. In addition, successful use of futures
contracts is dependent on the Sub-advisor's ability to correctly predict
movements in the securities markets and no assurance can be given that its
judgment will be correct. For an additional discussion of futures contracts and
the risks involved therein, see the Trust's Prospectus and this Statement under
"Certain Risk Factors and Investment Methods."
Options on Futures Contracts. The Portfolio may use stock
index futures on a continual basis to equitize cash so that the Portfolio may
maintain 100% equity exposure. The Portfolio will not enter into any futures
contracts or options on futures contracts if immediately thereafter the amount
of margin deposits on all the futures contracts of the Portfolio and premiums
paid on outstanding options on futures contracts owned by the Portfolio (other
than those entered into for bona fide hedging purposes) would exceed 5% of the
market value of the total assets of the Portfolio.
A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. The Portfolio
will be required to deposit initial margin and variation margin with respect to
put and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received will
be included as initial margin deposits. In anticipation of a decline in interest
rates, the Portfolio may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities that the Portfolio intends to purchase.
Similarly, if the value of the securities held by the Portfolio is expected to
decline as a result of an increase in interest rates, the Portfolio might
purchase put options or sell call options on futures contracts rather than sell
futures contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option my or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contact involves risks similar to those risks relating to
the sale of futures contracts.
Options on Securities Indices. The Fund may purchase and write (sell)
call and put options on securities indices. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index.
Options on securities indices entail certain risks. The absence of a
liquid secondary market to close out options positions on securities indices may
occur, although the Portfolio generally will only purchase or write such an
option if the Sub-adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolio will not purchase such options unless
the Sub-adviser believes the market is sufficiently developed such that the risk
of trading in such options is no greater than the risk of trading in options on
securities.
For an additional discussion of options and the risks involved therein,
see the Trust's Prospectus and this Statement under "Certain Risk Factors and
Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Bankers Trust Enhanced 500 Index
Portfolio. These limitations are not "fundamental' restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
Purchase any security or evidence of interest therein on margin, except that
such short-term credit as may be necessary for the clearance of purchases and
sales of securities may be obtained and except that deposits of initial deposit
and variation margin may be made in connection with the purchase, ownership,
holding or sale of futures;
2. Invest for the purpose of exercising control or management;
3. Purchase for the Portfolio securities of any investment company if
such purchase at the time thereof would cause: (a) more than 10% of the
Portfolio's total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the Portfolio's
total assets (taken at the greater of cost or market value) to be invested in
any one investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (as an operating
policy, the Portfolio will not invest in another open-end registered investment
company); or
4. Invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not readily
marketable not including (a) Rule 144A securities that have been determined to
be liquid by the Board of Trustees; and (b) commercial paper that is sold under
section 4(2) of the 1933 Act which is not traded flat or in default as to
interest or principal.
Marsico Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. This is a fundamental objective of the Portfolio. Realization of
income is not an investment objective and any income realized on the Portfolio's
investments, therefore, will be incidental to the Portfolio's objective.
Investment Policies:
Futures, Options and Other Derivative Instruments. The Portfolio may
enter into futures contracts on securities, financial indices, and foreign
currencies and options on such contracts, and may invest in options on
securities, financial indices and foreign currencies, forward contracts and
swaps. The Portfolio will not enter into any futures contracts or options on
futures contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contract positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio. The Portfolio may invest in forward currency contracts with stated
values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by the Sub-advisor, and only pursuant to procedures adopted by the
Sub-advisor for monitoring the creditworthiness of those entities. To the extent
that an option bought or written by the Portfolio in a negotiated transaction is
illiquid, the value of an option bought or the amount of the Portfolio's
obligations under an option written by the Portfolio, as the case may be, will
be subject to the Portfolio's limitation on illiquid investments. In the case of
illiquid options, it may not be possible for the Portfolio to effect an
offsetting transaction at a time when the Sub-advisor believes it would be
advantageous for the Portfolio to do so. For a description of these strategies
and instruments and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Portfolio, in order to
attempt to protect the value of its investments from interest rate or currency
exchange rate fluctuations, may enter into interest rate swaps and may buy or
sell interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its investments. The Portfolio also may enter into these
transactions to protect against any increase in the price of securities the
Portfolio may consider buying at a later date. The Portfolio does not intend to
use these transactions as speculative investments. Interest rate swaps involve
the exchange by the Portfolio with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The exchange commitments can involve payments to be made in
the same currency or in different currencies. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a contractually based principal amount from the party selling the
interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be calculated on a daily basis and an amount of cash or other liquid assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap on other than a net asset basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or other liquid assets having an aggregate net asset
value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that the Portfolio contractually is entitled
to receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above. For
an additional discussion of these strategies, see this Statement under "Certain
Risk Factors and Investment Methods."
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may
enter into repurchase agreements. The Portfolio may also enter into reverse
repurchase agreements. For a description of these investment techniques, see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Marsico Capital Growth
Portfolio. These limitations are not "fundamental" restrictions, and may be
changed by the Trustees without shareholder approval.
1. The Portfolio does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
2. The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities on
margin.
3. The Portfolio may not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to (i)
reverse repurchase agreements; (ii) deposits of assets on margin; (iii)
guaranteed positions in futures, options, swaps or forward contracts; or (iv)
the segregation of assets in connection with such contracts.
4. The Portfolio does not currently intend to purchase any securities
or enter into a repurchase agreement if, as a result, more than 15% of its net
assets would be invested in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and in securities that are
illiquid by virtue of legal or contractual restrictions on resale or the absence
of a readily available market. The Trustees of the Trust, or the Sub-advisor
acting pursuant to authority delegated by the Trustees, may determine that a
readily available market exists for securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as amended, or any successor to such
rule, and Section 4(2) commercial paper. Accordingly, such securities may not be
subject to the foregoing limitation.
5. The Portfolio may not invest in companies for the purpose of
exercising control or management.
Investment Objective and Policy Applicable to All Portfolios:
In order to permit the sale of shares of the Trust to separate accounts
of Participating Insurance Companies in certain states, the Trust may make
commitments more restrictive than the restrictions described in the section of
this Statement entitled "Investment Restrictions." Should the Trust determine
that any such commitment is no longer in the best interests of the Trust and its
shareholders it will revoke the commitment and terminate sales of its shares in
the state(s) involved.
The Board of Trustees of the Trust may, from time to time, promulgate
guidelines with respect to the investment policies of the Portfolios.
INVESTMENT RESTRICTIONS:
The investment restrictions set forth below are "fundamental" policies.
See the subsection of this Statement entitled "Investment Objectives and
Policies" for further discussion of "fundamental" policies of the Trust and the
requirements for changing such "fundamental" policies. Investment policies that
are not "fundamental" may be found in the general description of the investment
policies of each Portfolio, as described in the section of this Statement and
the Trust's Prospectus entitled "Investment Objectives and Policies."
The investment restrictions below apply only to the Portfolio or
Portfolios described in the text preceding the restrictions.
Investment Restrictions Applicable Only to the Lord Abbett Growth and Income
Portfolio, the JanCap Growth Portfolio, the AST Money Market Portfolio, the
Federated Utility Income Portfolio, the Federated High Yield Portfolio, the
Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio,
the PIMCO Total Return Bond Portfolio, the PIMCO Limited Maturity Bond
Portfolio, and the Berger Capital Growth Portfolio.
1. A Portfolio will not purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of closed-end
investment companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved and only if immediately
thereafter not more than 10% of this Portfolio's total assets, at market value,
would be invested in such securities, or by investing no more than 5% of the
Portfolio's total assets in other open-end investment companies or by purchasing
no more than 3% of any one open-end investment company's securities.
2. A Portfolio will not buy any securities or other property on margin (except
for such short-term credits as are necessary for the clearance of transactions).
3. A Portfolio will not invest in companies for the purpose of exercising
control or management.
4. A Portfolio will not underwrite securities issued by others except to the
extent that the Portfolio may be deemed an underwriter when purchasing or
selling securities.
5. A Portfolio will not purchase or retain securities of any issuer (other than
the shares of such Portfolio) if to the Trust's knowledge, the officers and
Trustees of the Trust and the officers and directors of the Investment Manager
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
6. A Portfolio will not issue senior securities.
Investment Restrictions Applicable Only to the Lord Abbett Growth and
Income Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. The Portfolio will not lend money or securities to any person except through
entering into short-term repurchase agreements with sellers of securities the
Portfolio has purchased, and through lending Portfolio securities to registered
broker-dealers where the loan is 100% secured by cash or its equivalent as long
as the Portfolio complies with regulatory requirements and the Sub-advisor deems
such loans not to expose the Portfolio to significant risk or adversely affect
the Portfolio's qualification for pass-through tax treatment under the Internal
Revenue Code (investment in repurchase agreements exceeding 7 days and in other
illiquid investments is limited to a maximum of 10% of Portfolio net assets).
3. The Portfolio will not pledge, mortgage, or hypothecate its assets --
however, this provision does not apply to the grant of escrow receipts or the
entry into other similar escrow arrangements arising out of the writing of
covered call options.
4. The Portfolio will not purchase securities of any issuer unless it or its
predecessor has a record of three years' continuous operation, except that the
Portfolio may purchase securities of such issuers through subscription offers or
other rights it receives as a security holder of companies offering such
subscriptions or rights, and such purchases will then be limited in the
aggregate to 5% of the Portfolio's net assets at the time of investment.
5. The Portfolio will not concentrate its investments in any one industry (the
Portfolio's investment policy of keeping its assets in those securities which
are selling at the most reasonable prices in relation to value normally results
in diversification among many industries -- consistent with this, the Portfolio
does not intend to invest more than 25% of its assets in any one industry
classification used by the Sub-advisor for investment purposes, although such
concentration could, under unusual economic and market conditions, amount to 30%
or conceivably somewhat more).
6. The Portfolio will not borrow money except from banks and then in amounts not
in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing
interest rates and invest the Portfolios in additional securities. The
Portfolio's borrowings are limited so that immediately after such borrowing the
value of the Portfolio's assets (including borrowings) less its liabilities (not
including borrowings) is at least three times the amount of the borrowings.
Should the Portfolio, for any reason, have borrowings that do not meet the above
test then, within three business days, the Portfolio must reduce such borrowings
so as to meet the necessary test. Under such a circumstance, the Portfolio have
to liquidate securities at a time when it is disadvantageous to do so.
7. The Portfolio will not make short sales except short sales made "against the
box" to defer recognition of taxable gains or losses.
8. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
9. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
10. The Portfolio will not purchase a security if as a result, more than 5% of
the value of that Portfolio's assets, at market value, would be invested in the
securities of issuers which, with their predecessors, have been in business less
than three years.
Investment Restrictions Applicable Only to the JanCap Growth Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except cash items and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
3. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
5. The Portfolio will not purchase or sell physical commodities other than
foreign currencies unless acquired as a result of ownership of securities (but
this shall not prevent the Portfolio from purchasing or selling options,
futures, swaps and forward contracts or from investing in securities and other
instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan, if as a
result, more than 25% of its total assets would be lent to other parties (but
this limitation does not apply to purchases of commercial paper, debt securities
or to repurchase agreements).
Investment Restrictions Applicable Only to the AST Janus Overseas Growth
Portfolio:
1. The Portfolio may borrow money for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). If borrowings exceed 33 1/3% of the value of the Portfolio's total
assets by reason of a decline in net assets, the Portfolio will reduce its
borrowings within three business days to the extent necessary to comply with the
33 1/3% limitation. This policy shall not prohibit reverse repurchase
agreements, deposits of assets to margin or guarantee positions in futures,
options, swaps or forward contracts, or the segregation of assets in connection
with such contracts.
2. The Portfolio will not, as to 75% of the value of its total assets, own more
than 10% of the outstanding voting securities of any one issuer, or purchase the
securities of any one issuer (except cash items and "government securities" as
defined under the 1940 Act as amended), if immediately after and as a result of
such purchase, the value of the holdings of the Portfolio in the securities of
such issuer exceeds 5% of the value of its total assets.
3. The Portfolio will not invest more than 25% of the value of its assets
in any particular industry (other than U.S. government securities).
4. The Portfolio will not invest directly in real estate or interests in real
estate; however, the Portfolio may own debt or equity securities issued by
companies engaged in those businesses.
5. The Portfolio will not purchase or sell physical commodities other than
foreign currencies unless acquired as a result of ownership of securities (but
this limitation shall not prevent the Portfolio from purchasing or selling
options, futures, swaps and forward contracts or from investing in securities or
other instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan if, as a
result, more than 25% of the Portfolio's total assets would be lent to other
parties (but this limitation does not apply to purchases of commercial paper,
debt securities or repurchase agreements).
7. The Portfolio will not act as an underwriter of securities issued by others,
except to the extent that the Portfolio may be deemed an underwriter in
connection with the disposition of its securities.
8. The Portfolio will not issue senior securities except in compliance with the
1940 Act.
Investment Restrictions Applicable Only to the AST Money Market Portfolio:
1. The Portfolio will not purchase a security if as a result, the Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
3. The Portfolio will not acquire any illiquid securities, such as repurchase
agreements with more than seven days to maturity or fixed time deposits with a
duration of over seven calendar days, if as a result thereof, more than 10% of
the market value of the Portfolio's total assets would be in investments which
are illiquid.
4. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, negotiable
certificates of deposit, time deposits, and bankers' acceptances of United
States branches of United States banks).
5. The Portfolio will not enter into reverse repurchase agreements exceeding in
the aggregate one-third of the market value of the Portfolio's total assets,
less liabilities other than obligations created by reverse repurchase
agreements.
6. The Portfolio will not borrow money, except from banks for extraordinary or
emergency purposes and then only in amounts not to exceed 10% of the value of
the Portfolio's total assets, taken at cost, at the time of such borrowing. The
Portfolio may not mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 10% of the value
of the Portfolio's net assets at the time of such borrowing. The Portfolio will
not purchase securities while borrowings exceed 5% of the Portfolio's total
assets. This borrowing provision is included to facilitate the orderly sale of
securities, for example, in the event of abnormally heavy redemption requests,
and is not for investment purposes and shall not apply to reverse repurchase
agreements.
7. The Portfolio will not make loans, except through purchasing or holding debt
obligations, or entering into repurchase agreements, or loans of Portfolio
securities in accordance with the Portfolio's investment objectives and
policies.
8. The Portfolio will not purchase securities on margin, make short sales of
securities, or maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of when-issued securities
or of securities for delivery at a future date.
9. The Portfolio will not purchase or sell puts, calls, straddles, spreads, or
any combination thereof; real estate; commodities; or commodity contracts or
interests in oil, gas or mineral exploration or development programs. However,
the Portfolio may purchase bonds or commercial paper issued by companies which
invest in real estate or interests therein including real estate investment
trusts.
Investment Restrictions Applicable Only to the Federated Utility Income
Portfolio:
1. The Portfolio will invest at least 25% of its total assets in securities
of utility companies.
2. The Portfolio will not purchase or sell commodities. However, the Portfolio
may purchase options on Portfolio securities and on financial futures contracts
for hedging purposes only.
3. The Portfolio will not purchase or sell real estate, although it may invest
in securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
4. The Portfolio will not purchase any securities on margin, other than in
connection with the purchase of put options on financial futures contracts, but
may obtain such short-term credits as may be necessary for the clearance of
transactions.
5. The Portfolio will not sell securities short unless: (i) during the time the
short position is open, it owns an equal amount of securities sold or securities
readily and freely convertible into or exchangeable, without payment of
additional consideration, for securities of the same issue as, and equal in
amount to, the securities sold short; and (ii) not more than 10% of the current
value of the Portfolio's net assets is held as collateral for such sales at any
one time.
6. The Portfolio will not issue senior securities, except that the Portfolio may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
7. The Portfolio will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary or
emergency measure to facilitate management of the Portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of Portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio will
not purchase any securities while any such borrowings are outstanding. However,
during the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Portfolio will restrict the purchase of portfolio investments to money
market instruments maturing on or before the expiration date of the reverse
repurchase agreements.
8. The Portfolio may lend Portfolio securities, as long as the value of the
loaned securities does not exceed one-third of the value of the Portfolio's
total assets. This shall not prevent the holding of corporate bonds, debentures,
notes, certificates of indebtedness or other debt securities of an issuer,
repurchase agreements, or other transactions which are permitted by the
Portfolio's Investment Objective and Policies.
9. The Portfolio will not invest more than 10% of its total assets in restricted
securities.
10. The Portfolio will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although it may purchase
securities of issuers which engage in whole or in part in such activities.
11. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
12. The Portfolio will not purchase the securities of any issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments secured by
the securities of such issuers, such as repurchase agreements or cash or cash
items) if, as a result, more than 5% of the value of its total assets would be
invested in the securities of such issuer, or acquire more than 10% of any class
of voting securities of any issuer. For these purposes, all common stock and
preferred stock of an issuer, taken together, will be deemed to be a single
class, regardless of priorities, series, designations, or other differences.
13. The Portfolio will not invest more than 5% of its net assets in warrants,
not more than 2% of which may be warrants not listed on the New York Stock
Exchange or American Stock Exchange.
Investment Restrictions Applicable Only to the Federated High Yield Portfolio:
1. The Portfolio will not purchase any securities on margin but may obtain such
short-term credits as may be necessary for the clearance of transactions.
2. The Portfolio will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and only in amounts
not in excess of 5% of the value of its net assets, taken at the lower of cost
or market. In addition, to meet redemption requests without immediately selling
portfolio securities, the Portfolio may borrow up to one-third of the value of
its total assets (including the amount borrowed) less its liabilities (not
including borrowings, but including the current fair market value of any
securities carried in open short positions). This practice is not for investment
leverage but solely to facilitate management of the portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. If, due to market
fluctuations or other reasons, the value of the Portfolio's assets falls below
300% of its borrowings, it will reduce its borrowings within three business
days. No more than 10% of the value of the Portfolio's total assets at the time
of providing such security may be used to secure borrowings.
3. The Portfolio will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments, securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as repurchase
agreements).
4. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
5. The Portfolio will not invest more than 5% of the value of its total
assets in foreign securities which are not publicly traded in the United States.
6. The Portfolio will not purchase or sell real estate, although it may invest
in marketable securities secured by real estate or interests in real estate, and
it may invest in the marketable securities of companies investing or dealing in
real estate.
7. The Portfolio will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral exploration or development programs. However, it may
invest in the marketable securities of companies investing in or sponsoring such
programs.
8. The Portfolio will not make loans, except through the purchase or holding of
securities in accordance with its investment objective, policies, and
limitations and through repurchase agreements. The Portfolio may invest up to 5%
of its total assets in repurchase agreements which mature more than seven days
from the time they are entered into. The Portfolio may lend portfolio securities
if the borrower provides 100% cash collateral in the form of cash or U.S.
government securities. This collateral must be valued daily and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral. The Portfolio retains the right to any dividends,
interest, or other distribution paid on the securities and any increase in their
market value. Loans will be subject to termination at the option of the
Portfolio or the borrower.
9. The Portfolio will not write, purchase, or sell puts, calls, or any
combination thereof.
10. The Portfolio will not make short sales of securities or maintain short
positions, unless: during the time the short position is open, it owns an equal
amount of the securities sold or securities readily and freely convertible into
or exchangeable, without payment of additional consideration, for securities of
the same issue as, and equal in amount to, the securities sold short; and not
more than 10% of the Portfolio's net assets (taken at current value) is held as
collateral for such sales at any one time.
11. The Portfolio will not purchase securities of a company for the purpose of
exercising control or management. However, the Portfolio may invest in up to 10%
of the voting securities of any one issuer and may exercise its voting powers
consistent with the best interests of the Portfolio. From time to time, the
Portfolio, together with other investment companies advised by subsidiaries or
affiliates of Federated Investors, may together buy and hold substantial amounts
of a company's voting stock. All such stock may be voted together. In some such
cases, the Portfolio and the other investment companies might collectively be
considered to be in control of the company in which they have invested. In some
cases, Directors, agents, employees, officers, or others affiliated with or
acting for the Portfolio, its Sub-advisor, or affiliated companies might
possibly become directors of companies in which the Portfolio holds stock.
12. The Portfolio will not invest more than 25% of the value of its total assets
in one industry. However, for temporary defensive purposes, the Portfolio may at
times invest more than that percentage in: cash and cash items; securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities;
or instruments secured by these money market instruments, such as repurchase
agreements.
Investment Restrictions Only Applicable to the T. Rowe Price Asset
Allocation Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures
contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the
value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly- distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. government, or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts on hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Only Applicable to the T. Rowe Price International
Equity Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that the Portfolio may enter
into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the
value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly-distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments back by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price Natural
Resources Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Portfolio may borrow from banks, other Price
Portfolios or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures
contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25%
of the value of the Portfolio's total assets would be invested in the securities
of issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and
participate in an interfund lending program with other Price Portfolio provided
that no such loan may be made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Portfolio's total assets; (ii) purchase money
market securities and enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the
above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow from or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry. Industries are determined by reference to the classifications of
industries set forth in the Portfolio's semi-annual and annual reports.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price International
Bond Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Borrow money, except as a temporary measure for extraordinary or emergency
purposes or except in connection with reverse repurchase agreements provided
that the Portfolio maintains asset coverage of 300% for all borrowings;
2. Purchase or sell real estate (except that the Portfolio may invest in (i)
securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Portfolio
reserves freedom of action to hold and to sell real estate acquired as a result
of the Portfolio's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
3. Act as underwriter of securities issued by others, except to the extent that
it may be deemed an underwriter in connection with the disposition of portfolio
securities of the Portfolio;
4. Make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent the entry into repurchase agreements and the purchase of debt
securities in accordance with its investment objectives and investment policies
may be deemed to be loans;
5. Issue senior securities except in compliance with the 1940 Act; or
6. Purchase any securities which would cause more than 25% of the market value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers having their principal business activities in
the same industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (for the purposes of this restriction, telephone
companies are considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents).
Investment Restrictions Applicable Only to the T. Rowe Price Small Company
Value Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Portfolio may borrow from banks, and other
funds or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into futures
contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of the
value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and
participate in an interfund lending program to the extent permitted by
applicable law, provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or privately-placed debt
securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the 1940 Act; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the
above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow from or lend to any other fund unless it applies for and receives an
exemptive order from the SEC, if so required, or the SEC issues rules permitting
such transactions. The Portfolio has no current intention of engaging in any
such activity and there is no assurance the SEC would grant any order requested
by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the Founders Capital
Appreciation Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Purchase any securities on margin except to obtain such short-term credits as
may be necessary for the clearance of transactions.
2. Sell securities short.
3. Make loans to other persons; the purchase of a portion of an issue of
publicly distributed bonds, debentures or other securities is not considered the
making of a loan by the Portfolio. The Portfolio may also enter into repurchase
agreements by purchasing U.S. Government securities with a simultaneous
agreement with the seller to repurchase them at the original purchase price plus
accrued interest.
4. Underwrite the securities of other issuers.
5. Invest in commodities, commodity futures contracts, real estate, real estate
mortgage loans or other illiquid interests in real estate, except that the
Portfolio may invest in securities of issuers which invest in commodities,
commodity futures, real estate, real estate mortgage loans or other illiquid
interests in real estate.
6. Make any investment which would concentrate 25% or more of the Portfolio's
total assets in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
7. Issue any senior securities.
8. Borrow money, except for extraordinary or emergency purposes, and then only
from banks in amounts up to 10% of the Portfolio's net assets computed at the
lesser of cost or value.
In applying the above restriction regarding investments in a single
industry, the Portfolio uses industry classifications based, where applicable,
on Bridge Information Systems, Reuters, the S&P Stock Guide published by
Standard & Poor's, information obtained from Bloomberg L.P. and Moody's
International, and/or the prospectus of the issuing company. Selection of an
appropriate industry classification resource will be made by the Sub-advisor in
the exercise of its reasonable discretion. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the Founders Passport Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Make loans of money or securities other than (a) through the purchase of
securities in accordance with the Portfolio's investment objective, (b) through
repurchase agreements, and (c) by lending portfolio securities in an amount not
to exceed 33 1/3% of the Portfolio's total assets;
2. Underwrite securities issued by others except to the extent that the
Portfolio may be deemed an underwriter when purchasing or selling securities;
3. Issue senior securities;
4. Invest directly in physical commodities (other than foreign currencies), real
estate or interests in real estate; provided, that the Portfolio may invest in
securities of issuers which invest in physical commodities, real estate or
interests in real estate; and, provided further, that this restriction shall not
prevent the Portfolio from purchasing or selling options, futures, swaps and
forward contracts, or from investing in securities or other instruments backed
by physical commodities, real estate or interests in real estate;
5. Make any investment which would concentrate 25% or more of the Portfolio's
total assets in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
6. Borrow money except from banks in amounts up to 33 1/3% of the
Portfolio's total assets;
7. As to 75% of the value of its total assets, invest more than 5% of its total
assets, at market value, in the securities of any one issuer (except securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
or
8. As to 75% of the value of its total assets, purchase more than 10% of any
class of securities of any single issuer or purchase more than 10% of the voting
securities of any single issuer.
In applying the above restriction regarding investments in a single
industry, the Portfolio uses industry classifications based, where applicable,
on Bridge Information Systems, Reuters, the S&P Stock Guide published by
Standard & Poor's, information obtained from Bloomberg L.P. and Moody's
International, and/or the prospectus of the issuing company. Selection of an
appropriate industry classification resource will be made by the Sub-advisor in
the exercise of its reasonable discretion. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the INVESCO Equity Income Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue preference shares or create any funded debt;
2. Sell short;
3. Borrow money except from banks in excess of 5% of the value of its total
net assets, and when borrowing, it is a temporary measure for emergency
purposes;
4. Buy or sell real estate, commodities, commodity contracts (however, the
Portfolio may purchase securities of companies investing in real estate);
5. Purchase any security or enter into a repurchase agreement, if as a result,
more than 15% of its net assets would be invested in repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
in securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees or the
Investment Manager or the Sub-advisor, acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to that rule, and therefore that such securities are not
subject to the foregoing limitation;
6. Purchase securities if the purchase would cause the Portfolio, at the
time, to have more than 5% of its total assets invested in the securities of any
one company or to own more than 10% of the voting securities of any one company
(except obligations issued or guaranteed by the U.S. Government);
7. Make loans to any person, except through the purchase of debt securities in
accordance with the Portfolio's investment policies, or the lending of portfolio
securities to broker-dealers or other institutional investors, or the entering
into repurchase agreements with member banks of the Federal Reserve System,
registered broker-dealers and registered government securities dealers. The
aggregate value of all portfolio securities loaned may not exceed 33-1/3% of the
Portfolio's total net assets (taken at current value); or
8. Invest more than 25% of the value of the Portfolio's assets in one particular
industry.
Investment Restrictions Applicable Only to the PIMCO Total Return Bond
Portfolio:
1. The Portfolio will not invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market value at the time
of investment) would be invested in securities of issuers of a particular
industry, except that this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities (or
repurchase agreements with respect thereto);
2. The Portfolio will not, with respect to 75% of its total assets, invest in a
security if, as a result of such investment, more than 5% of its total assets
(taken at market value at the time of investment) would be invested in the
securities of any one issuer, except that this restriction does not apply to
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities (or repurchase agreements with respect thereto);
3. The Portfolio will not, with respect to 75% of its assets, invest in a
security if, as a result of such investment, it would hold more than 10% (taken
at the time of investment) of the outstanding voting securities of any one
issuer;
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein);
5. The Portfolio will not purchase or sell commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit the Portfolio, subject to
restrictions stated in the Trust's Prospectus and elsewhere in this Statement,
from purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities related or foreign currency-related hedging
instrument, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities laws or
commodities laws;
6. The Portfolio will not borrow money, issue senior securities, pledge,
mortgage, hypothecate its assets, except that the Portfolio may (i) borrow from
banks or enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is an asset coverage of 300% and (ii)
enter into transactions in options, futures and options on futures and other
derivative instruments as described in the Trust's Prospectus and this Statement
(the deposit of assets in escrow in connection with the writing of covered put
and call options and the purchase of securities on a when-issued or delayed
delivery basis, collateral arrangements with respect to initial or variation
margin deposits for future contracts and commitments entered into under swap
agreements or other derivative instruments, will not be deemed to be pledges of
the Portfolio's assets);
7. The Portfolio will not lend funds or other assets, except that the Portfolio
may, consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of a loan, (b) enter into repurchase agreements,
and (c) lend its Portfolio securities in an amount not to exceed one-third the
value of its total assets, provided such loans are and in accordance with
applicable guidelines established by the SEC and the Trust's Board of Trustees;
or
8. The Portfolio will not maintain a short position, or purchase, write or sell
puts, calls, straddles, spreads or combinations thereof, except as set forth in
the Trust's Prospectus and this Statement for transactions in options, futures,
and options on futures transactions arising under swap agreements or other
derivative instruments.
Investment Restrictions Applicable Only to the PIMCO Limited Maturity Bond
Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Invest in a security if, as a result of such investment, more than 25% of its
total assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
2. With respect to 75% of its assets, invest in a security if, as a result of
such investment, more than 5% of its total assets (taken at market value at the
time of such investment) would be invested in securities of any one issuer,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities;
3. With respect to 75% of its assets, invest in a security if, as a result of
such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer;
4. Purchase or sell real estate (although it may purchase securities secured by
real estate or interests therein, or securities issued by companies which invest
in real estate, or interests therein);
5. Purchase or sell commodities or commodities contracts or oil, gas or mineral
programs. This restriction shall not prohibit the Portfolio, subject to
restrictions described in the Prospectus and elsewhere in this Statement, from
purchasing, selling or entering into futures contracts, options, or any interest
rate, securities-related or foreign currency-related hedging instrument,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws;
6. Borrow money, issue senior securities, or pledge, mortgage or hypothecate its
assets, except that the Portfolio may (i) borrow from banks or enter into
reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, but only if immediately after each
borrowing there is asset coverage of 300% and (ii) enter into transactions in
options, futures and options on futures and other derivative instruments as
described in the Prospectus and in this Statement (the deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for futures
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio assets);
7. Lend any funds or other assets, except that a Portfolio may, consistent with
its investment objective and policies: (a) invest in debt obligations, including
bonds, debentures or other debt securities, banker' acceptance and commercial
paper, even though the purchase of such obligations may be deemed to be the
making of loans, (b) enter into repurchase agreements, and (c) lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the Trust's
Board of Trustees; or
8. Maintain a short position, or purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except on such conditions as may be set forth
in the Prospectus and in this Statement.
Investment Restrictions Applicable Only to the Berger Capital Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Purchase the securities of any one issuer (except U.S. Government securities)
if immediately after and as a result of such purchase (a) the value of the
holdings of the Portfolio in the securities of such issuer exceeds 5% of the
value of the Portfolio's total assets or (b) the Portfolio owns more than 10% of
the outstanding voting securities or of any class of securities of such issuer.
2. Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if such purchase would
cause the Portfolio's investments in all such companies taken at cost to exceed
5% of the value of the Portfolio's total assets.
3. Invest in any one industry more than 25% of the value of its total
assets at the time of such investment.
4. Purchase securities on margin from a broker or dealer or make short sales of
securities.
5. Make loans, except that the Portfolio may enter into repurchase agreements in
accordance with the Trust's investment policies. The Portfolio does not, for
this purpose, consider the purchase of all or a portion of an issue of publicly
distributed bonds, bank loan participation agreements, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or not
the purchase is made upon the original issuance of the securities, to be the
making of a loan.
6. Borrow in excess of 5% of the value of its total assets, or pledge, mortgage,
or hypothecate its assets taken at market value to an extent greater than 10% of
the Portfolio's total assets taken at cost (and no borrowing may be undertaken
except from banks as a temporary measure for extraordinary or emergency
purposes).
7. Act as a securities underwriter (except to the extent the Portfolio may be
deemed an underwriter under the Securities Act of 1933 in disposing of a
security), issue senior securities (except to the extent permitted under the
1940 Act), invest in real estate although it may purchase shares of a real
estate investment trust), or invest in commodities or commodity contracts.
8. Participate on a joint or joint and several basis in any securities trading
account.
Investment Restrictions Applicable Only to the Robertson Stephens Value +
Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue any class of securities which is senior to the Portfolio's shares of
beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. Purchase securities on margin (but the Portfolio may obtain such short-term
credits as may be necessary for the clearance of transactions). (Margin payments
or other arrangements in connection with transactions in short sales, futures
contracts, options, and other financial instruments are not considered to
constitute the purchase of securities on margin for this purpose.);
3. Borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. Act as underwriter of securities of other issuers except to the extent that,
in connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under certain federal securities laws;
5. As to 75% of the Portfolio's total assets, purchase any security (other than
obligations of the U.S. Government, its agencies or instrumentalities) if as a
result: (i) more than 5% of the Portfolio's total assets (taken at current
value) would then be invested in securities of a single issuer, or (ii) more
than 25% of the Portfolio's total assets (taken at current value) would be
invested in a single industry;
6. Invest in securities of any issuer if any officer or Trustee of the Trust or
any officer or director of the Sub-advisor, as the case may be, owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers,
Trustees and directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer; or
7. Make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities.
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
Investment Restrictions Applicable Only to the Twentieth Century
International Growth Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its portfolio securities except to unaffiliated persons and subject to
the rules and regulations adopted under the 1940 Act. No such rules and
regulations have been issued, but it is Sub-advisor's policy that such loans
must be secured continuously by cash collateral maintained on a current basis in
an amount at least equal to the market value of the securities loaned, or by
irrevocable letters of credit. During the existence of the loan, the Portfolio
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities loaned and interest on the investment of the
collateral; the Portfolio must have the right to call the loan and obtain the
securities loaned at any time on five days' notice, including the right to call
the loan to enable the Portfolio to vote the securities. To comply with the
regulations of certain state securities administrators, such loans may not
exceed one-third of the Portfolio's net assets taken at market;
2. With respect to 75% of the value of its total assets, purchase the security
of any one issuer if such purchase would cause more than 5% of the Portfolio's
assets at market to be invested in the securities of such issuer, except U.S.
government securities, or if the purchase would cause more than 10% of the
outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash and
U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be
deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this
restriction will not preclude the Portfolio from investing in securities of
corporations that deal in real estate);
7. Purchase or sell commodities or commodity contracts; except that the
Portfolio may, for non-speculative purposes, buy or sell interest rate futures
contracts on debt securities (debt futures and bond index futures) and related
options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total
assets of the Portfolio, and then only for emergency and extraordinary purposes;
this does not prohibit the escrow and collateral arrangements in connection with
investment in interest rate futures contracts and related options by the
Portfolio.
In determining industry groups for purposes of the above restriction
regarding investments in a single industry, the Securities and Exchange
Commission ordinarily uses the Standard Industry Classification codes developed
by the United States Office of Management and Budget. The Sub-advisor monitors
industry concentration using a more restrictive list of industry groups than
that recommended by the Securities and Exchange Commission. The Sub-advisor
believes that these classifications are reasonable and are not so broad that the
primary economic characteristics of the companies in a single class are
materially different. The use of these more restrictive industry classifications
may, however, cause the Portfolio to forego investment possibilities which may
otherwise be available to it under the 1940 Act. (This note is not a fundamental
policy.)
Investment Restrictions Applicable Only to the Twentieth Century Strategic
Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Lend its securities except to unaffiliated persons and subject to the rules
and regulations adopted under the 1940 Act. No such rules and regulations have
been promulgated, but it is the Sub-advisor's policy that such loans must be
secured continuously by cash collateral maintained on a current basis in an
amount at least equal to the market value of the securities loaned, or by
irrevocable letters of credit. During the existence of the loan, the Sub-advisor
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities loaned and interest on the investment of the
collateral; the Portfolio must have the right to call the loan and obtain the
securities loaned at any time on five days' notice, including the right to call
the loan to enable the Portfolio to vote the securities. To comply with the
regulations of certain state securities administrators, such loans may not
exceed one-third of the Portfolio's net assets taken at market.
2. With respect to 75% of the value of its total assets, purchase the security
of any one issuer if such purchase would cause more than 5% of the Portfolio's
assets at market to be invested in the securities of such issuer, except United
States government securities, or if the purchase would cause more than 10% of
the outstanding voting securities of any one issuer to be held in the Portfolio;
3. Invest more than 25% of the assets of the Portfolio, exclusive of cash and
U.S. government securities, in securities of any one industry;
4. Issue any senior security except in compliance with the 1940 Act;
5. Underwrite any securities except to the extent that the Portfolio may be
deemed an underwriter when purchasing or selling securities;
6. Purchase or sell real estate. (In the opinion of the Sub-advisor, this
restriction will not preclude the Portfolio from investing in securities of
corporations that deal in real estate.);
7. Purchase or sell commodities or commodity contracts; except that the
Portfolio may, for non-speculative purposes, buy or sell interest rate futures
contracts on debt securities (debt futures and bond index futures) and related
options; or
8. Borrow any money, except in an amount not in excess of 33 1/3% of the total
assets of the Portfolio, and then only for emergency and extraordinary purposes;
this does not prohibit the escrow and collateral arrangements in connection with
investment in interest rate futures contracts and related options by the
Portfolio.
Investment Restrictions Applicable Only to the AST Putnam Value Growth & Income
Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money in excess of 33 1/3% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at the
time the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased;
2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein;
4. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options;
5. Make loans, except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Portfolio's total assets would be invested in any one industry; or
9. Issue any class of securities which is senior to the Portfolio's shares of
beneficial interest.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions Applicable Only to the AST Putnam International
Equity Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Borrow money except from banks and then in amounts not in excess of 33 1/3%
of its total assets. The Portfolio may borrow at prevailing interest rates and
invest the funds in additional securities. The Portfolio's borrowings are
limited so that immediately after such borrowing the value of the Portfolio's
assets (including borrowings) less its liabilities (not including borrowings) is
at least three times the amount of the borrowings. Should the Portfolio, for any
reason, have borrowings that do not meet the above test then, within three
business days, the Portfolio must reduce such borrowings so as to meet the
necessary test. Under such a circumstance, the Portfolio may have to liquidate
securities at a time when it is disadvantageous to do so;
2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under certain federal securities laws;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities representing interests in real estate, and it may acquire
and dispose of real estate or interests in real estate acquired through the
exercise of its rights as a holder of debt obligations secured by real estate or
interests therein;
4. Purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and related options;
5. Make loans, except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities;
6. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
7. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
8. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if as a result of such purchase more than 25% of
the Portfolio's total assets would be invested in any one industry; or
9. Issue senior securities.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions Applicable Only to the AST Putnam Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. With respect to 75% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total assets
of the Portfolio (taken at current value) would be invested in the securities of
such issuer; provided that this limitation does not apply to obligations issued
or guaranteed as to interest or principal by the U.S. government or its agencies
or instrumentalities;
2. With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer;
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein;
4. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Portfolio's total assets would be invested in any one industry;
5. Invest in commodities or commodity contracts except that it may purchase or
sell financial futures contracts and options thereon;
6. Underwrite securities issued by others except to the extent that the
Portfolio may be deemed an underwriter when purchasing or selling securities;
7. Borrow money in excess of 10% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at the
time the borrowing is made, and then only from banks as a temporary measure to
facilitate the meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes. Such borrowings will be repaid before any
additional investments are purchased;
8. Make loans, except by purchase of debt obligations in which the Portfolio may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities; or
9. Issue senior securities.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions Applicable Only to the Lord Abbett Small Cap Value
Portfolio, the Robertson Stephens Contrarian Portfolio, the Cohen & Steers Real
Estate Investment Portfolio, the Stein Roe Small Cap Blend Portfolio, the
Bankers Trust Enhanced 500 Index Portfolio, and the Marsico Capital Growth
Portfolio.
1. No Portfolio may issue senior securities, except as permitted under
the 1940 Act.
2. No Portfolio may borrow money, except that a Portfolio may (i)
borrow money for non-leveraging, temporary or emergency purposes, and (ii)
engage in reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent with
the Portfolio's investment objective and policies; provided that the combination
of (i) and (ii) shall not exceed 33 1/3% of the value of the Portfolio's assets
(including the amount borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which come to exceed this
amount will be reduced in accordance with applicable law. Subject to the above
limitations, a Portfolio may borrow from banks or other persons to the extent
permitted by applicable law.
3. No Portfolio may underwrite securities issued by other persons,
except to the extent that the Portfolio may be deemed to be an underwriter
(within the meaning of the Securities Act of 1933) in connection with the
purchase and sale of portfolio securities.
4. No Portfolio may purchase or sell real estate unless acquired as a
result of the ownership of securities or other instruments; provided that this
restriction shall not prohibit a Portfolio from investing in securities or other
instruments backed by real estate or in securities of companies engaged in the
real estate business.
5. No Portfolio other than the Robertson Stephens Contrarian Portfolio
may purchase or sell physical commodities unless acquired as a result of the
ownership of securities or instruments; provided that this restriction shall not
prohibit a Portfolio from (i) engaging in permissible options and futures
transactions and forward foreign currency contracts in accordance with the
Portfolio's investment policies, or (ii) investing in securities of any kind.
The Robertson Stephens Contrarian Portfolio may not purchase or sell physical
commodities, although this restriction will not prohibit the Portfolio from (i)
investing in companies that engage in commodity businesses to the extent
otherwise permitted by the Portfolio's investment policies and restrictions and
by applicable law, (ii) engaging in the options, futures and commodity
activities described in the Prospectus and elsewhere in this SAI, or (iii)
investing in securities of any kind.
6. No Portfolio may make loans, except that a Portfolio may (i) lend
portfolio securities in accordance with the Portfolio's investment policies in
amounts up to 33 1/3% of the total assets of the Portfolio taken at market
value, (ii) purchase money market securities and enter into repurchase
agreements, and (iii) acquire publicly distributed or privately placed debt
securities.
7. No Portfolio other than the Cohen & Steers Real Estate Investment
Portfolio may purchase any security if, as a result, more than 25% of the value
of the Portfolio's assets would be invested in the securities of issuers having
their principal business activities in the same industry; provided that this
restriction does not apply to investments in obligations issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities (or repurchase
agreements with respect thereto). The Cohen & Steers Real Estate Investment
Portfolio will invest at least 25% of its total assets in securities of
companies engaged in the real estate business.
8. No Portfolio, other than the Cohen & Steers Real Estate Investment
Portfolio and the Robertson Stephens Contrarian Portfolio, may, with respect to
75% of the value of its total assets, purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities) if, as a result, (i) more than 5% of the value of
the Portfolio's total assets would be invested in the securities of such issuer,
or (ii) more than 10% of the outstanding voting securities of such issuer would
be held by the Portfolio. The Cohen & Steers Real Estate Investment Portfolio
and the Robertson Stephens Contrarian Portfolio may not, with respect to 50% of
its total assets, invest in the securities of any one issuer (other than the
U.S. Government and its agencies and instrumentalities), if immediately after
and as a result of such investment more than 5% of the total assets of either
Portfolio would be invested in such issuer.
If a restriction on a Portfolio's investments is adhered to at the time
an investment is made, a subsequent change in the percentage of Portfolio assets
invested in certain securities or other instruments, or change in average
duration of the Portfolio's investment portfolio, resulting from changes in the
value of the Portfolio's total assets, will not be considered a violation of the
restriction; provided, however, that the asset coverage requirement applicable
to borrowings shall be maintained in the manner contemplated by applicable law.
With respect to investment restrictions (2) and (6), a Portfolio will
not borrow or lend to any other fund unless it applies for and receives an
exemptive order from the Securities and Exchange Commission (the "Commission"),
if so required, or the Commission issues rules permitting such transactions.
There is no assurance the Commission would grant any order requested by a
Portfolio or promulgate any rules allowing the transactions.
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the investment instruments, techniques and methods which may be
used by one or more of the Portfolios and the risks attendant thereto are
described below. Other risk factors and investment methods may be described in
the "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods" section in the Trust's Prospectus and in the "Investment
Objectives and Policies" section of this Statement. The risks and investment
methods described below apply only to those Portfolios which may invest in such
instruments or use such techniques.
Debt Obligations:
Yields on short, intermediate, and long-term securities are dependent
on a variety of factors, including, the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Portfolio to
achieve its investment objectives is also dependent on the continuing ability of
the issuers of the debt securities in which the Portfolio invests to meet their
obligations for the payment of interest and principal when due.
Special Risks Associated with Low-Rated and Comparable Unrated Securities:
Low-rated and comparable unrated securities, while generally offering
higher yields than investment-grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with such investments are discussed below. See the Appendix of this Statement
for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Portfolio might
incur additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of low-rated and comparable unrated securities and thus in a Portfolio's net
asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Portfolio's net asset
value. If a Portfolio experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of high-yield
securities (discussed below) a Portfolio may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a
Portfolio's asset base over which expenses could be allocated and could result
in a reduced rate of return for a Portfolio.
Payment Expectations. Low-rated and comparable unrated securities
typically contain redemption, call, or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Portfolio may have to replace the securities with a lower-yielding security,
which would result in a lower return for a Portfolio.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such issuers
may not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the Sub-advisor's credit analysis than would be the case with
investments in investment-grade debt securities. The Sub-advisor may employ its
own credit research and analysis, which could include a study of existing debt,
capital structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Sub-advisor continually monitors the investments in a Portfolio
and evaluates whether to dispose of or to retain low-rated and comparable
unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. A Portfolio anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Portfolio's asset value and a Portfolio's ability to
dispose of particular securities, when necessary to meet a Portfolio's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing a
Portfolio. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder (buyer)
the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
When writing a call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, a Portfolio will realize a gain or loss from the sale of the
underlying security or currency.
Writing (Selling) Put Options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to buy, the
underlying security or currency at the exercise price during the option period
(American style) or at the expiration of the option (European style). So long as
the obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
Premium Received from Writing Call or Put Options. A Portfolio will
receive a premium from writing a put or call option, which increases such
Portfolio's return in the event the option expires unexercised or is closed out
at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of the underlying
security or currency. A Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written. A Portfolio
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Portfolio.
Furthermore, effecting a closing transaction will permit the Portfolio
to write another call option on the underlying security or currency with either
a different exercise price or expiration date or both. If the Portfolio desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Portfolio will be able to
effect such closing transactions at a favorable price. If the Portfolio cannot
enter into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When the Portfolio writes a covered call
option, it runs the risk of not being able to participate in the appreciation of
the underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The
Portfolio will pay transaction costs in connection with the writing of options
to close out previously written options. Such transaction costs are normally
higher than those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a Portfolio
for the purpose of acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call options enables the
Portfolio to acquire the securities or currencies at the exercise price of the
call option plus the premium paid. At times the net cost of acquiring securities
or currencies in this manner may be less than the cost of acquiring the
securities or currencies directly. This technique may also be useful to a
Portfolio in purchasing a large block of securities or currencies that would be
more difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the
Portfolio is partially protected from any unexpected decline in the market price
of the underlying security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the premium paid for
the option.
Purchasing Put Options. A Portfolio may purchase a put option on an
underlying security or currency (a "protective put") owned by the Portfolio as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Portfolio, as the holder of the put option,
is able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Portfolio purchases put options at a time when the Portfolio does
not own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Portfolio seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Portfolio will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
Dealer Options. Exchange-traded options generally have a continuous
liquid market while dealer options have none. Consequently, the Portfolio will
generally be able to realize the value of a dealer option it has purchased only
by exercising it or reselling it to the dealer who issued it. Similarly, when
the Portfolio writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the option.
While the Portfolio will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate a dealer option at a favorable price at any time prior
to expiration. Until the Portfolio, as a covered dealer call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Portfolio may be
unable to liquidate a dealer option. With respect to options written by the
Portfolio, the inability to enter into a closing transaction may result in
material losses to the Portfolio. For example, since the Portfolio must maintain
a secured position with respect to any call option on a security it writes, the
Portfolio may not sell the assets which it has segregated to secure the position
while it is obligated under the option. This requirement may impair the
Portfolio's ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Portfolio may treat the cover used for written OTC options as
liquid if the dealer agrees that the Portfolio may repurchase the OTC option it
has written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. To this extent, the Portfolio will treat dealer options as subject to
the Portfolio's limitation on unmarketable securities. If the SEC changes its
position on the liquidity of dealer options, the Portfolio will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options: During the option period, a Portfolio, as writer of a call option
has, in return for the premium received on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Portfolio may lose the premium it
paid plus transaction costs. If the Portfolio does not exercise the option and
is unable to close out the position prior to expiration of the option, it will
lose its entire investment.
An option position may be closed out only on an exchange which provides
a secondary market. There can be no assurance that a liquid secondary market
will exist for a particular option at a particular time and that the Portfolio
can close out its position by effecting a closing transaction. If the Portfolio
is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, the Portfolio may not be able to sell the underlying security at a
time when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices:
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
Risk Factors in Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether the Portfolio will
realize a gain or a loss on the purchase or sale of an option on an index
depends upon the movements in the level of prices in the market generally or in
an industry or market segment rather than upon movements in the price of the
individual security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Portfolio would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased, which
would result in substantial losses.
Price movements in Portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Portfolio bears the
risk that the price of the securities may not increase as much as the level of
the index. In this event, the Portfolio would bear a loss on the call which
would not be completely offset by movements in the prices of the securities. It
is also possible that the index may rise when the value of the Portfolio's
securities does not. If this occurred, a Portfolio would experience a loss on
the call which would not be offset by an increase in the value of its securities
and might also experience a loss in the market value of its securities.
Unless a Portfolio has other liquid assets which are sufficient to
satisfy the exercise of a call on the index, the Portfolio will be required to
liquidate securities in order to satisfy the exercise.
When a Portfolio has written a call on an index, there is also the risk
that the market may decline between the time the Portfolio has the call
exercised against it, at a price which is fixed as of the closing level of the
index on the date of exercise, and the time the Portfolio is able to sell
securities. As with options on securities, the Sub-advisor will not learn that a
call has been exercised until the day following the exercise date, but, unlike a
call on securities where the Portfolio would be able to deliver the underlying
security in settlement, the Portfolio may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Portfolio exercises a put option on an index which it has
purchased before final determination of the closing index value for the day, it
runs the risk that the level of the underlying index may change before closing.
If this change causes the exercised option to fall "out-of-the-money" the
Portfolio will be required to pay the difference between the closing index value
and the exercise price of the option (multiplied by the applicable multiplier)
to the assigned writer. Although the Portfolio may be able to minimize this risk
by withholding exercise instructions until just before the daily cutoff time or
by selling rather than exercising an option when the index level is close to the
exercise price, it may not be possible to eliminate this risk entirely because
the cutoff time for index options may be earlier than those fixed for other
types of options and may occur before definitive closing index values are
announced.
Trading in Futures:
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time and
place designated at the time the contract is made. Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when the Portfolio purchases or sells a security, no price
would be paid or received by the Portfolio upon the purchase or sale of a
futures contract. Upon entering into a futures contract, and to maintain the
Portfolio's open positions in futures contracts, the Portfolio would be required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable money market
instruments, or other liquid securities, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Portfolio.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Portfolio expects
to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for the
underlying instruments, in practice most futures contracts are usually closed
out before the delivery date. Closing out an open futures contract purchase or
sale is effected by entering into an offsetting futures contract purchase or
sale, respectively, for the same aggregate amount of the identical securities
and the same delivery date. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain; if it is less, the
Portfolio realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Portfolio will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Portfolio is not able to enter
into an offsetting transaction, the Portfolio will continue to be required to
maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level of
the UK Financial Times 100 Share Index on a given future date. Settlement of a
stock index futures contract may or may not be in the underlying security. If
not in the underlying security, then settlement will be made in cash, equivalent
over time to the difference between the contract price and the actual price of
the underlying asset at the time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss.
Commissions on financial futures contracts and related options
transactions may be higher than those which would apply to purchases and sales
of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that Futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for Futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated Futures
contracts. A public market exists in Futures contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Regulatory Matters. The Staff of Securities and Exchange Commission
("SEC") has taken the position that the purchase and sale of futures contracts
and the writing of related options may give rise to "senior securities" for the
purposes of the restrictions contained in Section 18 of the 1940 Act on
investment companies' issuing senior securities. However, the Staff has taken
the position that no senior security will be created if a Portfolio maintains in
a segregated account an amount of cash or other liquid assets at least equal to
the amount of the Portfolio's obligation under the futures contract or option.
Similarly, no senior security will be created if a Portfolio "covers" its
futures and options positions by owning corresponding positions or securities
underlying the positions that enable the Portfolio to close out its futures and
options positions without paying additional cash consideration. Each Portfolio
will conduct its purchases and sales of any futures contracts and writing of
related options transactions in accordance with these requirements.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be certain
that the Portfolio has sufficient assets to satisfy its obligations under a
futures contract, the Portfolio earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Portfolio may elect to close some or all of
its futures positions at any time prior to their expiration. The Portfolio would
do so to reduce exposure represented by long futures positions or increase
exposure represented by short futures positions. The Portfolio may close its
positions by taking opposite positions which would operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin would then be made, additional cash would be required to be paid by or
released to the Portfolio, and the Portfolio would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Portfolio intends
to purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Portfolio would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Portfolio of
futures contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. Sub-advisor will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in its judgment, will have a significant
correlation with movements in the prices of the Portfolio's underlying
instruments sought to be hedged.
Successful use of futures contracts by the Portfolio for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when the
Portfolio has sold futures to hedge its portfolio against a decline in the
market, the index, indices, or underlying instruments on which the futures are
written might advance and the value of the underlying instruments held in the
Portfolio's portfolio might decline. If this were to occur, the Portfolio would
lose money on the futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a certain degree,
Sub-advisor may believe that over time the value of the Portfolio's portfolio
will tend to move in the same direction as the market indices which are intended
to correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Portfolio were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased, the Portfolio
would lose part or all of the benefit of increased value of those underlying
instruments that it has hedged, because it would have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio had
insufficient cash, it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying instruments might be,
but would not necessarily be, at increased prices (which would reflect the
rising market). The Portfolio might have to sell underlying instruments at a
time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by Sub-advisor might
not result in a successful hedging transaction over a very short time period.
Certain Risks of Options on Futures Contracts. The Portfolio may seek
to close out an option position by writing or buying an offsetting option
covering the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options:
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers who trade foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from customers for foreign futures or foreign
options transactions may not be provided the same protections as funds received
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time your order is placed and the time it is
liquidated, offset or exercised.
Foreign Currency Futures Contracts and Related Options. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the interbank market
conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades.
Depending on the applicable investment policies and restrictions
applicable to a Portfolio, a Portfolio may generally enter into forward foreign
currency exchange contracts under two circumstances. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Portfolio may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities, denominated in any currency, to cover
the amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
Purchase and Sale of Currency Futures Contracts and Related Options. As
noted above, a currency futures contract sale creates an obligation by a
Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Portfolio, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors:
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The exchange
commitments can involve payments to be made in the same currency or in different
currencies. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually based principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Hybrid Instruments:
Hybrid instruments combine the elements of futures contracts or options
with those of debt, preferred equity or a depository instrument. The risks of
investing in hybrid instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement for a discussion of these risks. Further, the prices
of the hybrid instrument and the related commodity or currency may not move in
the same direction or at the same time. Hybrid instruments may bear interest or
pay preferred dividends at below market (or even relatively nominal) rates. In
addition, because the purchase and sale of hybrid instruments could take place
in an over-the-counter market or in a private transaction between the Portfolio
and the seller of the hybrid instrument, the creditworthiness of the contra
party to the transaction would be a risk factor which the Portfolio would have
to consider. Hybrid instruments also may not be subject to regulation of the
CFTC, which generally regulates the trading of commodity futures by U.S.
persons, the SEC, which regulates the offer and sale of securities by and to
U.S. persons, or any other governmental regulatory authority.
Foreign Currency Exchange-Related Securities:
Certain Portfolios may invest in foreign currency warrants and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are warrants which
entitle the holder to receive from their issuer an amount of cash (generally,
for warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero-Coupon Securities:
Zero-coupon securities pay no cash income and are sold at substantial
discounts from their value at maturity. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. Zero-coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest (cash). Zero-coupon securities which are convertible into common stock
offer the opportunity for capital appreciation as increases (or decreases) in
market value of such securities closely follows the movements in the market
value of the underlying common stock. Zero-coupon convertible securities
generally are expected to be less volatile than the underlying common stocks, as
they usually are issued with maturities of 15 years or less and are issued with
options and/or redemption features exercisable by the holder of the obligation
entitling the holder to redeem the obligation and receive a defined cash
payment.
Zero-coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries
(CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Portfolio, most
likely will be deemed the beneficial holder of the underlying U.S.
Government securities.
The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero-coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities that the Treasury sells
itself.
When-Issued Securities:
The price of when-issued securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period between
purchase and settlement, no payment is made by the Portfolio to the issuer and
no interest accrues to the Portfolio. Forward commitments involve a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in value of the
Portfolio's other assets. While when-issued securities may be sold prior to the
settlement date, the Portfolio intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
Mortgage-Backed Securities:
Principal and interest payments made on the mortgages in an underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to the Portfolio. This
principal is returned to the Portfolio at par. As a result, if a mortgage
security were trading at a premium, its total return would be lowered by
prepayments, and if a mortgage securities were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities:
Asset-backed securities directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets such as motor vehicle or credit card
receivables. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support."
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple classes
may be used as a method of providing credit support. This is accomplished
typically through creation of one or more classes whose right to payments on the
asset-backed security is made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support." Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with a class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Portfolio may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Portfolio.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may be backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may be
backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
Warrants:
Investments in warrants is speculative in that warrants have no voting
rights, pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of time. They do not
represent ownership of the securities but only the right to buy them. Warrants
differ from call options in that warrants are issued by the issuer of the
security which may be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Portfolio's assets denominated in that currency. Such changes will
also affect a Portfolio's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Portfolio's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens). The value of a Portfolio's
securities denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment in
certain of such countries and may increase the cost and expenses of a Portfolio.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
Additional or different restrictions may be imposed at any time by these or
other countries in which a Portfolio invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents. Although these restrictions may in the future make
it undesirable to invest in these countries, Sub-advisor does not believe that
any current repatriation restrictions would affect its decision to invest in
these countries.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Portfolio's securities may be less liquid
and more volatile than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable U.S.
securities and such levels may not be sustainable. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Portfolio will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a Portfolio's
foreign securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolio's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Portfolio.
Costs. Investors should understand that the expense ratio of the
Portfolio can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Portfolio are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of the Portfolio,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of the Portfolio's assets invested in such countries and these authorities may
not qualify as a foreign custodian under the 1940 Act and exemptive relief from
such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, a
number of Latin American countries are also among the largest debtors of
developing countries. There have been moratoria on, and reschedulings of,
repayment with respect to these debts. Such events can restrict the flexibility
of these debtor nations in the international markets and result in the
imposition of onerous conditions on their economics.
Certain Latin American countries may have managed currencies which are
maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and negative
effect on foreign investors. Certain Latin American countries also may restrict
the free conversion of their currency into foreign currencies, including the
U.S. dollar. There is no significant foreign exchange market for certain
currencies and it would, as a result, be difficult for the Portfolio to engage
in foreign currency transactions designed to protect the value of the
Portfolio's interests in securities denominated in such currencies.
PORTFOLIO TURNOVER: High turnover involves correspondingly greater
brokerage commissions and other transaction costs. Portfolio turnover
information can be found in the Trust's Prospectus under "Financial Highlights"
and "Portfolio Turnover."
Over the past two fiscal years the following Portfolios experienced
significant variation in their portfolio turnover rates. The turnover rate for
the T. Rowe Price International Bond Portfolio (formerly, the AST Scudder
International Bond Portfolio) for the year ended December 31, 1995 was 325% and
the year ended December 31, 1996 was 241%. Rowe Price-Fleming International,
Inc. became the Portfolio's Sub-advisor on May 1, 1996, and manages the
Portfolio with an anticipated annual rate of turnover not to exceed 350%. The
turnover rate for the Founders Passport Portfolio (formerly, the Seligman
Henderson International Small Cap Portfolio) from May 2, 1995 (commencement of
operations) to December 31, 1995 was 4% and for the year ended December 31, 1996
was 133%. Founders Asset Management, Inc. became the Portfolio's Sub-advisor on
October 15, 1996, and manages the Portfolio with an anticipated annual rate of
turnover not to exceed 150%. The turnover rate for the PIMCO Total Return Bond
Portfolio for the year ended December 31, 1995 was 124% and the year ended
December 31, 1996 was 403%. The portfolio turnover rate in 1996 resulted
primarily from the Sub-advisor's use of mortgage dollar rolls, which involve
monthly buy and sell transactions of mortgage-backed securities, and thereby
tend to generate high turnover. The turnover rate for the Berger Capital Growth
Portfolio for the year ended December 31, 1995 was 84% and for the year ended
December 31, 1996 was 156%. During 1996, the Sub-advisor used a more aggressive
trading strategy, which involved changing the Portfolio's emphasis on various
industries due to the respective valuations of the securities of issuers within
those industries. The turnover rate for the AST Putnam International Equity
Portfolio (formerly, the Seligman Henderson International Equity Portfolio) for
the years ended December 31, 1995 and 1996 were 59% and 124% respectively.
Putnam Investment Management, Inc. became the Portfolio's Sub-advisor on October
15, 1996, and manages the Portfolio with an anticipated annual rate of turnover
not to exceed 100%. The turnover rate for the AST Putnam Balanced Portfolio
(formerly, the AST Phoenix Balanced Asset Portfolio) for the years ended
December 31, 1995 and 1996 were 161% and 276% respectively. Putnam Investment
Management, Inc. became the Portfolio's Sub-advisor on October 15, 1996, and
manages the Portfolio with an anticipated annual rate of turnover not to exceed
200%.
The rate of turnover for the Robertson Stephens Value + Growth
Portfolio was 77% for the period from commencement of operations (May 2, 1996)
to December 31, 1996, and is not anticipated to exceed an annual rate of 250%
under normal market conditions. The annual rates of turnover for the AST Janus
Overseas Growth Portfolio, the T. Rowe Price Small Company Value Portfolio, the
Twentieth Century International Growth Portfolio, the Twentieth Century
Strategic Balanced Portfolio and the AST Putnam Value Growth & Income Portfolio,
all of which were first publicly offered in January 1997, are not anticipated to
exceed 200%, 100%, 150%, 150% and 100%, respectively, under normal market
conditions. The annual rates of turnover for the Lord Abbett Small Cap Value
Portfolio, the Robertson Stephens Contrarian Portfolio, the Cohen & Steers Real
Estate Investment Portfolio, the Stein Roe Small Cap Blend Portfolio, the
Bankers Trust Enhanced 500 Index Portfolio, and the Marsico Capital Growth
Portfolio, all of which are first being offered as of the date of this
Statement, are not anticipated to exceed 100%, 100%, 150%, 100%, 100%, and 100%,
respectively, under normal market conditions. The policy of the AST Money Market
Portfolio of investing only in securities maturing 397 days or less from the
date of acquisition or purchased pursuant to repurchase agreements that provide
for repurchase by the seller within 397 days from the date of acquisition will
result in a high portfolio turnover rate.
MANAGEMENT: The overall management of the business and affairs of the Trust is
vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust and persons or companies furnishing
services to the Trust, including the Trust's agreements with the Investment
Manager, Administrator, Custodian and Transfer and Shareholder Servicing Agent
and the agreements between the Investment Manager and each Sub-advisor. The
day-to-day operations of the Trust are delegated to the Trust's officers subject
always to the investment objectives and policies of the Trust and to the general
supervision of the Board of Trustees.
The Trustees and officers of the Trust and their principal occupations
are listed below. Unless otherwise indicated, the address of each Trustee and
executive officer is One Corporate Drive, Shelton, Connecticut 06484:
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Office and Age Principal Occupation
Gordon C. Boronow*+ President and Chief Operating Officer:
Vice President and Trustee (44) American Skandia Life Assurance Corporation
June 1989 to present
Jan R. Carendi*+ Senior Executive Vice President and
President, Principal Executive Officer Member of Corporate Management Group:
and Trustee (52) Skandia Insurance Company Ltd.
September 1986 to present
David E. A. Carson President, Chairman and Chief Executive Officer:
Trustee (63) People's Bank
850 Main Street
Bridgeport, Connecticut 06604
1983 to present
Richard G. Davy, Jr.*+ Controller:
Controller (49) American Skandia Investment
Services, Incorporated
September 1994 to present;
Self-employed Consultant
December 1991 to September 1994
Eric. C. Freed* Securities Counsel
Secretary (34) American Skandia Investment Holding Corporation
December 1996 to present;
Attorney, Senior Attorney and Special Counsel,
U.S. Securities and Exchange Commission
March 1991 to November 1996
Julian A. Lerner Semi-retired since 1995; Senior Vice President
Trustee (73) and Portfolio Manager of AIM Charter Fund
and AIM Summit Fund from 1986 to 1995:
12850 Spurling Road -- Suite 208
Dallas, Texas 75230
Thomas M. Mazzaferro*+ Executive Vice President and
Treasurer (Principal Financial Chief Financial Officer:
and Accounting Officer) (44) American Skandia Life Assurance Corporation
April 1988 to present
Thomas M. O'Brien Vice Chairman
Trustee (47) North Fork Bank
275 Broad Hollow Road
Melville, NY 11747;
January 1997 to present
President and Chief Executive Officer:
North Side Savings Bank
170 Tulip Avenue
Floral Park, New York 11001
December 1984 to December 1996
F. Don Schwartz Management Consultant:
Trustee (62) 1101 Penn Grant Road
Lancaster, PA 17602
April 1985 to present
</TABLE>
* Interested person as defined in the 1940 Act.
+ Individuals are officers and/or directors of one or more of the following
companies: American Skandia Investment Services, Incorporated (the Investment
Manager), American Skandia Life Assurance Corporation, American Skandia
Marketing, Incorporated (the principal underwriter for various annuities deemed
to be securities for American Skandia Life Assurance Corporation) and the
immediate parent of each these companies, American Skandia Investment Holding
Corporation.
The interested Trustees and officers of the Trust do not receive
compensation directly from the Trust for serving in such capacities. However,
those officers and Trustees of the Trust who are affiliated with the Investment
Manager may receive remuneration indirectly, as the Investment Manager will
receive fees from the Trust for the services it provides. Each of the other
Trustees receives an annual fee paid by the Trust plus expenses for each meeting
of the Board and of shareholders which he attends. Compensation received during
the year ended December 31, 1996 by the Trustees who are not interested persons
was as follows:
<TABLE>
<CAPTION>
Aggregate Compensation from Total Compensation from Registrant and
Name of Trustee ---------------------------------------- Fund Complex Paid to Trustee(1)
Registrant
- ------------------------------------------ -----------------------------------------
<S> <C> <C>
David E. A. Carson $39,500 $39,500
Julian A. Lerner(2) 7,500 7,500
Thomas M. O'Brien 39,500 39,500
F. Don Schwartz 39,500 39,500
</TABLE>
(1) As of the date of this Statement, the "Fund Complex" consisted of the
Trust, American Skandia Advisor Funds, Inc. ("ASAF"), and American Skandia
Master Trust ("ASMT"). Because ASAF commenced operations in July, 1997, ASMT
commenced operations in June, 1997, and the above table is for the year ended
December 31, 1996, the amount indicated reflects the compensation paid to the
above Trustees solely for their service on the Board of Trustees of the Trust.
(2) Mr. Lerner became a Trustee of the Trust in November, 1996.
The Trust does not offer pension or retirement benefits to its
Trustees.
Under the terms of the Massachusetts General Corporation Law, the Trust
may indemnify any person who was or is a Trustee, officer or employee of the
Trust to the maximum extent permitted by the Massachusetts General Corporation
Law; provided, however, that any such indemnification (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Board of Trustees, by
a majority vote of a quorum which consists of Trustees who are neither
"interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act
(the "1940 Act"), nor parties to the proceeding, or (ii) if the required quorum
is not obtainable or if a quorum of such Trustees so directs by independent
legal counsel in a written opinion. No indemnification will be provided by the
Trust to any Trustee or officer of the Trust for any liability to the Trust or
its shareholders to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
INVESTMENT ADVISORY AND OTHER SERVICES:
Investment Advisory Services: The Trust has entered into investment
management agreements with the Investment Manager (the "Management Agreements").
The Investment Manager furnishes each Portfolio with investment advice and
certain administrative services with respect to the applicable Portfolio's
assets subject to the supervision of the Board of Trustees and in conformity
with the stated policies of the applicable Portfolio. The Investment Manager has
engaged the Sub-advisors noted on the cover of this Statement to conduct the
various investment programs of each Portfolio pursuant to separate sub-advisory
agreements with the Investment Manager.
Under the terms of the Management Agreements, the Investment Manager
furnishes, at its expense, such personnel as is required by each Portfolio for
the proper conduct of its affairs and engages the Sub-advisors to conduct the
investment programs pursuant to the Investment Manager's obligations under the
Management Agreements. The Investment Manager, not the Trust, is responsible for
the expenses of conducting the investment programs. The Sub-advisor is
responsible for the expenses of conducting the investment programs in relation
to the applicable Portfolio pursuant to agreements between the Investment
Manager and each Sub-advisor. Each Portfolio pays all of its other expenses,
including but not limited to, brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder servicing agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and Trustees if available) of the Trust which inure to its
benefit, expenses relating to Trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Trust in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders. Expenses
incurred by the Trust not directly attributable to any specific Portfolio or
Portfolios are allocated on the basis of the net assets of the respective
Portfolios.
Under the terms of the Management Agreements, the Investment Manager is
permitted to render services to others. The Management Agreements provide that
neither the Investment Manager nor its personnel shall be liable for any error
of judgment or mistake of law or for any act or omission in the administration
or management of the applicable Portfolios, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Management Agreements.
The investment management fee paid for each of the past three fiscal years by
each Portfolio that was publicly offered prior to January 1997 was as follows:
<TABLE>
<CAPTION>
Investment Management Fees
--------------------------- --------------------------- ----------------------------
1994 1995 1996
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Lord Abbett Growth and Income 0 1,059,567 2,881,119
JanCap Growth 0 2,977,217 5,726,567
AST Money Market 0 1,503,661 2,092,880
Federated Utility Income 0 601,598 764,844
Federated High Yield 0 346,448 991,953
T. Rowe Price Asset Allocation 0 314,161 727,787
T. Rowe Price International Equity 601,032 1,412,350 3,011,378
T. Rowe Price Natural Resources 0 20,950 351,569
T. Rowe Price International Bond 59,968 276,299 595,953
Founders Capital Appreciation 100,689 486,749 1,240,016
Founders Passport 0 76,285 778,018
INVESCO Equity Income 232,348 821,220 1,883,792
PIMCO Total Return Bond 0 652,311 1,895,849
PIMCO Limited Maturity Bond 0 100,949 1,249,854
Berger Capital Growth 0 160,794 683,999
AST Putnam International Equity 0 2,198,484 2,771,876
AST Putnam Balanced 0 1,107,736 1,828,306
Robertson Stephens Value + Growth 0 0 117,917
</TABLE>
The sub-advisory fee paid by the Investment Manager to the Sub-advisors for each
such Portfolio for each of the past three fiscal years was as follows:
<TABLE>
<CAPTION>
Sub-Advisory Fees
--------------------------- --------------------------- ----------------------------
1994 1995 1996
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
Lord Abbett Growth and Income 0 705,288 1,736,325
JanCap Growth 0 1,869,411 3,451,651
AST Money Market 0 501,220 697,446
Federated Utility Income 0 306,916 374,935
Federated High Yield 0 210,529 448,151
T. Rowe Price Asset Allocation 0 166,105 301,555
T. Rowe Price International Equity 368,381 786,175 1,532,137
T. Rowe Price Natural Resources 0 13,967 208,022
T. Rowe Price International Bond(1) 35,381 165,779 315,293
Founders Capital Appreciation 72,720 350,949 859,376
Founders Passport(2) 0 45,904 463,898
INVESCO Equity Income 148,729 482,833 979,103
PIMCO Total Return Bond 0 299,969 804,173
PIMCO Limited Maturity Bond 0 47,155 551,613
Berger Capital Growth 0 116,002 427,236
AST Putnam International Equity(3) 0 1,389,549 1,752,761
AST Putnam Balanced(4) 0 576,648 942,912
Robertson Stephens Value + Growth 0 0 70,750
</TABLE>
(1) For fiscal years 1994 and 1995, the entire fee noted above was paid to
Scudder, Stevens & Clark, Inc. ("Scudder"), the prior Sub-advisor for the
Portfolio. For fiscal year 1996, $103,905 was paid to Scudder and $211,388 was
paid to Rowe Price-Fleming International, Inc., the current Sub-advisor for the
Portfolio. (2) For fiscal years 1994 and 1995 , the entire fee noted above was
paid to Seligman Henderson Co. ("Seligman"), the prior Sub-advisor for the
Portfolio. For fiscal year 1996, $325,763 was paid to Seligman and $138,135 was
paid to Founders Asset Management, Inc., the current Sub-advisor for the
Portfolio. (3) For fiscal years 1994 and 1995 , the entire fee noted above was
paid to Seligman, the prior Sub-advisor for the Portfolio. For fiscal year 1996,
$1,338,724 was paid to Seligman and $414,037 was paid to Putnam Investment
Management, Inc. ("Putnam"), the current Sub-advisor for the Portfolio. (4) For
fiscal years 1994 and 1995 , the entire fee noted above was paid to Phoenix
Investment Counsel, Inc. ("Phoenix"), the prior Sub-advisor for the Portfolio.
For fiscal year 1996, $691,855 was paid to Phoenix and $251,057 was paid to
Putnam, the current Sub-advisor for the Portfolio.
The Investment Manager has agreed by the terms of the Management
Agreements for the following Portfolios of the Trust to reimburse the Portfolio
for any fiscal year in order to prevent Portfolio expenses (exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, determined by the
Trust or the Investment Manager, but inclusive of the management fee) from
exceeding a specified percentage of the Portfolio's average daily net assets, as
follows:
Lord Abbett Growth and Income Portfolio: 1.25%
JanCap Growth Portfolio: 1.35%. Commencing September 4, 1996, the
Investment Manager has voluntarily agreed to reimburse certain operating
expenses in excess of 1.33% for the JanCap Growth Portfolio. This voluntary
agreement may be terminated by the Investment Manager at any time.
AST Money Market Portfolio: .65%. The Investment Manager has voluntarily
agreed to reimburse certain operating expenses in excess of .60% for the AST
Money Market Portfolio. This voluntary agreement may be terminated by the
Investment Manager at any time.
Federated Utility Income Portfolio: 1.25%
Federated High Yield Portfolio: 1.15%
T. Rowe Price Asset Allocation Portfolio: 1.25%
T. Rowe Price International Equity Portfolio: 1.75%. Commencing May 1,
1996, the Investment Manager has voluntarily agreed to reimburse certain
operating expenses in excess of 1.71% for the T. Rowe Price International Equity
Portfolio. This voluntary agreement may be terminated by the Investment Manager
at any time.
T. Rowe Price Natural Resources Portfolio: 1.35%
T. Rowe Price International Bond Portfolio: 1.75%
Founders Capital Appreciation Portfolio: 1.30%
Founders Passport Portfolio: 1.75%
INVESCO Equity Income Portfolio: 1.20%
PIMCO Total Return Bond Portfolio: 1.05%
PIMCO Limited Maturity Bond Portfolio: 1.05%
Berger Capital Growth Portfolio: 1.25%
Robertson Stephens Value + Growth Portfolio: 1.45%
AST Putnam International Equity Portfolio: 1.75%
AST Putnam Balanced Portfolio: 1.25%
The Investment Manager has also voluntarily agreed to reimburse the
other Portfolios of the Trust for any fiscal year in order to prevent Portfolio
expenses (exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, determined by the Trust or the Investment Manager, but inclusive of
the management fee) from exceeding a specified percentage of each Portfolio's
average daily net assets, as follows:
AST Janus Overseas Growth Portfolio: 1.75%
T. Rowe Price Small Company Value Portfolio: 1.30%
Twentieth Century International Growth Portfolio: 1.75%
Twentieth Century Strategic Balanced Portfolio: 1.25%
AST Putnam Value Growth & Income Portfolio: 1.25%
Lord Abbett Small Cap Value Portfolio: [INSERT]
Robertson Stephens Contrarian Portfolio: [INSERT]
Cohen & Steers Real Estate Investment Portfolio: [INSERT]
Stein Roe Small Cap Blend Portfolio: [INSERT]
Bankers Trust Enhanced 500 Index Portfolio: [INSERT]
Marsico Capital Growth Portfolio: [INSERT]
The Investment Manager may terminate the above voluntary agreements at
any time. Voluntary payments of Portfolio expenses by the Investment Manager are
subject to reimbursement by the Portfolio at the Investment Manager's discretion
within the two year period following such payment to the extent permissible
under applicable law and provided that the Portfolio is able to effect such
reimbursement and remain in compliance with applicable expense limitations.
Each Management Agreement will continue in effect from year to year,
provided it is approved, at least annually, in the manner stipulated in the 1940
Act. This requires that each Management Agreement and any renewal be approved by
a vote of the majority of the Trustees who are not parties thereto or interested
persons of any such party, cast in person at a meeting specifically called for
the purpose of voting on such approval. Each Management Agreement may be
terminated without penalty on sixty days' written notice by vote of a majority
of the Board of Trustees or by the Investment Manager, or by holders of a
majority of the applicable Portfolio's outstanding shares, and will
automatically terminate in the event of its "assignment" as that term is defined
in the 1940 Act.
The Administrator and Transfer and Shareholder Servicing Agent: PFPC
Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington, Delaware 19809, a
Delaware corporation that is an indirect wholly-owned subsidiary of PNC
Financial Corp., serves as the Administrator and Transfer and Shareholder
Servicing Agent for the Trust. Pursuant to a Trust Accounting and Administration
Agreement between the Trust and the Administrator, dated May 1, 1992 (the
"Administration Agreement"), the Administrator 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 Portfolios' 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 of the Trust.
Under the terms of the Administration Agreement, the Administrator
shall not be liable for any error of judgment or mistake of law or for any loss
or expense suffered by the Trust, in connection with the matters to which the
Administration Agreement relates, except for a loss or expense resulting from
willful misfeasance, bad faith, or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Agreement. Any person, even though also an officer,
director, partner, employee or agent of the Administrator, who may be or become
an officer, Trustee, employee or agent of the Trust, shall be deemed when
rendering services to the Trust or acting on any business of the Trust (other
than services or business in connection with the Administrator's duties under
the Administration Agreement) to be rendering such services to or acting solely
for the Trust and not as an officer, director, partner, employee or agent or one
under the control or direction of the Administrator even though paid by them.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreement includes payment of the
Administrator's "out-of-pocket" expenses. Such "out-of-pocket" expenses of the
Administrator include, but are not limited to, postage and mailing, forms,
envelopes, checks, toll-free lines (if requested by the Trust), telephone,
hardware and telephone lines for remote terminals (if required by the Trust),
wire fees, certificate issuance fees, microfiche and microfilm, telex, federal
express, outside independent pricing service charges, record retention/storage
and proxy solicitation, mailing and tabulation expenses (if required by the
Trust). For the years ended December 31, 1994, 1995 and 1996, the Trust paid the
Administrator $1,114,940, $2,080,598 and $3,330,687, respectively.
The Administration Agreement provides that it will continue in effect
from year to year. The Administration Agreement is terminable, without penalty,
by the Board of Trustees, by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities, or by the Administrator, on not less than
sixty days' notice. The Administration Agreement shall automatically terminate
upon its assignment by the Administrator without the prior written consent of
the Trust, provided, however, that no such assignment shall release
Administrator from its obligations under the Agreement.
BROKERAGE ALLOCATION: Subject to the supervision of the Board of Trustees of the
Trust, decisions to buy and sell securities for the Trust are made for each
Portfolio by its Sub-advisor. Each Sub-advisor is authorized to allocate the
orders placed by it on behalf of the applicable Portfolio to brokers who also
provide research or statistical material, or other services to the Portfolio or
the Sub-advisor for the use of the applicable Portfolio or the Sub-advisor's
other accounts. Such allocation shall be in such amounts and proportions as the
Sub-advisor shall determine and the Sub-advisor will report on said allocations
either to the Investment Manager, which will report on such allocations to the
Board of Trustees, or, if requested, directly to the Board of Trustees. Such
reports will indicate the brokers to whom such allocations have been made and
the basis therefor. The Sub-advisor may consider sale of shares of the
Portfolios or variable insurance products that use the Portfolios as investment
vehicles, or may consider or follow recommendations of the Investment Manager
that take such sales into account, as factors in the selection of brokers to
effect portfolio transactions for a Portfolio, subject to the requirements of
best net price available and most favorable execution. In this regard, the
Investment Manager has directed certain of the Sub-advisors to try to effect a
portion of their Portfolios' transactions through broker-dealers that give
prominence to variable insurance products using the Portfolios as investment
vehicles, to the extent consistent with best net price available and most
favorable execution.
Subject to the rules promulgated by the SEC, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in such amounts and proportions as the Sub-advisor shall
determine and the Sub-advisor will report on said allocations either to the
Investment Manager, which will report on such allocations to the Board of
Trustees, or, if requested, directly to the Board of Trustees.
In selecting a broker to execute each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Portfolio on a
continuing basis. Accordingly, the cost of the brokerage commissions in any
transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the brokerage services
offered. Subject to such policies and procedures as the Board of Trustees may
determine, a Sub-advisor shall not be deemed to have acted unlawfully or to have
breached any duty solely by reason of its having caused a Portfolio to pay a
broker that provides research services to the Sub-advisor an amount of
commission for effecting an investment transaction in excess of the amount of
commission another broker would have charged for effecting that transaction, if
the Sub-advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research service provided by such
broker viewed in terms of either that particular transaction or the
Sub-advisor's ongoing responsibilities with respect to a Portfolio or its
managed accounts generally. For the years ended December 31, 1994, 1995 and
1996, aggregate brokerage commissions of $2,244,147, $3,220,077 and $7,096,640,
respectively, were paid in relation to brokerage transactions for the Trust. The
increase in commissions paid corresponds roughly to the increase in the Trust's
net assets during those periods.
During the year ended December 31, 1996, brokerage commissions were
paid to affiliates of certain of the Sub-advisors. Specifically, during the year
ended December 31, 1996 brokerage commissions were paid to certain affiliates of
Rowe Price-Fleming International, Inc. by the T. Rowe Price International Equity
Portfolio in the amount of $17,032. For that year, 2.4% of the total brokerage
commissions paid by this Portfolio were paid to the affiliated brokers, with
respect to transactions representing 3.2% of the Portfolio's total dollar amount
of transactions involving the payment of commissions. Similarly, brokerage
commissions were paid to Robertson Stephens & Co., an affiliate of Robertson,
Stephens & Company Investment Management L.P., by the Robertson Stephens Value +
Growth Portfolio in the aggregate amount of $31,999 for the year ended December
31, 1996. For the year ended December 31, 1996, 66.7% of the total brokerage
commissions paid by these Portfolios were paid to Robertson Stephens & Co., with
respect to transactions representing 65.3% of the total amount of the
Portfolio's transactions involving the payment of commissions.
ALLOCATION OF INVESTMENTS: The Sub-advisors have other advisory clients, some of
which have similar investment objectives to one or more Portfolios for which
advisory services are being provided. In addition, a Sub-advisor may be engaged
to provide advisory services for more than one of the Trust's Portfolios. There
will be times when a Sub-advisor may recommend purchases and/or sales of the
same securities for a Portfolio and such Sub-advisor's other clients. In such
circumstances, it will be the policy of each Sub-advisor to allocate purchases
and sales among a Portfolio and its other clients, including other Trust
Portfolios for which it provides advisory services, in a manner which the
Sub-advisor deems equitable, taking into consideration such factors as size of
account, concentration of holdings, investment objectives, tax status, cash
availability, purchase costs, holding period and other pertinent factors
relative to each account.
COMPUTATION OF NET ASSET VALUES: The Trust determines the net asset values of a
Portfolio's shares at the close of the New York Stock Exchange (the "Exchange"),
currently 4:00 p.m. Eastern time, on each day that the Exchange is open for
business. Currently, the Exchange is closed on Saturdays and Sundays and on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
All Portfolios with the exception of the AST Money Market Portfolio:
The net asset value per share of all of the Portfolios with the exception of the
AST Money Market Portfolio is determined by dividing the market value of its
securities as of the close of trading plus any cash or other assets (including
dividends and accrued interest receivable) less all liabilities (including
accrued expenses), by the number of shares outstanding. Portfolio securities,
including open short positions and options written, are valued at the last sale
price on the securities exchange or securities market on which such securities
primarily are traded. Securities not listed on an exchange or securities market,
or securities in which there were not transactions on that day, are valued at
the average of the most recent bid and asked prices, except in the case of open
short positions where the asked price is available. Any securities or other
assets for which recent market quotations are not readily available are valued
at fair market value as determined in good faith by the Board of Trustees.
Short-term obligations with sixty days or less remaining to maturity are valued
on an amortized cost basis unless the Trustees determine that this amortized
cost value does not represent fair market value. Expenses and fees, including
the investment management fees, are accrued daily and taken into account for the
purpose of determining net asset value of shares.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in computing the net asset value of the shares of
a Portfolio generally are determined as of such earlier times. Foreign currency
exchange rates are also generally determined prior to the close of the Exchange.
Occasionally, events affecting the value of such securities and such exchange
rates may occur between the times at which they usually are determined and the
close of the Exchange. If such extraordinary events occur, the securities will
be valued at their fair market value as determined in good faith by the
Trustees.
For purposes of determining the net asset value per share of each
Portfolio all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at an exchange rate quoted by a major bank
that is a regular participant in the foreign exchange market or on the basis of
a pricing service that takes into account the quotes provided by a number of
such major banks.
AST Money Market Portfolio: For the AST Money Market Portfolio, all
securities are valued by the amortized cost method. The amortized cost method of
valuation values a security at its cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The purpose of this method of calculation is to attempt to
maintain a constant net asset value per share of $1.00. No assurance can be
given that this goal can be attained. If a difference of more than 1/2 of 1%
occurs between valuation based on the amortized cost method and valuation based
on market value, the Trustees will take steps necessary to reduce such
deviation, such as changing dividend policy, shortening the average maturity of
the investments in the Portfolio or realizing gains or losses.
PURCHASE AND REDEMPTION OF SHARES: A complete description of the manner by
which the Trust's shares may be purchased and redeemed appears in the Prospectus
under the heading "Purchase and Redemption of Shares."
TAX MATTERS: A description of some of the tax considerations generally affecting
the Trust and its shareholders is found in the section of the Prospectus
entitled "Tax Matters." No attempt is made to present a detailed explanation of
the tax treatment of the Trust or its shareholders. The discussion in the
Prospectus is not intended as a substitute for careful tax planning.
UNDERWRITER: The Trust is presently used for funding variable annuities, and may
also be used for funding variable life insurance. Pursuant to an exemptive order
of the Securities and Exchange Commission, the Trust may also sell its shares
directly to qualified plans. If the Trust does so, it intends to use American
Skandia Marketing, Incorporated ("ASM, Inc.") or another affiliated
broker-dealer as underwriter, if so required by applicable law. ASM, Inc. is
registered as a broker-dealer with the Securities and Exchange Commission and
the National Association of Securities Dealers. It is an affiliate of American
Skandia Life Assurance Corporation and the Investment Manager, being a
wholly-owned subsidiary of American Skandia Investment Holding Corporation. As
of the date of this Statement, ASM, Inc. has not received payments from the
Trust in connection with any brokerage or underwriting services provided to the
Trust.
PERFORMANCE: The Prospectus contains a brief description of how performance is
calculated. Quotations of average annual return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in such Portfolio over periods of 1, 5, and 10 years (up
to the life of the Portfolio) and for such other periods as deemed appropriate
by the Investment Manager. These are the annual total rates of return that would
equate the initial amount invested to the ending redeemable value. These rates
of return are calculated pursuant to the following formula: P(1+T)n = ERV (where
P = a hypothetical initial payment of $1,000, T = the average annual total
return, n = the number of years and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Portfolio
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. The total return of each Portfolio, computed as of June
30, 1997, is shown in the table below. Such performance information is
historical and is not intended to indicate future performance of the Portfolio.
<TABLE>
<CAPTION>
Total Return
Date Available Since
for Sale One Year Three Years Five Years Inception
- ----------------------------------------- ------------------- --------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
AST Putnam Internat'l Equity 05/17/89 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio(1)
Founders Passport Portfolio(2) 05/02/95 [INSERT] [INSERT] [INSERT] [INSERT]
Lord Abbett Growth and Income Portfolio 05/01/92 [INSERT] [INSERT] [INSERT] [INSERT]
JanCap Growth Portfolio 11/06/92 [INSERT] [INSERT] [INSERT] [INSERT]
Federated Utility Income Portfolio 05/04/93 [INSERT] [INSERT] [INSERT] [INSERT]
Federated High Yield Portfolio 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
AST Putnam Balanced Portfolio(3) 05/04/93 [INSERT] [INSERT] [INSERT] [INSERT]
T. Rowe Price Asset Allocation Portfolio 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
T. Rowe Price Internat'l Equity 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
T. Rowe Price Natural Resources 05/02/95 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
T. Rowe Price Internat'l Bond 05/03/94 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio(4)
Founders Capital Appreciation Portfolio 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
INVESCO Equity Income Portfolio 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
PIMCO Total Return Bond Portfolio 01/04/94 [INSERT] [INSERT] [INSERT] [INSERT]
PIMCO Limited Maturity Bond Portfolio 05/02/95 [INSERT] [INSERT] [INSERT] [INSERT]
Berger Capital Growth Portfolio 10/20/94 [INSERT] [INSERT] [INSERT] [INSERT]
Robertson Stephens Value + Growth 05/02/96 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
AST Janus Overseas Growth Portfolio 01/02/97 [INSERT] [INSERT] [INSERT] [INSERT]
T. Rowe Price Small Company Value 01/02/97 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
Twentieth Century Internat'l Growth 01/02/97 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
Twentieth Century Strategic Balanced 01/02/97 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
AST Putnam Value Growth & Income 01/02/97 [INSERT] [INSERT] [INSERT] [INSERT]
Portfolio
</TABLE>
(1) Prior to October 15, 1996, Seligman Henderson Co. served as Sub-advisor to
the Portfolio. The performance information provided in the above chart reflects
that of the Portfolio for periods during part of which the Portfolio was
sub-advised by the prior Sub-advisor. (2) Prior to October 15, 1996, Seligman
Henderson Co. served as Sub-advisor to the Portfolio. The performance
information provided in the above chart reflects that of the Portfolio for
periods during part of which the Portfolio was sub-advised by the prior
Sub-advisor. (3) Prior to October 15, 1996, Phoenix Investment Counsel, Inc.
served as Sub-advisor to the Portfolio. The performance information provided in
the above chart reflects that of the Portfolio for periods during part of which
the Portfolio was sub-advised by the prior Sub-advisor. (4) Prior to May 1,
1996, Scudder, Stevens & Clark, Inc. served as Sub-advisor to the Portfolio. The
performance information provided in the above chart reflects that of the
Portfolio for periods during part of which the Portfolio was sub-advised by the
prior Sub-advisor. * Not annualized.
Quotations of a Portfolio's yield (other than the AST Money Market
Portfolio) are based on the investment income per share earned during a
particular 30-day period (including dividends, if any, and interest), less
expenses accrued during the period ("net investment income"), and are computed
by dividing net investment income by the net asset value per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b + 1)6 -1]
cd
where: a = dividend and interest income
b = expenses accrued for the period
c = average daily number of shares outstanding during the period that
were entitled to receive dividends d = maximum net asset value per
share on the last day of the period
The AST Money Market Portfolio yield refers to the income generated by
an investment in the Portfolio over a seven-day period expressed as an annual
percentage rate. Such Portfolio also may calculate an effective yield by
compounding the base period return over a one-year period. The effective yield
will be slightly higher than the yield because of the compounding effect on this
assumed reinvestment.
The current yield and effective yield calculations for shares of the
AST Money Market Portfolio are illustrated for the seven-day period ended
June 30, 1997:
Current Yield Effective Yield
[INSERT]% [INSERT]%
Such Portfolio's total return is based on the overall dollar or
percentage change in value of a hypothetical investment in the Portfolio
assuming dividend distributions are reinvested. A cumulative total return
reflects the hypothetical annual compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a
Portfolio's performance, investors should recognize that they are not the same
as actual year-by-year results.
OTHER INFORMATION:
Principal Holders: As of September 15, 1997, more than 99% of each
Portfolio was owned of record by American Skandia Life Assurance Corporation
("ASLAC") on behalf of the owners of variable annuity contracts issued by ASLAC.
To the knowledge of the Trust, no person beneficially owned more than 5% of any
Portfolio as of that date. As of September 15, 1997, the amount of shares of the
Trust owned by the ten persons who were the officers and directors of the Trust
at that time, and are expected to be the officers and directors as of the date
of this Statement, and who are shown as such in the section of this Statement
entitled "Management," was less than one percent of the shares.
The Participating Insurance Companies and Qualified Plans are not
obligated to continue to invest in shares of any Portfolio under all
circumstances. Variable annuity and variable life insurance policy holders
should refer to the prospectuses for such products for a description of the
circumstances in which such a change might occur.
Reports to Holders: Holders of variable annuity contracts or variable
life insurance policies issued by Participating Insurance Companies and
Qualified Plans for which shares of the Trust are the investment vehicle will
receive from the Participating Insurance Companies or Qualified Plans, as
applicable, unaudited semi-annual financial statements and audited year-end
financial statements. Participants in Qualified Plans will receive from trustees
of the Qualified Plans, or directly from the Trust as applicable, unaudited
semi-annual financial statements and audited year-end financial statements. Each
report will show the investments owned by the Trust and the market values of the
investments and will provide other information about the Trust and its
operations.
FINANCIAL STATEMENTS: Included in this Statement of Additional Information are
Audited Financial Statements for the Trust for the year ended December 31, 1996,
as well as Unaudited Financial Statements for the Trust for the period ended
June 30, 1997. To the extent and only to the extent that any statement in a
document incorporated by reference into this Statement is modified or superseded
by a statement in this Statement or in a later-filed document, such statement is
hereby deemed so modified or superseded and not part of this Statement.
You may obtain, without charge, a copy of any or all the documents
incorporated by reference in this Statement, including any exhibits to such
documents which have been specifically incorporated by reference. We send such
documents upon receipt of your written or oral request. Please address your
request to American Skandia Trust, P.O. Box 883, Shelton, Connecticut, 06484 or
call (203) 926-1888.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
AMERICAN SKANDIA TRUST:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of AST Putnam International Equity Portfolio
(formerly Seligman Henderson International Equity Portfolio), Lord Abbett Growth
and Income Portfolio, JanCap Growth Portfolio, AST Money Market Portfolio,
Federated Utility Income Portfolio, AST Putnam Balanced Portfolio (formerly AST
Phoenix Balanced Asset Portfolio), Federated High Yield Portfolio, T. Rowe Price
Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio, INVESCO Equity
Income Portfolio, Founders Capital Appreciation Portfolio, T. Rowe Price
International Equity Portfolio, T. Rowe Price International Bond Portfolio
(formerly AST Scudder International Bond Portfolio), Berger Capital Growth
Portfolio, Founders Passport Portfolio (formerly Seligman Henderson
International Small Cap Portfolio), T. Rowe Price Natural Resources Portfolio,
PIMCO Limited Maturity Bond Portfolio, and Robertson Stephens Value + Growth
Portfolio of American Skandia Trust ("the Trust") as of December 31, 1996, the
related statements of operations and changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodians and brokers and where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of AST Putnam
International Equity Portfolio, Lord Abbett Growth and Income Portfolio, JanCap
Growth Portfolio, AST Money Market Portfolio, Federated Utility Income
Portfolio, AST Putnam Balanced Portfolio, Federated High Yield Portfolio, T.
Rowe Price Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio,
INVESCO Equity Income Portfolio, Founders Capital Appreciation Portfolio, T.
Rowe Price International Equity Portfolio, T. Rowe Price International Bond
Portfolio, Berger Capital Growth Portfolio, Founders Passport Portfolio, T. Rowe
Price Natural Resources Portfolio, PIMCO Limited Maturity Bond Portfolio, and
Robertson Stephens Value + Growth Portfolio of American Skandia Trust as of
December 31, 1996, the results of their operations, the changes in their net
assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 7, 1997
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
FOREIGN STOCK -- 97.0%
AUSTRALIA -- 2.4%
Commonwealth Bank of Australia... 217,100 $ 2,079,297
Goodman Fielder Ltd.............. 1,624,400 2,015,801
QBE Insurance Group Ltd.......... 364,500 1,922,389
Westpac Banking Corp. Ltd........ 398,100 2,267,438
------------
8,284,925
------------
AUSTRIA -- 1.2%
VA Technologie AG................ 26,600 4,183,869
------------
BELGIUM -- 0.1%
Solvay SA........................ 800 490,763
------------
BRAZIL -- 1.0%
Telebras SA [ADR]................ 45,500 3,480,750
------------
CANADA -- 0.8%
Magna International, Inc. Cl-A... 47,100 2,602,275
------------
DENMARK -- 0.5%
Danisco AS....................... 28,900 1,760,935
------------
FRANCE -- 11.2%
Cetelem Group SA................. 18,400 2,131,151
Chargeurs International SA*...... 39,100 1,939,791
Credit Local de France........... 45,400 3,961,315
Dassault Systems SA*............. 56,000 2,586,877
Lafarge SA....................... 53,600 3,220,987
Michelin C.G.D.E. Cl-B........... 73,600 3,979,569
Peugeot Citroen SA............... 19,700 2,220,875
SGS-Thomson Microelectronics*.... 87,300 6,184,796
Societe Nationale Elf Aquitaine
SA............................. 50,376 4,592,897
Sommer-Allibert.................. 34,080 1,019,709
Total SA Cl-B.................... 66,500 5,417,254
Zodiac SA........................ 4,900 1,500,184
------------
38,755,405
------------
GERMANY -- 7.9%
Adidas AG........................ 24,200 2,094,079
Altana AG........................ 3,600 2,808,328
Bayer AG......................... 161,200 6,549,733
Bayerische Motoren Werke AG...... 7,300 5,043,982
Deutsche Telekom AG*............. 160,000 3,341,575
Preussag AG...................... 8,100 1,833,962
Tarkett AG....................... 47,000 954,066
Veba AG.......................... 84,900 4,888,517
------------
27,514,242
------------
HONG KONG -- 9.0%
Amoy Properties Ltd. ............ 1,874,000 2,701,545
Cheung Kong Holdings Ltd. ....... 576,000 5,119,917
Dao Heng Bank Group Ltd. ........ 280,500 1,345,472
Guoco Group Ltd. ................ 410,000 2,295,300
Hong Kong Electric Holdings
Ltd. .......................... 208,000 691,137
Hong Kong Land Holdings Ltd. .... 741,000 2,059,980
HSBC Holdings PLC................ 336,800 7,206,723
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
Hutchison Whampoa Ltd. .......... 402,000 3,157,476
Sun Hung Kai Properties Ltd. .... 272,000 3,332,084
Swire Pacific Ltd. Cl-A.......... 339,000 3,232,433
------------
31,142,067
------------
INDIA -- 0.8%
Hindalco Industries Ltd. [GDR]... 112,500 2,756,250
------------
IRELAND -- 4.3%
Allied Irish Banks PLC........... 661,000 $ 4,390,220
Bank of Ireland PLC.............. 406,600 3,680,059
CRH PLC.......................... 481,100 4,925,674
Greencore Group PLC.............. 299,300 1,878,717
------------
14,874,670
------------
ITALY -- 1.0%
Ente Nazionale Idrocarburi SPA... 655,700 3,349,491
------------
JAPAN -- 16.4%
Bridgestone Corp. ............... 170,000 3,233,895
Canon, Inc. ..................... 208,000 4,604,237
Dai Nippon Printing Co. Ltd. .... 161,000 2,826,027
Daikin Industries Ltd. .......... 135,000 1,202,335
Denso Corp. ..................... 153,000 3,691,051
East Japan Railway Co. Ltd. ..... 430 1,937,138
Hirose Electric Ltd. ............ 32,000 1,856,636
Ito-Yokado Co. Ltd. ............. 62,000 2,701,945
Kao Corp. ....................... 244,000 2,848,249
Komori Corp. .................... 29,000 616,861
Kurita Water Industries Ltd. .... 95,000 1,922,179
Kyushu Electric Power Ltd. ...... 63,000 1,225,681
Mauri Co. Ltd. .................. 153,000 2,764,981
Mitsubishi Motors Corp. ......... 195,000 1,424,773
Mitsui & Co. Ltd. ............... 267,000 2,170,169
Murata Manufacturing Co. Ltd. ... 47,000 1,564,635
Nippon Telegraph & Telephone
Corp. ......................... 231 1,753,722
Obayashi Corp. .................. 276,000 1,866,252
Omron Corp. ..................... 100,000 1,884,998
Onward Kashiyama Co. Ltd. ....... 95,000 1,338,954
Santen Phamaceutical Ltd. ....... 61,000 1,265,888
Sekisui Chemical Co. Ltd. ....... 112,000 1,133,074
Sharp Corp. ..................... 159,000 2,268,482
TDK Corp. ....................... 60,000 3,916,991
Tokio Marine & Fire Insurance
Co. ........................... 146,000 1,376,048
Tostem Corp. .................... 34,000 940,770
Yamanouchi Pharmaceutical Co.
Ltd. .......................... 79,000 1,625,767
Yamato Transport Co. Ltd. ....... 93,000 964,980
------------
56,926,718
------------
MALAYSIA -- 0.8%
Malayan Banking BHD.............. 100,000 1,108,779
Malaysian Assurance Alliance
BHD............................ 326,000 1,587,851
------------
2,696,630
------------
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
MEXICO -- 0.6%
Panamerican Beverages, Inc.
Cl-A........................... 41,200 $ 1,936,400
------------
NETHERLANDS -- 12.0%
ABN AMRO Holding NV.............. 78,600 5,122,124
Aegon NV......................... 53,700 3,427,858
AKZO Nobel NV.................... 24,300 3,324,907
DSM NV........................... 16,900 1,669,620
Getronics NV..................... 76,100 2,069,278
Gucci Group NV................... 16,300 1,039,125
IHC Caland NV.................... 54,700 3,130,154
ING Groep NV..................... 135,000 4,868,391
KLM Royal Dutch Airlines NV...... 69,000 1,944,226
New Holland NV*.................. 105,000 2,191,875
Philips Electronics NV........... 96,300 3,908,279
Royal PTT Nederland [ADR]........ 103,900 3,948,200
Unilever NV...................... 16,300 2,888,033
Vendex International NV.......... 48,700 2,086,578
------------
41,618,648
------------
PORTUGAL -- 1.0%
Portugal Telecom SA.............. 125,400 3,576,384
------------
SINGAPORE -- 1.1%
Far East Levingston Shipbuilding
Ltd. .......................... 285,000 1,487,559
Overseas Union Bank Ltd. Cl-F.... 149,000 1,150,579
United Overseas Bank Ltd......... 105,000 1,171,171
------------
3,809,309
------------
SPAIN -- 1.0%
Banco Bilbao Vizcaya SA.......... 36,500 1,976,707
Mapfre Vida SA................... 10,400 723,115
Tabacalera SA Cl-A............... 20,800 898,270
------------
3,598,092
------------
SWEDEN -- 6.7%
Astra AB Cl-A.................... 93,300 4,629,353
Autoliv AB....................... 23,500 1,034,541
Electrolux AB Cl-B............... 40,800 2,378,834
Ericsson, (L.M.) Telephone Co.
Cl-B........................... 124,900 3,880,196
Pharmacia & Upjohn, Inc. ........ 107,900 4,440,296
Sandvik AB Cl-B.................. 139,200 3,791,575
Svenska Cellulosa AB Cl-B........ 141,500 2,885,459
------------
23,040,254
------------
SWITZERLAND -- 5.7%
ABB AG........................... 2,430 3,023,201
Julius Baer Holdings AG Cl-B..... 1,570 1,645,901
Nestle SA........................ 3,990 4,284,264
Novartis AG*..................... 3,360 3,848,823
Rieter Holdings AG............... 4,600 1,271,763
Schweizerische Rueckversicerungs-
Gesellschaft................... 3,100 3,310,095
Societe Generale de Surveillance
Holding SA..................... 1,000 2,458,343
------------
19,842,390
------------
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
UNITED KINGDOM -- 11.5%
BAT Industries PLC............... 562,000 $ 4,663,920
Barclays PLC..................... 214,000 3,667,346
British Petroleum Co. PLC........ 247,700 2,972,044
Burmah Castrol PLC............... 170,100 3,207,840
General Electric Co. PLC......... 594,000 3,886,609
Guinness PLC..................... 88,500 693,514
Molins PLC....................... 44,400 682,556
RTZ Corp. PLC.................... 203,300 3,261,116
Scottish Power PLC............... 611,900 3,689,301
Securicor PLC.................... 288,700 1,382,132
Shell Transport & Trading Co.
PLC............................ 203,300 3,522,283
United Utilities PLC............. 182,000 1,935,905
Vodafone Group PLC............... 955,400 4,033,882
Weir Group PLC................... 471,700 2,120,881
------------
39,719,329
------------
TOTAL FOREIGN STOCK
(COST $312,082,358)................ 335,959,796
------------
<CAPTION>
PAR
MATURITY (000)
---------- --------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 2.9%
UBS Securities Funding,
Inc. 6.75% dated
12/31/96, repurchase
price $9,924,720
(Collateralized by
U.S. Treasury Note,
par value $10,406,000,
market value
$10,137,364 due
11/15/05)
(COST $9,921,000)..... 01/02/97 $9,921 9,921,000
------------
TOTAL INVESTMENTS -- 99.9%
(COST $322,003,358).................. 345,880,796
------------
OTHER ASSETS LESS
LIABILITIES -- 0.1%.................. 330,585
------------
NET ASSETS -- 100.0%................... $346,211,381
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy DEM $ 861,223 1.5548 01/97 $ 10,093
Buy GBP 13,435 0.5952 01/97 260
Buy GBP 6,583,201 0.5996 05/97 154,018
Buy JPY 26,257,749 111.6242 01/97 (889,472)
----------
$(725,101)
==========
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell BEF $ 60,778 31.9902 01/97 $ (627)
Sell DEM 11,065,956 1.5010 05/97 163,858
Sell FRF 24,309,261 5.1201 05/97 89,751
Sell GBP 218,333 0.5854 01/97 (563)
Sell GBP 6,438,840 0.6130 05/97 (298,380)
Sell JPY 39,687,235 112.7929 01/97 942,956
Sell NLG 15,396,465 1.6976 05/97 106,752
--------
$1,003,747
==========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 85.9%
AEROSPACE -- 0.6%
Boeing Co. .................... 30,000 $ 3,191,250
------------
AUTOMOBILE MANUFACTURERS -- 1.8%
General Motors Corp............ 175,000 9,756,250
------------
CHEMICALS -- 1.9%
Dow Chemical Co................ 70,000 5,486,250
Hanna, (M.A.) Co............... 200,000 4,375,000
------------
9,861,250
------------
CLOTHING & APPAREL -- 1.5%
Liz Claiborne, Inc. ........... 100,000 3,862,500
VF Corp........................ 60,000 4,050,000
------------
7,912,500
------------
COMPUTER HARDWARE -- 6.6%
Digital Equipment Corp.*....... 130,000 4,728,750
EMC Corp.*..................... 150,000 4,968,750
Hewlett-Packard Co............. 225,000 11,306,250
International Business Machines
Corp......................... 50,000 7,550,000
Seagate Technology, Inc.*...... 160,000 6,320,000
------------
34,873,750
------------
CONGLOMERATES -- 1.2%
Minnesota Mining &
Manufacturing Co. ........... 80,000 6,630,000
------------
CONSUMER PRODUCTS &
SERVICES -- 2.2%
American Brands, Inc. ......... 170,000 8,436,250
Whirlpool Corp................. 70,000 3,263,750
------------
11,700,000
------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.4%
Emerson Electric Co. .......... 120,000 11,610,000
National Service Industries,
Inc. ........................ 170,000 6,353,750
------------
17,963,750
------------
ENVIRONMENTAL SERVICES -- 1.6%
WMX Technologies, Inc. ........ 260,000 8,482,500
------------
FINANCIAL-BANK & TRUST -- 8.5%
Bank of Boston Corp............ 200,000 12,850,000
BankAmerica Corp. ............. 60,000 5,985,000
Chase Manhattan Corp. ......... 100,000 8,925,000
Comerica, Inc. ................ 90,000 4,713,750
Great Western Financial
Corp. ....................... 210,000 6,090,000
Keycorp........................ 130,000 6,565,000
------------
45,128,750
------------
FINANCIAL SERVICES -- 1.3%
Dean Witter Discover & Co. .... 30,900 2,047,125
Providian Corp. ............... 100,000 5,137,500
------------
7,184,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOOD -- 8.1%
Conagra, Inc. ................. 200,000 9,950,000
CPC International, Inc. ....... 85,000 6,587,500
Heinz, (H.J.) Co. ............. 170,000 6,077,500
Hershey Foods Corp. ........... 75,000 3,281,250
Pioneer Hi-Bred International,
Inc. ........................ 100,000 7,000,000
Sara Lee Corp. ................ 170,000 6,332,500
Supervalu, Inc. ............... 140,000 3,972,500
------------
43,201,250
------------
HEALTHCARE SERVICES -- 1.1%
United Healthcare Corp. ....... 125,000 $ 5,625,000
------------
INDUSTRIAL PRODUCTS -- 2.4%
Cooper Tire & Rubber Co. ...... 79,400 1,568,150
Corning, Inc. ................. 240,000 11,100,000
------------
12,668,150
------------
INSURANCE -- 5.8%
American General Corp. ........ 38,000 1,553,250
Chubb Corp. ................... 225,000 12,093,750
CIGNA Corp. ................... 30,000 4,098,750
Safeco Corp. .................. 175,000 6,901,563
Transamerica Corp. ............ 80,000 6,320,000
------------
30,967,313
------------
MACHINERY & EQUIPMENT -- 4.4%
Deere & Co. ................... 275,000 11,171,875
Goulds Pumps, Inc. ............ 210,000 4,816,875
Snap-On, Inc. ................. 200,000 7,125,000
------------
23,113,750
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 1.7%
Mallinckrodt Group, Inc. ...... 200,000 8,825,000
------------
OFFICE EQUIPMENT -- 0.8%
Harris Corp. .................. 65,000 4,460,625
------------
OIL & GAS -- 7.7%
Chevron Corp. ................. 80,000 5,200,000
Coastal Corp. ................. 70,000 3,421,250
Consolidated Natural Gas
Co. ......................... 75,000 4,143,750
Mobil Corp. ................... 100,000 12,225,000
Schlumberger Ltd. ............. 45,000 4,494,375
Sonat, Inc. ................... 100,000 5,150,000
Total SA [ADR]................. 160,000 6,440,000
------------
41,074,375
------------
PAPER & FOREST PRODUCTS -- 4.4%
International Paper Co. ....... 225,000 9,084,375
James River Corp. of
Virginia..................... 270,000 8,943,750
Kimberly-Clark Corp. .......... 55,000 5,238,750
------------
23,266,875
------------
PHARMACEUTICALS -- 3.4%
Smithkline Beecham PLC [ADR]... 120,000 8,160,000
Warner-Lambert Co. ............ 130,000 9,750,000
------------
17,910,000
------------
</TABLE>
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PRINTING & PUBLISHING -- 0.6%
Deluxe Corp. .................. 100,000 $ 3,275,000
------------
RESTAURANTS -- 1.1%
Brinker International, Inc.*... 350,000 5,600,000
------------
RETAIL & MERCHANDISING -- 5.1%
Dillard Department Stores, Inc.
Cl-A......................... 200,000 6,175,000
May Department Stores Co. ..... 85,000 3,973,750
Payless Shoesource, Inc.*...... 170,000 6,375,000
Toys 'R' Us, Inc.*............. 350,000 10,500,000
------------
27,023,750
------------
TELECOMMUNICATIONS -- 3.2%
AT&T Corp. .................... 140,000 6,090,000
Lucent Technologies, Inc. ..... 65,000 3,006,250
MCI Communications Corp. ...... 240,000 7,845,000
------------
16,941,250
------------
UTILITIES -- 5.5%
Baltimore Gas & Electric
Co. ......................... 260,000 6,955,000
Carolina Power & Light Co. .... 200,000 7,300,000
Central & South West Corp. .... 280,000 7,175,000
Cinergy Corp. ................. 230,000 7,676,250
------------
29,106,250
------------
TOTAL COMMON STOCK
(COST $384,990,810).............. 455,743,213
------------
PREFERRED STOCK -- 4.1%
CONTAINERS & PACKAGING -- 0.8%
Sonoco Products Co. $2.25
[CVT]........................ 75,000 4,115,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
INSURANCE -- 0.7%
Aetna, Inc. Cl-C 6.25% [CVT]... 50,000 $ 3,968,750
------------
OIL & GAS -- 2.6%
Atlantic Richfield Co. 9.01%
[CVT]........................ 250,000 5,375,000
Occidental Petroleum Corp.
$3.875 [CVT] 144A............ 140,000 8,223,040
------------
13,598,040
------------
TOTAL PREFERRED STOCK
(COST $21,967,527)............... 21,682,415
------------
SHORT TERM INVESTMENTS -- 7.1%
Temporary Investment Cash
Fund......................... 18,939,511 18,939,511
Temporary Investment Fund...... 18,939,511 18,939,511
------------
(COST $37,879,022)............. 37,879,022
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 2.5%
U.S. Treasury Bonds
6.875%
(COST $12,755,062)... 08/15/25 $13,000 13,253,240
------------
TOTAL INVESTMENTS -- 99.6%
(COST $457,592,421)................. 528,557,890
OTHER ASSETS LESS
LIABILITIES -- 0.4%................. 1,939,559
------------
NET ASSETS -- 100.0%.................. $530,497,449
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.6% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 92.1%
AEROSPACE -- 3.9%
Boeing Co. ...................... 268,800 $ 28,593,600
Gulfstream Aerospace Corp.* ..... 35,425 859,056
Textron, Inc. ................... 56,850 5,358,113
------------
34,810,769
------------
AIRLINES -- 3.8%
UAL Corp.* ...................... 538,025 33,626,563
------------
BEVERAGES -- 6.1%
Coca-Cola Co. ................... 297,200 15,640,150
Coca-Cola Enterprises, Inc. ..... 185,250 8,984,625
Pepsico, Inc. ................... 1,021,550 29,880,338
------------
54,505,113
------------
CHEMICALS -- 7.5%
Cytec Industries, Inc.* ......... 743,950 30,222,969
Monsanto Co. .................... 694,650 27,004,519
Praxair, Inc. ................... 206,900 9,543,263
------------
66,770,751
------------
CLOTHING & APPAREL -- 4.5%
Gucci Group NV [ADR] ............ 210,950 13,474,431
Nike, Inc. Cl-B ................. 442,825 26,458,794
St. John Knits, Inc. ............ 7,375 320,813
------------
40,254,038
------------
COMPUTER HARDWARE -- 5.8%
Dell Computer Corp.* ............ 264,925 14,074,141
International Business Machines
Corp. ......................... 246,850 37,274,350
------------
51,348,491
------------
COMPUTER SERVICES & SOFTWARE -- 13.8%
Cadence Design Systems, Inc.* ... 100,000 3,975,000
Cisco Systems, Inc.* ............ 469,525 29,873,528
Clarify, Inc.* .................. 46,100 2,212,800
Computer Sciences Corp.* ........ 134,425 11,039,653
First Data Corp. ................ 563,878 20,581,547
Gartner Group, Inc. Cl-A* ....... 289,800 11,284,087
HBO & Co. ....................... 161,875 9,611,328
Microsoft Corp.* ................ 306,575 25,330,759
Oracle Corp.* ................... 36,750 1,534,313
Parametric Technology Corp.* .... 71,025 3,648,909
Sapient Corp.* .................. 84,000 3,538,500
Transactions Systems Architects,
Inc.* ......................... 12,100 402,325
------------
123,032,749
------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.1%
Applied Materials, Inc.* ........ 150,000 5,390,625
Diebold, Inc. ................... 65,825 4,138,747
Etec Systems, Inc.* ............. 28,450 1,088,212
General Electric Co. ............ 151,225 14,952,372
KLA Instruments Corp.* .......... 45,000 1,597,500
Raychem Corp. ................... 12,400 993,550
------------
28,161,006
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.4%
Mirage Resorts, Inc.* ........... 578,800 $ 12,516,550
------------
FINANCIAL-BANK & TRUST -- 13.0%
Bank Plus Corp.* ................ 670,609 7,712,003
Chase Manhattan Corp. ........... 281,450 25,119,412
Citicorp ........................ 403,445 41,554,835
Mercantile Bancorporation,
Inc. .......................... 111,200 5,712,900
Wells Fargo & Co. ............... 134,083 36,168,889
------------
116,268,039
------------
FINANCIAL SERVICES -- 8.1%
Associates First Capital
Corp. ......................... 187,975 8,294,397
Federal Home Loan Mtge. Corp. ... 135,175 14,886,147
Federal National Mtge. Assoc. ... 352,085 13,115,166
First USA Paymentech, Inc.* ..... 137,400 4,654,425
Hambrecht & Quist Group* ........ 258,775 5,596,009
Merrill Lynch & Co., Inc. ....... 312,925 25,503,387
------------
72,049,531
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Fresenius Medical Care AG
[ADR]*......................... 171,325 4,818,516
------------
METALS & MINING -- 1.5%
Potash Corp. of Saskatchewan,
Inc............................ 154,175 13,104,875
------------
OFFICE EQUIPMENT -- 1.8%
Alco Standard Corp. ............. 63,200 3,262,700
Danka Business Systems PLC
[ADR].......................... 370,450 13,104,669
------------
16,367,369
------------
PHARMACEUTICALS -- 8.6%
Biochem Pharma, Inc.* ........... 84,450 4,243,612
Bristol-Meyers Squibb Co. ....... 6,475 704,156
Lilly, (Eli) & Co. .............. 300,275 21,920,075
Pfizer, Inc. .................... 374,975 31,076,053
Warner Lambert Co. .............. 250,000 18,750,000
------------
76,693,896
------------
RETAIL & MERCHANDISING -- 0.9%
Cross-Continent Auto Retailers,
Inc.*.......................... 31,675 661,216
Finish Line, Inc.* .............. 72,500 1,531,562
Vons Companies, Inc.* ........... 94,375 5,650,703
------------
7,843,481
------------
SEMI-CONDUCTORS -- 1.7%
Intel Corp. ..................... 116,350 15,234,578
------------
TELECOMMUNICATIONS -- 5.5%
Ascend Communications, Inc.* .... 114,550 7,116,419
Cincinnati Bell, Inc. ........... 130,625 8,049,766
Lucent Technologies, Inc. ....... 733,100 33,905,875
------------
49,072,060
------------
UTILITIES -- 0.6%
PECO Energy Co. ................. 206,325 5,209,706
------------
TOTAL COMMON STOCK
(COST $644,897,492) ............... 821,688,081
------------
</TABLE>
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCK -- 1.3%
AUTOMOBILE MANUFACTURERS
Porsche AG Pfd. -- (DEM)
(COST $8,294,264) ............... 13,419 $ 12,004,636
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- --------
<S> <C> <C>
COMMERCIAL PAPER -- 4.4%
American Express Credit
Corp. 6.55%
(COST $39,292,850) .... 01/02/97 $39,300 39,292,850
------------
<CAPTION>
VALUE
-----
<S> <C>
TOTAL INVESTMENTS -- 97.8%
(COST $692,484,606) ............... $872,985,567
OTHER ASSETS LESS
LIABILITIES -- 2.2% ............... 19,338,822
------------
NET ASSETS -- 100.0% ................ $892,324,389
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH APPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell DEM $6,388,155 1.4757 01/97 $247,747
========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 12.7%
FINANCIAL-BANK & TRUST
Abbey National
Treasury [VR]
5.375%.............. 01/15/97 $15,000 $ 14,995,855
Bayerische Landesbank [VR]
5.37%............... 01/15/97 5,000 4,999,879
First Union National
Bank NC
5.595% [VR]......... 01/20/97 5,000 5,000,000
5.36%............... 02/18/97 20,000 20,000,000
PNC Bank N.A. [VR]
5.5037%............. 01/11/97 15,000 14,989,511
Society National Bank
of Cleveland [VR]
4.85%............... 01/01/97 10,000 9,996,492
------------
TOTAL CORPORATE OBLIGATIONS
(COST $69,981,737)................ 69,981,737
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 15.8%
Federal Home Loan Bank
6.50%............... 01/02/97 76,630 76,616,164
Federal National Mtge.
Assoc. [VR]
5.42%............... 01/07/97 10,000 9,996,583
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $86,612,747)................ 86,612,747
------------
U.S. TREASURY OBLIGATIONS -- 1.8%
U.S. Treasury Notes
5.25%
(COST $9,967,357)..... 12/31/97 10,000 9,967,357
------------
CERTIFICATES OF DEPOSIT -- 39.9%
Bank of New York
Co., Inc.
5.55%............... 04/01/97 5,000 4,999,141
Bank of Tokyo N.A.
5.58%............... 03/17/97 25,000 25,000,000
Banque National de
Paris NY
5.38%............... 03/03/97 20,000 19,999,558
Banque National de
Paris SF
5.80%............... 01/09/97 7,000 6,999,274
Bayerische Landesbank
NY
5.50%............... 11/21/97 7,500 7,494,208
Canadian Imperial Bank
of Commerce
5.39%............... 01/30/97 17,225 17,225,000
5.46%............... 02/19/97 7,500 7,500,101
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Deutsche Bank
5.55%............... 11/10/97 $20,000 $ 19,991,058
Landesbank Hess
6.01%............... 07/18/97 5,000 5,007,710
National Westminster
Bank NY
5.39%............... 02/14/97 21,000 20,999,979
NationsBank Corp.
4.90%............... 02/05/97 12,000 11,999,445
Royal Bank of Canada
5.745%.............. 05/15/97 22,000 22,003,372
Sanwa Bank Ltd.
5.68%............... 01/13/97 25,000 25,000,083
Societe Generale NY
5.65%............... 04/01/97 15,000 15,000,971
Sumitomo Bank Ltd. NY
5.61%............... 01/31/97 10,000 10,000,083
------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $219,219,983)............... 219,219,983
------------
COMMERCIAL PAPER -- 29.6%
BEVERAGES -- 0.9%
Coca-Cola Co.
5.92%............... 01/09/97 5,000 4,993,422
FINANCIAL-BANK & TRUST -- 9.8%
ABN AMRO Bank
5.34%............... 06/19/97 10,000 9,749,317
Barclays U.S. Funding
Corp.
5.72%............... 01/03/97 25,000 24,992,056
Caisse D'Amortissement
5.33%............... 02/06/97 19,000 18,898,730
------------
53,640,103
------------
FINANCIAL SERVICES -- 8.9%
Deutsche Bank
Financial, Inc.
5.70%............... 01/02/97 5,000 4,999,208
Ford Motor Credit
Corp.
7.00%............... 01/02/97 25,000 24,995,139
Korea Development Bank
5.32%............... 03/05/97 19,000 18,823,110
------------
48,817,457
------------
INSURANCE -- 0.9%
AIG Funding Corp.
5.95%............... 01/02/97 5,000 4,999,174
------------
OIL & GAS -- 4.6%
Koch Industries, Inc.
7.10%............... 01/02/97 25,000 24,995,069
------------
</TABLE>
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
PHARMACEUTICALS -- 4.5%
Warner-Lambert Co.
6.10%............... 01/06/97 $25,000 $ 24,978,819
------------
TOTAL COMMERCIAL PAPER
(COST $162,424,044)............... 162,424,044
------------
TOTAL INVESTMENTS -- 99.8%
(COST $548,205,868)............... 548,205,868
OTHER ASSETS LESS
LIABILITIES -- 0.2%............... 1,263,717
------------
NET ASSETS -- 100.0%................ $549,469,585
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 74.6%
AUTOMOBILE MANUFACTURERS -- 1.1%
Ford Motor Co. .................... 44,000 $ 1,402,500
------------
CONGLOMERATES -- 1.9%
Philip Morris Companies, Inc. ..... 20,200 2,275,025
------------
FINANCIAL-BANK & TRUST -- 1.0%
Mellon Bank Corp. ................. 16,600 1,178,600
------------
OIL & GAS -- 2.9%
Exxon Corp......................... 6,000 588,000
New Jersey Resources Corp. ........ 8,700 254,475
Panenergy Corp. ................... 29,900 1,345,500
Williams Companies, Inc. .......... 37,950 1,423,125
------------
3,611,100
------------
REAL ESTATE -- 2.9%
Meditrust Corp. [REIT]............. 90,700 3,628,000
------------
TELECOMMUNICATIONS -- 19.2%
Ameritech Corp. ................... 58,400 3,540,500
AT&T Corp. ........................ 24,000 1,044,000
BellSouth Corp. ................... 87,300 3,524,737
Frontier Corp. .................... 26,500 599,562
GTE Corp. ......................... 77,700 3,535,350
MCI Communications Corp. .......... 111,600 3,647,925
Pacific Telesis Group.............. 69,200 2,543,100
SBC Communications, Inc. .......... 13,100 677,925
Sprint Corp. ...................... 61,600 2,456,300
Telebras SA [ADR].................. 18,400 1,407,600
Telefonica del Peru SA Cl-B
[ADR]............................ 32,400 611,550
------------
23,588,549
------------
UTILITIES -- 0.2%
American Water Works Co., Inc. .... 13,900 286,687
------------
UTILITIES -- ELECTRIC -- 41.0%
Cinergy Corp. ..................... 43,800 1,461,825
CMS Energy Corp. .................. 114,200 3,839,975
DPL, Inc. ......................... 132,200 3,238,900
DQE, Inc. ......................... 99,850 2,895,650
Duke Power Co. .................... 98,300 4,546,375
FPL Group, Inc. ................... 106,900 4,917,400
GPU, Inc........................... 54,600 1,835,925
Illinova Corp...................... 109,000 2,997,500
Korea Electric Power Corp. [ADR]... 41,600 852,800
National Power PLC [ADR]........... 78,300 2,652,413
NIPSCO Industries, Inc............. 72,800 2,884,700
Pacificorp......................... 91,400 1,873,700
PECO Energy Co..................... 90,100 2,275,025
Pinnacle West Capital Co........... 116,700 3,705,225
Portland General Corp.............. 63,900 2,683,800
Southern Co........................ 122,700 2,776,087
Teco Energy, Inc................... 108,400 2,615,150
Texas Utilities Co................. 59,000 2,404,250
------------
50,456,700
------------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
UTILITIES -- GAS -- 4.4%
MCN Corp........................... 102,900 $ 2,971,238
Pacific Enterprises................ 81,500 2,475,563
------------
5,446,801
------------
TOTAL COMMON STOCK
(COST $81,880,351)................. 91,873,962
------------
PREFERRED STOCK -- 15.7%
COMPUTER SERVICES & SOFTWARE -- 1.7%
Microsoft Corp. 2.75% [CVT]........ 25,700 2,059,213
------------
CONTAINERS & PACKAGING -- 0.5%
Amcor Ltd. 7.25% [CVT]............. 12,700 647,700
------------
ENVIRONMENTAL SERVICES -- 1.0%
Browning-Ferris Industries, Inc.
7.25% [CVT]...................... 45,300 1,291,050
------------
FINANCIAL SERVICES -- 5.8%
Merrill Lynch & Co., Inc. [CVT]
6.00%............................ 33,300 740,925
6.25%............................ 15,200 609,900
6.50%............................ 31,300 2,104,925
7.25%............................ 11,600 771,400
Salomon, Inc. [CVT]
6.25%............................ 22,200 1,337,550
7.625%........................... 22,000 673,750
SunAmerica, Inc. $3.10 [CVT]....... 20,000 845,000
------------
7,083,450
------------
INSURANCE -- 1.0%
Aetna, Inc. 6.25% [CVT]............ 15,500 1,230,312
------------
METALS & MINING -- 1.0%
Coeur D'arlene Mines Corp. 7.00%
[CVT]............................ 68,700 1,202,250
------------
OFFICE EQUIPMENT -- 0.5%
Alco Standard Corp. $5.04 [CVT].... 6,600 630,300
------------
OIL & GAS -- 2.5%
Tosco Corp. [CVT] 144A*............ 23,800 1,228,675
Williams Companies, Inc. $3.50
[CVT]............................ 20,500 1,783,500
------------
3,012,175
------------
PAPER & FOREST PRODUCTS -- 0.3%
International Paper Co. 5.25%
[CVT]............................ 7,800 354,900
------------
PRINTING & PUBLISHING -- 0.5%
Hollinger International Publishing
Co. 9.75% [CVT].................. 58,600 673,900
------------
TELECOMMUNICATIONS -- 0.9%
Airtouch Communications, Inc. 6.00%
Cl-B [CVT]....................... 41,100 1,119,975
------------
TOTAL PREFERRED STOCK
(COST $18,081,464)................... 19,305,225
------------
</TABLE>
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FOREIGN STOCK -- 2.0%
TELECOMMUNICATIONS -- 1.3%
Stet di Risp SPA -- (ITL).......... 475,600 $ 1,599,377
------------
UTILITIES -- ELECTRIC -- 0.7%
Iberdrola SA -- (ESP).............. 59,000 838,690
------------
TOTAL FOREIGN STOCK
(COST $1,809,986).................... 2,438,067
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- --------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 4.0%
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.9%
Solectron Corp. Notes
[CVT] 144A
6.00%.................. 03/01/06 $1,050 1,136,625
------------
FINANCIAL SERVICES -- 1.0%
New World Infrastructure
Bonds [CVT] 144A
5.00%.................. 07/15/01 1,000 1,183,750
------------
HEALTHCARE SERVICES -- 0.5%
Tenet Healthcare Corp.
Sub. Notes [CVT]
6.00%.................. 12/01/05 560 594,300
------------
PHARMACEUTICALS -- 0.8%
Alza Corp. Sub. Debs.
[CVT]
5.00%.................. 05/01/06 1,100 1,061,500
------------
RETAIL &
MERCHANDISING -- 0.4%
Saks Holdings, Inc. Sub.
Notes [CVT]
5.50%.................. 09/15/06 500 455,625
------------
UTILITIES -- ELECTRIC -- 0.4%
Korea Electric Power
Debs. [CVT]
5.00%.................. 08/01/01 470 490,562
------------
TOTAL CORPORATE OBLIGATIONS
(COST $4,672,101)................... 4,922,362
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 3.3%
HSBC Securities, Inc.
5.50% dated 12/31/96,
repurchase price
$4,102,253
(Collateralized
by U.S. Treasury Note,
par value $4,030,000,
market value $4,202,292
due 04/15/98)
(COST $4,101,000)...... 01/02/97 $4,101 $ 4,101,000
------------
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund..... 5,138 5,138
Temporary Investment Fund.......... 5,138 5,138
------------
(COST $10,276)..................... 10,276
------------
TOTAL INVESTMENTS -- 99.6%
(COST $110,555,178).................. 122,650,892
OTHER ASSETS LESS
LIABILITIES -- 0.4%.................. 487,196
------------
NET ASSETS -- 100.0%................... $123,138,088
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 2.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 50.0%
ADVERTISING -- 0.2%
Omnicom Group, Inc. ............... 10,100 $ 462,075
----------
AEROSPACE -- 1.6%
General Motors Corp. Cl-H.......... 21,900 1,231,875
Gulfstream Aerospace Corp.*........ 2,800 67,900
Northrop Grumman Corp. ............ 15,150 1,253,662
Precision Castparts Corp. ......... 5,800 287,825
Rockwell International Corp.*...... 9,470 576,486
United Technologies Corp. ......... 17,580 1,160,280
----------
4,578,028
----------
AIRLINES -- 0.3%
Delta Air Lines, Inc. ............. 10,500 744,187
----------
AUTOMOBILE MANUFACTURERS -- 1.5%
Chrysler Corp. .................... 23,000 759,000
Ford Motor Co. .................... 43,090 1,373,494
General Motors Corp. .............. 37,300 2,079,475
----------
4,211,969
----------
AUTOMOTIVE PARTS -- 2.2%
Eaton Corp. ....................... 20,940 1,460,565
Echlin, Inc. ...................... 35,540 1,123,952
Goodyear Tire & Rubber Co. ........ 11,400 585,675
ITT Industries, Inc. .............. 39,320 963,340
Magna International, Inc. Cl-A..... 5,000 278,750
TRW, Inc. ......................... 38,100 1,885,950
----------
6,298,232
----------
BEVERAGES -- 0.3%
Anheuser-Busch Companies, Inc. .... 9,200 368,000
Coca-Cola Enterprises, Inc. ....... 5,700 276,450
Panamerican Beverages, Inc. Cl-A... 5,500 257,812
----------
902,262
----------
BROADCASTING -- 0.1%
Evergreen Media Corp. Cl-A......... 6,900 172,500
----------
BUILDING MATERIALS -- 0.4%
Armstrong World Industries,
Inc. ............................ 11,730 815,235
Sherwin-Williams Co. .............. 5,400 302,400
Terex Corp. Appreciation Rights*... 600 1,200
----------
1,118,835
----------
BUSINESS SERVICES -- 0.6%
Accustaff*......................... 10,100 213,362
Equifax, Inc. ..................... 14,200 434,875
Norrell Corp. ..................... 13,500 367,875
Primark Corp.*..................... 7,800 193,050
Quintiles Transnational Corp.*..... 3,400 225,250
Telespectrum Worldwide, Inc.*...... 14,100 223,838
----------
1,658,250
----------
CHEMICALS -- 1.6%
Dupont, (E.I.) de Nemours & Co. ... 13,700 1,292,938
Eastman Chemical Co. .............. 21,010 1,160,802
Praxair, Inc. ..................... 7,400 341,325
Witco Corp. ....................... 53,530 1,632,665
----------
4,427,730
----------
SHARES VALUE
------- ------------
CLOTHING & APPAREL -- 0.3%
Hilfiger, (Tommy) Corp.*........... 4,200 $ 201,600
Jones Apparel Group, Inc.*......... 7,600 284,050
Nine West Group, Inc.*............. 4,900 227,238
St. John Knits, Inc. .............. 3,900 169,650
----------
882,538
----------
COMPUTER HARDWARE -- 1.1%
Gateway 2000, Inc.*................ 2,600 139,262
Hewlett-Packard Co. ............... 18,300 919,575
International Business Machines
Corp. ........................... 13,630 2,058,130
----------
3,116,967
----------
COMPUTER SERVICES & SOFTWARE -- 1.3%
BMC Software, Inc.*................ 2,000 82,750
CDW Computers Centers, Inc.*....... 5,200 308,425
Citrix Systems, Inc.*.............. 4,600 179,687
DST Systems, Inc.*................. 6,200 194,525
Learning Co., Inc.*................ 10,100 145,188
McAfee Associates, Inc.*........... 7,500 330,000
NCR Corp.*......................... 18,720 624,780
Parametric Technology Corp.*....... 4,900 251,737
Paychex, Inc. ..................... 4,400 226,325
Peoplesoft, Inc.*.................. 6,800 325,975
Reynolds & Reynolds Co. Cl-A....... 21,300 553,800
Sterling Commerce, Inc.*........... 5,800 204,450
Viasoft, Inc.*..................... 3,500 165,375
Western Digital Corp.*............. 3,100 176,312
----------
3,769,329
----------
CONGLOMERATES -- 1.2%
Minnesota Mining & Manufacturing
Co. ............................. 23,040 1,909,440
Philip Morris Companies, Inc. ..... 12,360 1,392,045
----------
3,301,485
----------
CONSUMER PRODUCTS & SERVICES -- 2.8%
American Brands, Inc. ............. 25,800 1,280,325
Apollo Group, Inc. Cl-A*........... 8,200 274,187
Avon Products, Inc. ............... 18,400 1,051,100
Colgate-Palmolive Co. ............. 8,500 784,125
Eastman Kodak Co. ................. 25,720 2,064,030
Estee Lauder Co. Cl-A.............. 8,700 442,612
Tupperware Corp. .................. 4,600 246,675
Whirlpool Corp. ................... 21,840 1,018,290
Whitman Corp. ..................... 42,550 973,331
----------
8,134,675
----------
CONTAINERS & PACKAGING -- 0.5%
Crown Cork & Seal Co., Inc. ....... 17,585 956,184
Temple-Inland, Inc. ............... 10,950 592,669
----------
1,548,853
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.6%
ADT Ltd.*.......................... 9,400 215,025
BMC Industries, Inc. .............. 4,100 129,150
C-Cube Microsystems, Inc.*......... 3,200 118,200
Diebold, Inc. ..................... 5,000 314,375
Electronics For Imaging, Inc.*..... 2,900 238,525
General Signal Corp. .............. 19,870 849,442
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Honeywell, Inc. ................... 16,900 $ 1,111,175
International Game Technology...... 9,600 175,200
LSI Logic Corp.*................... 4,600 123,050
Perkin-Elmer Corp. ................ 3,500 206,063
Polaroid Corp. .................... 26,460 1,151,010
SCI Systems, Inc.*................. 4,800 214,200
Symbol Technologies, Inc.*......... 5,900 261,075
Texas Instruments, Inc. ........... 33,750 2,151,562
Waters Corp.*...................... 6,800 206,550
----------
7,464,602
----------
ENTERTAINMENT & LEISURE -- 0.1%
Callaway Golf Co. ................. 6,100 175,375
Harley-Davidson, Inc. ............. 4,100 192,700
----------
368,075
----------
ENVIRONMENTAL SERVICES -- 0.8%
United Waste Systems, Inc.*........ 7,600 261,250
U.S. Filter Corp.*................. 15,300 485,775
USA Waste Services, Inc.*.......... 8,900 283,688
WMX Technologies, Inc. ............ 34,730 1,133,066
----------
2,163,779
----------
FINANCIAL-BANK & TRUST -- 5.6%
Banc One Corp. .................... 26,190 1,126,170
BankAmerica Corp. ................. 12,170 1,213,957
Bankers Trust New York Corp. ...... 14,480 1,248,900
Charter One Financial, Inc. ....... 9,600 403,200
CoreStates Financial Corp. ........ 19,130 993,564
First of America Bank Corp. ....... 3,600 216,450
Fleet Financial Group, Inc. ....... 29,750 1,483,781
Great Western Financial Corp. ..... 19,330 560,570
Keycorp............................ 26,300 1,328,150
Mellon Bank Corp. ................. 8,210 582,910
Morgan, (J.P.) & Co., Inc. ........ 23,800 2,323,475
NationsBank Corp. ................. 9,020 881,705
Northern Trust Corp. .............. 8,800 319,000
PNC Bank Corp. .................... 63,610 2,393,326
State Street Boston Corp. ......... 5,600 361,200
TCF Financial Corp. ............... 7,900 343,650
Washington Mutual, Inc. ........... 8,600 372,488
----------
16,152,496
----------
FINANCIAL SERVICES -- 1.0%
Ahmanson, (H.F.) & Co. ............ 36,000 1,170,000
Beneficial Corp. .................. 15,820 1,002,592
Finova Group, Inc. ................ 6,600 424,050
SunAmerica, Inc. .................. 5,000 221,875
----------
2,818,517
----------
FOOD -- 0.4%
General Mills, Inc. ............... 19,340 1,225,673
----------
SHARES VALUE
------- ------------
HEALTHCARE SERVICES -- 0.6%
American Medical Response, Inc.*... 7,500 $ 243,750
Genesis Health Ventures, Inc.*..... 6,000 186,750
Health Care & Retirement Corp.*.... 7,400 211,825
Health Management Associates,
Inc.*............................ 11,000 247,500
Healthsouth Corp.*................. 5,600 216,300
Omnicare, Inc. .................... 12,800 411,200
Oxford Health Plans, Inc.*......... 4,700 275,244
----------
1,792,569
----------
HOTELS & MOTELS -- 0.1%
HFS, Inc.*......................... 3,600 215,100
----------
INDUSTRIAL PRODUCTS -- 0.4%
Corning, Inc. ..................... 27,700 1,281,125
----------
INSURANCE -- 1.7%
American General Corp. ............ 35,700 1,459,237
AON Corp. ......................... 20,070 1,246,849
Capmac Holdings, Inc. ............. 5,600 185,500
CIGNA Corp. ....................... 5,030 687,224
USF&G Corp. ....................... 68,440 1,428,685
----------
5,007,495
----------
MACHINERY & EQUIPMENT -- 0.5%
New Holland NV*.................... 66,600 1,390,275
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.7%
Baxter International, Inc. ........ 31,390 1,286,990
IDEXX Laboratories, Inc.*.......... 5,700 205,200
Stryker Corp. ..................... 10,600 316,675
U.S. Surgical Corp. ............... 5,700 224,438
----------
2,033,303
----------
METALS & MINING -- 0.4%
Freeport-McMoran Copper & Gold,
Inc. Cl-A........................ 37,530 1,055,531
----------
OFFICE EQUIPMENT -- 0.8%
Staples, Inc.*..................... 19,200 346,800
Xerox Corp. ....................... 39,020 2,053,428
----------
2,400,228
----------
OIL & GAS -- 3.8%
Amoco Corp. ....................... 22,180 1,785,490
British Petroleum Co. PLC [ADR].... 8,600 1,215,825
Camco International, Inc. ......... 6,800 313,650
Coastal Corp. ..................... 24,400 1,192,550
Global Marine, Inc.*............... 9,500 195,938
Halliburton Co. ................... 5,600 337,400
Mobil Corp. ....................... 9,450 1,155,263
Occidental Petroleum Corp. ........ 49,670 1,161,036
Panenergy Corp. ................... 22,010 990,450
Phillips Petroleum Co. ............ 26,930 1,191,653
Total SA [ADR]..................... 31,500 1,267,875
Western Atlas, Inc.*............... 2,800 198,450
----------
11,005,580
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 1.6%
Kimberly-Clark Corp. .............. 24,250 $ 2,309,813
Rayonier, Inc. .................... 18,860 723,753
Weyerhaeuser Co. .................. 33,150 1,570,481
----------
4,604,047
----------
PHARMACEUTICALS -- 2.8%
American Home Products Corp. ...... 17,600 1,031,800
Biochem Pharma, Inc.*.............. 3,900 195,975
Bristol-Meyers Squibb Co. ......... 8,920 970,050
Cardinal Health, Inc. ............. 7,050 410,662
Dura Pharmaceutical, Inc.*......... 5,400 257,850
Elan Corp. PLC [ADR]*.............. 10,900 362,425
Interneuron Pharmaceuticals,
Inc.*............................ 7,900 205,400
Pharmacia & Upjohn, Inc. .......... 64,050 2,537,981
Warner-Lambert Co. ................ 27,020 2,026,500
----------
7,998,643
----------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A............ 8,100 282,487
Gartner Group, Inc. Cl-A*.......... 6,900 268,669
Times Mirror Co. Cl-A.............. 21,040 1,046,740
----------
1,597,896
----------
RAILROADS -- 0.9%
Canadian National Railway Co. ..... 15,700 596,600
Norfolk Southern Corp. ............ 12,870 1,126,125
Union Pacific Corp. ............... 14,800 889,850
----------
2,612,575
----------
RETAIL & MERCHANDISING -- 3.1%
Borders Group, Inc.*............... 8,600 308,525
CompUSA, Inc.*..................... 6,600 136,125
Consolidated Stores Corp.*......... 12,325 395,941
Dayton-Hudson Corp. ............... 31,440 1,234,020
Harcourt General, Inc. ............ 6,400 295,200
J.C. Penney Co., Inc. ............. 22,280 1,086,150
Kmart Corp.*....................... 120,060 1,245,623
May Department Stores Co. ......... 21,700 1,014,475
Pier 1 Imports, Inc. .............. 9,900 174,488
Revco D.S., Inc.*.................. 9,200 340,400
Rite Aid Corp. .................... 32,060 1,274,385
Sears Roebuck & Co. ............... 13,200 608,850
Starbucks Corp.*................... 6,700 191,788
TJX Companies, Inc. ............... 11,300 535,338
----------
8,841,308
----------
SEMI-CONDUCTORS -- 0.6%
Analog Devices, Inc.*.............. 5,900 199,862
Microchip Technology, Inc.*........ 3,700 188,238
Motorola, Inc. .................... 21,980 1,349,023
----------
1,737,123
----------
SHARES VALUE
------- ------------
TELECOMMUNICATIONS -- 3.8%
ADC Telecommunications, Inc.*...... 6,000 $ 186,750
Ameritech Corp. ................... 11,900 721,437
BellSouth Corp. ................... 34,980 1,412,317
Cascade Communications Corp.*...... 5,300 292,162
Cincinnati Bell, Inc. ............. 2,500 154,062
Clear Channel Communications,
Inc.*............................ 10,300 372,087
Deutsche Telekom AG [ADR]*......... 31,000 633,563
GTE Corp. ......................... 43,550 1,981,525
LCI International, Inc.*........... 7,300 156,950
Pacific Telesis Group.............. 35,940 1,320,795
Pairgain Technologies, Inc.*....... 4,900 149,144
Picturetel Corp.*.................. 6,800 176,800
Sprint Corp. ...................... 48,340 1,927,558
Telebras SA [ADR].................. 7,300 558,450
Teleport Communications Group, Inc.
Cl-A*............................ 10,100 308,050
Tellabs, Inc.*..................... 9,600 361,200
360 Communications Co.*............ 10,100 233,563
----------
10,946,413
----------
TRANSPORTATION -- 0.4%
Ryder Systems, Inc. ............... 36,100 1,015,313
Wisconsin Central Transportation
Corp.*........................... 6,100 241,713
----------
1,257,026
----------
UTILITIES -- 0.7%
California Energy Co., Inc.*....... 13,000 437,125
Northeast Utilities System......... 25,800 341,850
Union Electric Co. ................ 28,900 1,112,650
----------
1,891,625
----------
TOTAL COMMON STOCK
(COST $138,113,610).................. 143,188,919
----------
PREFERRED STOCK -- 0.4%
FINANCIAL-BANK & TRUST -- 0.0%
Chevy Chase Capital Corp. Cl-A
10.375%.......................... 1,140 57,855
----------
FOOD -- 0.0%
AmeriKing, Inc. 13.00% [PIK]....... 25 27,500
----------
MACHINERY & EQUIPMENT -- 0.3%
Case Corp. Cl-A $4.50 [CVT]........ 6,160 819,144
----------
TELECOMMUNICATIONS -- 0.1%
Cablevision Systems Corp. Cl-M
11.125% [PIK].................... 1,542 138,767
----------
TOTAL PREFERRED STOCK
(COST $1,022,357).................... 1,043,266
----------
FOREIGN STOCK -- 14.2%
AIRLINES -- 0.2%
KLM Royal Dutch Airlines NV --
(NLG)............................ 7,000 197,240
Swire Pacific Ltd. Cl-A -- (HKD)... 40,000 381,408
----------
578,648
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
AUTOMOBILE MANUFACTURERS -- 0.3%
Bayerische Motoren Werke AG --
(DEM)............................ 900 $ 621,861
Edaran Otomobil Nasional BHD --
(MYR)............................ 8,000 79,991
Peugeot Citroen SA -- (FRF)........ 2,450 276,200
----------
978,052
----------
AUTOMOTIVE PARTS -- 0.6%
Autoliv AB -- (SEK)................ 3,300 145,276
Bridgestone Corp. -- (JPY)......... 26,000 494,596
Denso Corp. -- (JPY)............... 20,000 482,490
Michelin CGDE Cl-B -- (FRF)........ 10,600 573,144
----------
1,695,506
----------
BEVERAGES -- 0.0%
Guinness PLC -- (GBP).............. 7,400 57,989
----------
BUILDING MATERIALS -- 0.4%
CRH PLC -- (IEP)................... 60,800 622,492
Lafarge SA -- (FRF)................ 6,900 414,642
----------
1,037,134
----------
BUSINESS SERVICES -- 0.1%
SGS Holdings SA -- (CHF)........... 125 307,293
----------
CHEMICALS -- 0.6%
Akzo-Nobel NV -- (NLG)............. 3,300 451,531
Bayer AG -- (DEM).................. 20,300 824,811
DSM NV -- (NLG).................... 2,000 197,588
Sekisui Chemical Co.
Ltd. -- (JPY).................... 29,000 293,385
Solvay SA -- (BEF)................. 75 46,009
----------
1,813,324
----------
CLOTHING & APPAREL -- 0.1%
Onward Kashiyama Co.
Ltd. -- (JPY).................... 15,000 211,414
----------
COMPUTER SERVICES & SOFTWARE -- 0.1%
Getronics NV -- (NLG).............. 13,800 375,244
----------
CONGLOMERATES -- 0.9%
BAT Industries PLC -- (GBP)........ 73,200 607,472
Cycle & Carriage Ltd. -- (SGD)..... 19,000 232,304
Hutchison Whampoa Ltd. -- (HKD).... 56,000 439,847
Mitsui & Co. Ltd. -- (JPY)......... 48,000 390,143
Securicor PLC -- (GBP)............. 45,300 216,871
Sungei Way Holdings BHD -- (MYR)... 34,000 100,978
Sungei Way Holdings BHD Rights --
(MYR)*........................... 3,400 4,039
Tabacalera SA Cl-A -- (ESP)........ 2,600 112,284
Unilever NV -- (NLG)............... 2,000 354,360
----------
2,458,298
----------
CONSTRUCTION -- 0.0%
Toda Construction Co. -- (JPY)..... 16,000 121,747
----------
CONSUMER PRODUCTS & SERVICES -- 0.4%
Electrolux AB Cl-B -- (SEK)........ 5,500 320,676
Kao Corp. -- (JPY)................. 34,000 396,887
Zodiac SA -- (FRF)................. 1,200 367,392
----------
1,084,955
----------
SHARES VALUE
------- ------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.2%
General Electric Co.
PLC -- (GBP)..................... 71,000 $ 464,561
Hirose Electric Ltd. -- (JPY)...... 5,000 290,099
Murata Manufacturing Co. Ltd. --
(JPY)............................ 6,000 199,741
Omron Corp. -- (JPY)............... 15,000 282,750
Philips Electronics NV -- (NLG).... 12,300 499,188
SGS-Thomson Microelectronics --
(FRF)*........................... 13,000 920,989
Sharp Corp. -- (JPY)............... 20,000 285,344
TDK Corp. -- (JPY)................. 8,000 522,265
----------
3,464,937
----------
FINANCIAL-BANK & TRUST -- 1.8%
ABN AMRO Holding NV -- (NLG)....... 9,670 630,165
Allied Irish Banks PLC -- (IEP).... 70,800 470,238
Banco Bilbao Vizcaya SA -- (ESP)... 5,800 314,107
Barclays Bank PLC -- (GBP)......... 24,000 411,291
Certificados de la
Tesoreria -- (MXP)............... 390,540 419,554
Commonwealth Bank of Australia --
(AUD)............................ 21,000 201,130
Dao Heng Bank Group
Ltd. -- (HKD).................... 36,000 172,681
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD)............... 12,000 162,162
HSBC Holdings PLC -- (HKD)......... 31,600 676,165
ING Groep NV -- (NLG).............. 17,400 627,481
Julius Baer Holdings AG Cl-B --
(CHF)............................ 300 314,503
Malayan Banking BHD -- (MYR)....... 7,000 77,615
United Overseas Bank
Ltd. -- (SGD).................... 18,000 200,772
Westpac Banking Corp.
Ltd. -- (AUD).................... 87,000 495,521
----------
5,173,385
----------
FINANCIAL SERVICES -- 0.5%
Bank of Ireland -- (IEP)........... 52,500 475,168
Cetelem Group SA -- (FRF).......... 2,200 254,812
CLF Dexia France -- (FRF).......... 5,500 479,895
Gucco Group Ltd. -- (HKD).......... 48,000 268,718
----------
1,478,593
----------
FOOD -- 0.6%
Danisco AS -- (DKK)................ 3,600 219,355
Goodman Fielder Ltd. -- (AUD)...... 169,000 209,721
Greencore Group PLC -- (IEP)....... 57,000 357,791
Ito-Yokado Co. Ltd. -- (JPY)....... 8,000 348,638
Nestle SA -- (CHF)................. 495 531,506
----------
1,667,011
----------
INDUSTRIAL PRODUCTS -- 0.0%
Daikin Industries Ltd. -- (JPY).... 15,000 133,593
----------
INSURANCE -- 0.5%
Aegon NV -- (NLG).................. 7,400 472,368
Mapfre Vida -- (ESP)............... 3,100 215,544
Swiss Reinsurance Co. -- (CHF)..... 430 459,142
Tokio Marine & Fire Insurance Co.
-- (JPY)......................... 19,000 179,075
----------
1,326,129
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
MACHINERY & EQUIPMENT -- 0.6%
ABB AG -- (CHF).................... 308 $ 383,188
Komori Corp. -- (JPY).............. 5,000 106,355
Kurita Water Industries
Ltd. -- (JPY).................... 13,000 263,035
Rieter Holdings AG -- (CHF)........ 450 124,412
Sandvik AB Cl-B -- (SEK)........... 18,400 501,185
Weir Group PLC -- (GBP)............ 46,000 206,827
------------
1,585,002
------------
METALS & MINING -- 0.3%
Preussag AG -- (DEM)............... 1,800 407,547
RTZ Corp. PLC -- (GBP)............. 28,000 449,145
------------
856,692
------------
MISCELLANEOUS -- 0.2%
VA Technologie AG -- (ATS)......... 3,100 487,594
------------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)............... 24,000 531,258
------------
OIL & GAS -- 1.1%
British Petroleum Co.
PLC -- (GBP)..................... 29,700 356,357
Burmah Castrol PLC -- (GBP)........ 23,000 433,747
Ente Nazionale Idrocarburi SPA --
(ITL)............................ 91,100 465,363
Far East Levingston Shipbuilding
Ltd. -- (SGD).................... 39,000 203,561
Shell Transport & Trading Co.
PLC -- (GBP)..................... 25,600 443,534
Societe Nationale Elf Aquitaine
SA -- (FRF)...................... 6,650 606,296
Total SA Cl-B -- (FRF)............. 8,400 684,285
------------
3,193,143
------------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK).................... 17,500 356,859
------------
PHARMACEUTICALS -- 0.7%
Astra AB Cl-A -- (SEK)............. 11,000 545,797
Novartis AG -- (CHF)*.............. 555 635,363
Pharmacia & Upjohn,
Inc. -- (SEK).................... 13,400 551,436
Santen Pharmaceutical
Ltd. -- (JPY).................... 10,000 207,523
Yamanouchi Pharmaceutical Co.
Ltd. -- (JPY).................... 10,000 205,793
------------
2,145,912
------------
PRINTING & PUBLISHING -- 0.1%
Dai Nippon Printing Co.
Ltd. -- (JPY).................... 24,000 421,271
------------
RAILROADS -- 0.1%
East Japan Railway Co.
Ltd. -- (JPY).................... 85 382,923
------------
REAL ESTATE -- 0.6%
Amoy Properties Ltd. -- (HKD)...... 190,000 273,903
Cheung Kong Holdings
Ltd. -- (HKD).................... 72,000 639,990
Hong Kong Land Holdings Ltd. --
(HKD)............................ 93,000 258,540
Sung Hung Kai Properties Ltd. --
(HKD)............................ 34,000 416,510
------------
1,588,943
------------
SHARES VALUE
------- ------------
RETAIL & MERCHANDISING -- 0.3%
Marui Co. Ltd. -- (JPY)............ 22,000 $ 397,579
Vendex International NV -- (NLG)... 9,200 394,179
------------
791,758
------------
TELECOMMUNICATIONS -- 0.8%
Deutsche Telekom AG -- (DEM)....... 19,900 415,608
Nippon Telegraph & Telephone
Corp. -- (JPY)................... 60 455,512
Portugal Telecom SA -- (PTE)....... 15,600 444,909
Royal PTT NV -- (NLG).............. 8,900 340,045
Vodafone Group PLC -- (GBP)........ 138,900 586,462
------------
2,242,536
------------
TRANSPORTATION -- 0.2%
IHC Caland NV -- (NLG)............. 6,300 360,511
Yamato Transport Co.
Ltd. -- (JPY).................... 12,000 124,514
------------
485,025
------------
UTILITIES -- 0.6%
Chubu Electric Power
Ltd. -- (JPY).................... 9,000 178,988
Hong Kong Electric Holdings Ltd. --
(HKD)............................ 25,000 83,069
Kyushu Electric Power
Ltd. -- (JPY).................... 8,000 155,642
Scottish Power PLC -- (GBP)........ 78,000 470,282
United Utilities PLC -- (GBP)...... 19,300 205,291
Veba AG -- (DEM)................... 10,200 587,313
------------
1,680,585
------------
TOTAL FOREIGN STOCK
(COST $38,817,523)................... 40,712,753
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 11.3%
ADVERTISING -- 0.1%
Larmar Advertising Co. Sr.
Sub. Notes
9.625%.................. 12/01/06 $ 35 36,137
Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%................... 10/15/06 200 207,000
-------------
243,137
-------------
AEROSPACE -- 0.4%
BE Aerospace, Inc.
Sr. Sub. Notes
9.875%.................. 02/01/06 200 209,250
Howmet Corp.
Sr. Sub. Notes
10.00%.................. 12/01/03 150 163,500
Lockheed Martin Corp.
Notes
7.25%................... 05/15/06 400 408,500
Northrop Grumman Corp.
Notes
7.00%................... 03/01/06 155 152,869
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
UNC, Inc. Sr. Sub. Notes
11.00%.................. 06/01/06 $ 200 $ 214,000
-------------
1,148,119
-------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Daimler-Benz North America
Notes
7.375%.................. 09/15/06 120 123,600
-------------
AUTOMOTIVE PARTS -- 0.3%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%.................. 08/01/04 200 223,500
APS, Inc. Notes
11.875%................. 01/15/06 100 107,875
CSK Auto, Inc.
Sr. Sub. Notes 144A
11.00%.................. 11/01/06 35 36,225
Exide Corp. Sr. Notes
10.75%.................. 12/15/02 200 210,500
Lear Corp. Sub. Notes
9.50%................... 07/15/06 200 216,250
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%.................. 12/15/06 5 5,150
-------------
799,500
-------------
BEVERAGES -- 0.0%
Canandaigua Wine
Sr. Sub. Notes 144A
8.75%................... 12/15/03 45 43,987
-------------
BROADCASTING -- 0.5%
American Radio Systems
Notes
9.00%................... 02/01/06 100 98,500
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................... 11/01/05 200 203,500
Benedek Broadcasting Corp.
Sr. Notes
11.875%................. 03/01/05 200 208,750
Granite Broadcasting Corp.
Sr. Sub. Debs.
10.375%................. 05/15/05 150 154,875
News America Holdings
Debs.
7.70%................... 10/30/25 435 412,162
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%.................. 05/15/06 150 158,625
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 200 205,000
-------------
1,441,412
-------------
BUILDING MATERIALS -- 0.2%
Atrium Companies, Inc.
Sr. Sub. Notes 144A
10.50%.................. 11/15/06 30 30,450
PAR
MATURITY (000) VALUE
--------- -------- -------------
Building Materials Corp.
Sr. Notes 144A
8.625%.................. 12/15/06 $ 10 $ 10,000
Cemex SA 144A
12.75%.................. 07/15/06 75 84,000
Inter-City Products Corp.
USA Sr. Notes
9.75%................... 03/01/00 200 205,000
Southdown, Inc.
Sr. Sub. Notes
10.00%.................. 03/01/06 150 159,000
Terex Corp. Sr. Notes
13.25%.................. 05/15/02 150 162,000
-------------
650,450
-------------
BUSINESS SERVICES -- 0.1%
Outsourcing Solutions
Corp. Sr. Sub. Notes
144A
11.00%.................. 11/01/06 20 21,050
Primark Corp. Sr. Notes
8.75%................... 10/15/00 200 201,500
-------------
222,550
-------------
CHEMICALS -- 0.0%
Arcadian Partners L.P. Sr.
Notes Cl-B
10.75%.................. 05/01/05 50 55,500
-------------
COMPUTER SERVICES & SOFTWARE -- 0.1%
Unisys Corp. Sr. Notes
11.75%.................. 10/15/04 200 213,000
-------------
CONSTRUCTION -- 0.0%
Newport News Shipbuilding,
Inc. Sr. Notes 144A
8.625%.................. 12/01/06 20 20,500
9.25%................... 12/01/06 15 15,487
-------------
35,987
-------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Herff Jones, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/05 200 216,000
Imed Corp.
Sr. Sub. Notes 144A
9.75%................... 12/01/06 50 51,125
Pierce Leahy Corp.
Sr. Sub. Notes
11.125%................. 07/15/06 200 219,000
Rose Hills Acquisition Sr.
Sub. Notes 144A
9.50%................... 11/15/04 15 15,337
Scotsman Group Sr. Notes
9.50%................... 12/15/00 200 204,250
-------------
705,712
-------------
CONTAINERS & PACKAGING -- 0.3%
Amtrol Acquisition, Inc.
Sr. Sub. Notes 144A
10.625%................. 12/31/06 15 15,261
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Gaylord Container Corp.
Sr. Notes
11.50%.................. 05/15/01 $ 50 $ 53,375
Ivex Packaging Corp.
Sr. Sub. Notes
12.50%.................. 12/15/02 150 162,375
8.51% [STEP]............ 03/15/05 170 131,750
Owens Illinois, Inc. Debs.
11.00%.................. 12/01/03 150 167,625
Riverwood International
Co. Notes
10.875%................. 04/01/08 200 185,000
Stone Container Corp.
First Mtge.
10.75%.................. 10/01/02 200 211,000
-------------
926,386
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.1%
Amphenol Corp.
Sr. Sub. Notes
12.75%.................. 12/15/02 200 221,000
Celestica International
Sr. Sub. Notes 144A
10.50%.................. 12/31/06 20 21,075
-------------
242,075
-------------
ENTERTAINMENT & LEISURE -- 1.0%
ACT III Theaters
Sr. Sub. Notes
11.875%................. 02/01/03 200 217,750
Argosy Gaming Co.
First Mtge.
13.25%.................. 06/01/04 150 141,375
Casino America, Inc. Sr.
Notes
12.50%.................. 08/01/03 150 142,500
Cinemark USA, Inc.
Sr. Sub. Notes
9.625%.................. 08/01/08 200 202,000
Coast Hotels & Casino
Notes Cl-B
13.00%.................. 12/15/02 200 220,750
Colorado Gaming &
Entertainment Corp.
[PIK]
12.00%.................. 06/01/03 150 141,750
Players International Sr.
Notes
10.875%................. 04/15/05 150 148,875
Showboat Marina Casinos
First Mtge.
13.50%.................. 03/15/03 150 165,750
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
5.79%................... 06/15/05 200 188,250
PAR
MATURITY (000) VALUE
--------- -------- -------------
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 $ 450 $ 434,250
8.875%.................. 10/01/12 225 244,406
Time Warner, Inc. Cl-K
[PIK]
10.25%.................. 07/01/16 200 218,000
Trump Atlantic City
Assoc., Inc. Notes
11.25%.................. 05/01/06 150 148,500
Trump Holdings & Funding
Assoc. Sr. Notes
15.50%.................. 06/15/05 100 114,500
-------------
2,728,656
-------------
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste North America
Sr. Sub. Notes 144A
10.25%.................. 12/01/06 35 36,925
WMX Technologies, Inc.
Notes
7.10%................... 08/01/26 235 242,637
-------------
279,562
-------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 200 215,500
-------------
FINANCIAL-BANK & TRUST -- 1.7%
ABN AMRO Bank NV
7.55%................... 06/28/06 320 332,400
BankAmerica Corp.
Sub. Notes
8.125%.................. 02/01/02 238 252,577
8.375%.................. 03/15/02 130 139,587
Capital One Bank Notes
8.125%.................. 03/01/00 720 746,100
Consorcio Groupo Dina SA
Disc. Notes
12.00%.................. 11/15/02 200 165,500
First Nationwide Escrow
Sr. Sub. Notes 144A
10.625%................. 10/01/03 150 162,000
First Nationwide Holdings
Sr. Notes
12.50%.................. 04/15/03 200 222,500
Merita Bank Ltd. Sub.
Notes
6.50%................... 01/15/06 500 477,500
NationsBank Corp.
Sub. Notes
7.80%................... 09/15/16 410 424,862
7.25%................... 10/15/25 85 82,131
North Fork Bancorp 144A
8.70%................... 12/15/26 25 25,063
Peoples Bank-Bridgeport
Sub. Notes
7.20%................... 12/01/06 305 298,137
Provident Capital Trust
144A
8.60%................... 12/01/26 60 60,600
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Riggs Capital Trust 144A
8.625%.................. 12/31/26 $ 15 $ 15,037
Standard Credit Card
Master Trust 1991-3 C1-A
8.875%.................. 07/07/98 1,310 1,361,436
-------------
4,765,430
-------------
FINANCIAL SERVICES -- 0.9%
Aames Financial Corp. Sr.
Notes
9.125%.................. 11/01/03 200 204,500
American Life Holding Co.
Sr. Sub. Notes
11.25%.................. 09/15/04 200 230,750
BanPonce Financial Corp.
Notes
6.75%................... 08/09/01 305 305,000
Commercial Credit Co.
Notes
5.875%.................. 01/15/03 200 192,500
7.875%.................. 02/01/25 335 362,219
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 200 204,000
Dollar Financial Group Sr.
Notes 144A
10.875%................. 11/15/06 15 15,488
Ford Motor Credit Co. Sr.
Notes
7.00%................... 09/25/01 120 122,250
Intertek Finance PLC Sr.
Sub. Notes 144A
10.25%.................. 11/01/06 25 25,938
Lehman Brothers Holdings
Notes
6.40%................... 12/27/99 465 462,303
Southern Investments UK
Sr. Notes
6.80%................... 12/01/06 245 239,794
Van Kampen Merrit Sr.
Notes
9.75%................... 02/15/03 200 214,750
-------------
2,579,492
-------------
FOOD -- 0.1%
AmeriKing, Inc. Sr. Notes
10.75%.................. 12/01/06 15 15,488
Chiquita Brands Sr. Notes
9.625%.................. 01/15/04 100 103,500
RJR Nabisco, Inc. Notes
8.75%................... 08/15/05 185 185,000
-------------
303,988
-------------
HEALTHCARE SERVICES -- 0.1%
Genesis Health Ventures,
Inc. Sr. Sub. Notes 144A
9.25%................... 10/01/06 200 205,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Merit Behavioral Care Sr.
Sub. Notes
11.50%.................. 11/15/05 $ 100 $ 106,000
-------------
311,000
-------------
HOTELS & MOTELS -- 0.1%
Hammons, (J.Q.) Hotel
Group First Mtge.
8.875%.................. 02/15/04 100 99,000
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 200 209,000
Prime Hospitality Corp.
First Mtge.
9.25%................... 01/15/06 50 51,000
-------------
359,000
-------------
INSURANCE -- 0.4%
Aegon NV Sub. Notes
8.00%................... 08/15/06 350 372,750
Conseco, Inc. Sr. Notes
10.50%.................. 12/15/04 355 417,569
Reliance Group Holdings
Sr. Notes
9.00%................... 11/15/00 200 205,500
Travelers-Aetna Property
Casualty Corp. Sr. Notes
7.75%................... 04/15/26 250 257,500
-------------
1,253,319
-------------
MACHINERY & EQUIPMENT -- 0.0%
Clark Materials Handling
Sr. Notes 144A
10.75%.................. 11/15/06 15 15,750
Hawk Corp. Sr. Notes 144A
10.25%.................. 12/01/03 15 15,450
Motors and Gears, Inc. Sr.
Notes 144A
10.75%.................. 11/15/06 35 36,181
Ryder TRS, Inc.
Sr. Sub. Notes 144A
10.00%.................. 12/01/06 15 15,600
-------------
82,981
-------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Fresenius Medical Care AG
9.00%................... 12/01/06 50 50,938
-------------
METALS & MINING -- 0.3%
AK Steel Corp. Sr. Notes
144A
9.125%.................. 12/15/06 30 30,900
Noranda, Inc.
7.00%................... 07/15/05 680 669,800
WCI Steel, Inc. Sr. Notes
144A
10.00%.................. 12/01/04 50 50,750
-------------
751,450
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
OFFICE EQUIPMENT -- 0.1%
United Stationery Supply
Sr. Sub. Notes
12.75%.................. 05/01/05 $ 200 $ 222,500
-------------
OIL & GAS -- 0.8%
Abraxas Petroleum Corp.
Sr. Notes 144A
11.50%.................. 11/01/04 25 26,750
Citgo Petroleum Corp. Sr.
Notes
7.875%.................. 05/15/06 170 175,525
El Paso Natural Gas Co.
Debs.
7.50%................... 11/15/26 180 179,775
Flores & Rucks
Sr. Sub. Notes
9.75%................... 10/01/06 150 158,625
Forcenergy, Inc.
Sr. Sub. Notes
9.50%................... 11/01/06 25 26,125
HS Resources, Inc.
Sr. Sub. Notes 144A
9.25%................... 11/15/06 25 25,625
Husky Oil Ltd. Debs.
7.55%................... 11/15/16 305 303,475
Kelley Oil & Gas Corp. Sr.
Sub. Notes 144A
10.375%................. 10/15/06 25 26,000
LASMO (USA), Inc. Notes
7.50%................... 06/30/06 235 242,638
Maxus Energy Corp. Notes
10.83%.................. 09/01/04 150 160,500
Parker Drilling Corp.
Notes 144A
9.75%................... 11/15/06 30 31,650
Petroliam Nasional BHD
Notes 144A
7.625%.................. 10/15/26 750 754,688
Transtexas Gas Corp. Sr.
Disc. Notes [STEP] 144A
13.24%.................. 12/31/03 124 68,510
Transtexas Gas Corp. Sr.
Notes
11.50%.................. 06/15/02 150 162,000
-------------
2,341,886
-------------
PAPER & FOREST PRODUCTS -- 0.1%
Florida Coast Paper LLC
First Mtge.
12.75%.................. 06/01/03 150 163,500
Maxxam Group Holdings,
Inc. Sr. Notes 144A
12.00%.................. 08/01/03 20 20,450
Radnor Holdings Sr. Notes
144A
10.00%.................. 12/01/03 15 15,338
PAR
MATURITY (000) VALUE
--------- -------- -------------
Repap New Brunswick Sr.
Notes
10.625%................. 04/15/05 $ 200 $ 213,000
-------------
412,288
-------------
PRINTING & PUBLISHING -- 0.1%
America Media Operation
Sr. Sub. Notes
11.625%................. 11/15/04 150 161,250
K-III Communications Corp.
Cl-B [PIK]
11.625%................. 05/01/05 200 203,500
-------------
364,750
-------------
RETAIL & MERCHANDISING -- 0.2%
Phar-Mor, Inc. Sr. Notes
11.72%.................. 09/11/02 150 157,500
Rite Aid Corp. Notes
6.70%................... 12/15/01 170 169,788
Southland Corp. Sr. Sub.
Debs.
5.00%................... 12/15/03 200 165,750
-------------
493,038
-------------
SEMI-CONDUCTORS -- 0.0%
International Semi-Tech
Microelectronics Sr.
Disc. Notes [STEP]
13.30%.................. 08/15/03 200 131,500
-------------
TELECOMMUNICATIONS -- 2.2%
Adelphia Communications
Sr. Notes
12.50%.................. 05/15/02 150 154,125
Airtouch Communications,
Inc. Notes
7.125%.................. 07/15/01 295 300,531
Arch Communications Group
Sr. Disc. Notes [STEP]
14.26%.................. 03/15/08 250 143,750
Centennial Cellular Sr.
Notes
8.875%.................. 11/01/01 200 193,500
Century Communications
Corp. Sr. Notes
9.50%................... 03/01/05 150 154,125
Cia Telecom Chile Notes
7.625%.................. 07/15/06 295 304,956
Colt Telecom Group PLC
Units [STEP]
12.00%.................. 12/15/06 35 21,000
Comcast U.K. Cable Corp.
Debs. [STEP]
10.24%.................. 11/15/07 300 212,250
Comcast U.K. Cable Corp.
Sr. Sub. Debs.
9.50%................... 01/15/08 150 155,625
Commodore Media, Inc. Sr.
Sub. Notes [STEP]
7.50%................... 05/01/03 200 210,500
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Diamond Cable
Communications PLC Sr.
Disc. Notes [STEP]
10.61%.................. 12/15/05 $ 200 $ 143,000
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
9.54%................... 03/15/04 100 76,500
Globo Communicacoes
Partners Notes 144A
10.50%.................. 12/20/06 60 60,000
Heartland Wireless Sr.
Notes 144A
14.00%.................. 10/15/04 80 82,600
Intercel, Inc. Units
[STEP]
12.17%.................. 02/01/06 200 132,000
Intermedia Communications
of Florida, Inc. Sr.
Notes
13.50%.................. 06/01/05 300 346,500
International Cabletel,
Inc. Sr. Notes [STEP]
11.88%.................. 02/01/06 300 204,000
Jacor Communications Co.
Notes
9.75%................... 12/15/06 20 20,600
JCAC Communications, Inc.
Sr. Sub. Notes
10.125%................. 06/15/06 100 104,000
Jones Intercable Sr. Sub.
Debs.
10.50%.................. 03/01/08 200 214,000
Marcus Cable Co. Debs.
11.875%................. 10/01/05 150 157,500
Marcus Cable Co. Sr. Notes
[STEP]
12.08%.................. 12/15/05 100 71,000
MFS Communications Co.,
Inc. Sr. Disc. Notes
[STEP]
8.11%................... 01/15/04 200 174,000
Millicom International
Cellular Sr. Disc. Notes
[STEP]
12.59%.................. 06/01/06 200 124,000
Mobile Telecommunications
Corp. Sr. Notes
13.50%.................. 12/15/02 150 150,750
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
13.02%.................. 09/01/03 150 115,500
13.30%.................. 08/15/04 750 511,875
Omnipoint Corp. Sr. Notes
11.625%................. 08/15/06 150 156,750
Paxson Communications Sr.
Sub. Notes
11.625%................. 10/01/02 150 156,375
PAR
MATURITY (000) VALUE
--------- -------- -------------
Pegasus Media &
Communications, Inc.
Notes Cl-B
12.50%.................. 07/01/05 $ 200 $ 216,500
Pricellular Wireless
Sr. Notes 144A
10.75%.................. 11/01/04 200 209,500
Rogers Cablesystems Ltd.
Notes
11.00%.................. 12/01/15 200 216,000
Teleport Communications
Sr. Disc. Notes [STEP]
9.61%................... 07/01/07 440 304,150
Telewest PLC Debs. [STEP]
12.12%.................. 10/01/07 150 104,625
TV Filme, Inc. Sr. Notes
144A
12.875%................. 12/15/04 15 15,094
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 200 195,000
Videotron Holdings PLC Sr.
Disc. Notes [STEP]
6.66%................... 08/15/05 100 81,000
-------------
6,193,181
-------------
UTILITIES -- 0.6%
AES China Generating Co.
Ltd. Sr. Notes
10.125%................. 12/15/06 20 20,750
Arizona Public Service Sr.
Notes
6.75%................... 11/15/06 205 200,900
Cleveland Electric
Illumination Co.
First Mtge. Cl-B
9.50%................... 05/15/05 200 210,250
Connecticut Light & Power
First Mtge.
7.875%.................. 06/01/01 205 208,588
El Paso Electric Co.
First Mtge. Cl-E
9.40%................... 05/01/11 200 213,000
Emp Distribuidora Norte
Edenor Notes 144A
9.75%................... 12/04/01 35 35,788
Enersis SA Notes
7.40%................... 12/01/16 220 213,675
6.60%................... 12/01/26 220 216,425
Long Island Lighting Debs.
9.00%................... 11/01/22 150 159,000
Niagara Mohawk Power Corp.
Notes
9.95%................... 06/01/00 200 185,000
Norcen Energy Resources
Debs.
7.375%.................. 05/15/06 130 132,113
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Northeast Utilities System
Notes
8.58%................... 12/01/06 $ 10 $ 9,399
-------------
1,804,888
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $32,110,963).................... 32,496,762
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.7%
FEDERAL HOME LOAN MORTGAGE CORP. -- 1.1%
9.50%................... 05/01/05 505 528,883
8.00% [TBA]............. 01/16/27 600 611,628
7.50% [TBA]............. 02/16/27 2,015 2,013,106
-------------
3,153,617
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 7.6%
6.50%................... 07/01/03 355 351,781
6.50%................... 09/01/03 866 858,259
6.50% [TBA]............. 01/16/04 1,875 1,858,594
8.50%................... 10/15/08 1,171 1,218,184
6.50%................... 05/01/11 1,422 1,396,648
6.50%................... 06/01/11 1,041 1,022,760
7.50%................... 10/15/23 45 44,562
7.00%................... 12/15/25 346 339,040
6.50%................... 01/01/26 901 859,871
6.50%................... 02/01/26 687 656,185
7.50%................... 02/15/26 24 24,515
7.50%................... 03/15/26 309 309,513
6.50%................... 04/01/26 902 860,973
7.00%................... 04/15/26 1,140 1,115,454
7.00%................... 05/15/26 382 374,093
7.50%................... 05/15/26 42 42,382
7.00%................... 06/01/26 521 509,587
7.50%................... 07/01/26 688 687,646
7.00%................... 09/01/26 262 256,425
7.00%................... 10/01/26 261 255,920
7.50%................... 10/15/26 1,390 1,391,587
7.00%................... 11/01/26 1,720 1,682,385
7.00%................... 12/01/26 330 322,639
7.39% [VR].............. 12/01/26 580 602,838
6.50% [TBA]............. 01/16/27 775 739,156
7.00% [TBA]............. 01/16/27 1,260 1,232,041
7.50% [TBA]............. 01/26/27 2,725 2,723,310
-------------
21,736,348
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 1.0%
6.50%................... 10/15/23 546 520,890
6.50%................... 11/15/23 557 531,030
6.50%................... 12/15/23 764 728,504
8.00%................... 11/15/26 1,231 1,255,970
-------------
3,036,394
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $27,951,684).................... 27,926,359
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 3.5%
Federal Deposit Insurance
Credit Corp.
6.75%................... 05/25/26 $ 1,190 $ 1,184,422
Fifth Third Auto Grantor
Trust
6.45%................... 03/15/02 776 781,485
Ford Credit Auto Owner
Trust
6.50%................... 11/15/99 890 897,952
GE Capital Mortgage
Services, Inc.
7.25%................... 05/25/26 995 966,221
Premier Auto Trust
Series 1996-4 Cl-A4
6.40%................... 10/06/01 500 502,147
Residential Funding Mtge.
Securities, Inc.
7.10%................... 01/25/26 1,000 953,125
Sears Credit Account
Master Trust Series
1996-4 Cl-A
6.45%................... 10/16/06 500 498,889
Securitized Asset Sales,
Inc.
6.8076%................. 11/28/23 978 908,615
Standard Credit Card
Master Trust Series
1995-6 Cl-A
6.75%................... 06/07/00 860 869,119
Structured Asset
Securities Corp.
7.375%.................. 09/25/24 1,500 1,502,344
6.525%.................. 02/25/28 860 836,350
-------------
TOTAL COLLATERALIZED MORTGAGE &
ASSET-BACKED OBLIGATIONS (COST
$9,942,039)........................... 9,900,669
-------------
U.S. TREASURY OBLIGATIONS -- 4.6%
U.S. TREASURY BONDS -- 1.6%
8.125%.................. 08/15/19 3,885 4,494,595
-------------
U.S. TREASURY NOTES -- 3.0%
5.625%.................. 11/30/98 8,195 8,160,089
6.625%.................. 07/31/01 235 238,819
6.50%................... 08/15/05 165 166,064
6.00%................... 02/15/26 120 109,291
-------------
8,674,263
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $13,122,278).................... 13,168,858
-------------
SOVEREIGN ISSUES -- 0.6%
ARGENTINA -- 0.3%
Republic of Argentina
[BRB, FRB]
6.625%.................. 03/31/97 637 555,384
6.625%.................. 03/31/05 219 190,540
-------------
745,924
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
CANADA -- 0.2%
Quebec Province Debs.
7.125%.................. 02/09/24 $ 450 $ 429,188
-------------
MEXICO -- 0.1%
United Mexican States Cl-C
[BRB, FRB] (with Value
Recovery Rights
Attached)
6.375%.................. 12/31/19 400 345,000
-------------
NETHERLANDS -- 0.0%
Asia Pulp & Paper
International Finance
Co. Notes
11.75%.................. 10/01/05 100 107,250
-------------
TOTAL SOVEREIGN ISSUES
(COST $1,480,785)..................... 1,627,362
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 4.0%
AUSTRALIA -- 0.3%
Australian
Government
10.00%.................. 10/15/02 285 257,432
9.50%................... 08/15/03 385 342,813
10.00%.................. 02/15/06 200 186,338
------------
786,583
------------
CANADA -- 0.2%
Canadian Government
8.75%................... 12/01/05 40 33,957
9.00%................... 06/01/25 605 543,011
------------
576,968
------------
DENMARK -- 0.1%
Kingdom of Denmark
8.00%................... 03/15/06 1,295 242,452
------------
FRANCE -- 0.8%
French O.A.T.
6.00%................... 10/25/25 818 141,721
French Treasury Bill
4.50%................... 10/12/98 3,000 589,262
7.00%................... 10/12/00 7,440 1,573,081
------------
2,304,064
------------
GERMANY -- 1.4%
Bundesobligation
5.25%................... 02/21/01 2,535 1,698,631
Deutscheland Republic
6.25%................... 04/26/06 2,610 1,754,801
Treuhan Obligationen
5.625%.................. 09/24/98 815 549,502
------------
4,002,934
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- --------- ------------
<S> <C> <C> <C>
ITALY -- 0.2%
Italian Government
9.50%................... 02/01/01 820,000 $ 590,841
------------
SPAIN -- 0.2%
Spanish Government
10.10%.................. 02/28/01 62,000 551,553
------------
UNITED KINGDOM -- 0.8%
United Kingdom Treasury
9.00%................... 03/03/00 325 585,904
7.75%................... 09/08/06 1,090 1,895,019
------------
2,480,923
------------
TOTAL FOREIGN BONDS
(COST $11,339,498).......... 11,536,318
------------
<CAPTION>
PAR
(000)
---------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 5.0%
UBS Securities Funding, Inc.
6.75% dated 12/31/96,
repurchase price $14,447,416
(Collateralized by U.S.
Treasury Note, par value
$13,656,000, market value
$14,742,547, due 01/31/00)
(COST $14,442,000)............. 01/02/97 $14,442 14,442,000
-----------
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Fund
(COST $8,153).............. 8,153 8,153
-----------
TOTAL INVESTMENTS -- 103.3%
(COST $288,350,890)........ 296,051,419
<CAPTION>
PAR
MATURITY (000)
-------- -----
<S> <C> <C> <C>
SALE COMMITMENTS -- (0.8%)
Federal National Mortgage
Association [TBA]
6.50%
(COST ($2,420,296)).......... 01/16/12 $ 2,463 (2,418,358)
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (2.5%)....... (7,153,656)
------------
NET ASSETS -- 100.0%........... $286,479,405
============
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy AUD $ 873,055 1.2599 03/97 $ 1,224
Buy CAD 1,762,282 1.3460 03/97 (21,467)
Buy CHF 2,201,426 1.3095 03/97 (29,989)
Buy DEM 66,853 1.5548 01/97 783
Buy DEM 2,868,990 1.5415 03/97 23,148
Buy DKK 378,559 5.9103 03/97 3,821
Buy FRF 770,867 5.2668 03/97 16,474
Buy GBP 10,062 0.5957 01/97 204
Buy GBP 802,260 0.5996 03/97 18,769
Buy GBP 775,444 0.5989 05/97 18,483
Buy ITL 782,315 1536.6142 03/97 8,021
Buy JPY 7,326,946 111.3728 03/97 (192,014)
Buy SEK 349,106 6.7945 03/97 1,335
--------------
$ (151,208)
=============
Sell AUD $1,486,724 1.2230 03/97 $ 41,621
Sell CAD 924,642 1.3381 03/97 16,585
Sell CHF 3,565,843 1.2966 03/97 83,393
Sell DEM 6,287,993 1.5235 03/97 (76,203)
Sell DEM 1,581,065 1.4914 05/97 33,374
Sell DKK 253,353 5.9206 03/97 (3,003)
Sell ESP 72,744 131.7960 03/97 (1,189)
Sell FRF 1,470,853 5.2536 03/97 (27,654)
Sell FRF 3,036,501 5.0815 05/97 34,018
Sell GBP 12,459 0.5846 01/97 (14)
Sell GBP 1,285,444 0.6112 03/97 (52,642)
Sell GBP 771,235 0.6237 05/97 (49,794)
Sell JPY 5,221,403 111.8344 03/97 115,760
Sell NLG 1,923,231 1.6831 05/97 29,639
--------------
$ 143,891
=============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 0.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 91.2%
ADVERTISING -- 0.7%
Larmar Advertising Co.
Sr. Sub. Notes
9.625%............... 12/01/06 $ 1,400 $ 1,445,500
------------
AEROSPACE -- 0.3%
Tracor, Inc. Sr. Sub.
Notes
10.875%.............. 08/15/01 650 693,875
------------
AUTOMOTIVE PARTS -- 2.5%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%............... 08/01/04 1,250 1,403,125
Blue Bird Body Co. Sr.
Sub. Notes 144A
10.75%............... 11/15/06 250 261,875
Exide Corp. Sr. Notes
10.00%............... 04/15/05 1,225 1,280,125
JPS Automotive Products
Corp. Sr. Notes
11.125%.............. 06/15/01 250 269,375
Lear Corp. Sub. Notes
9.50%................ 07/15/06 1,000 1,075,000
Lear Seating Corp. Sr.
Sub. Notes
11.25%............... 07/15/00 150 153,750
8.25%................ 02/01/02 550 556,875
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%............... 12/15/06 175 180,688
------------
5,180,813
------------
BEVERAGES -- 0.7%
Delta Beverage Group
Sr. Notes 144A
9.75%................ 12/15/03 300 309,000
Dr. Pepper Bottling
Holding Co. Sr. Notes
[STEP]
9.50%................ 02/15/03 1,250 1,184,375
------------
1,493,375
------------
BROADCASTING -- 6.8%
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................ 11/01/05 500 506,250
Australis Media Ltd.
Units [STEP]
8.95%................ 05/15/03 625 368,750
Chancellor Broadcasting
Co. Sr. Sub. Notes
9.375%............... 10/01/04 750 759,375
12.50%............... 10/01/04 375 423,750
Granite Broadcasting
Corp. Sr. Sub. Debs.
10.375%.............. 05/15/05 1,000 1,030,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
Heritage Media Corp.
Sr. Sub. Notes
8.75%................ 02/15/06 $ 2,000 $ 1,932,500
Lenfest Communications
Sr. Sub. Notes
8.375%............... 11/01/05 500 485,000
10.50%............... 06/15/06 550 580,250
NWCG Holding Corp. Sr.
Disc. Notes [ZCB]
13.20%............... 06/15/99 300 251,250
SCI Television, Inc.
Sr. Notes
11.00%............... 06/30/05 1,150 1,239,125
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%............... 05/15/06 1,600 1,692,000
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%............... 12/15/03 650 666,250
10.00%............... 09/30/05 1,250 1,281,250
Sullivan Broadcasting
Holdings Co. Sr. Sub.
Notes
10.25%............... 12/15/05 1,500 1,522,500
13.25%............... 12/15/06 150 138,750
Young Broadcasting
Corp. Sr. Sub. Notes
11.75%............... 11/15/04 250 276,250
10.125%.............. 02/15/05 750 780,000
------------
13,933,250
------------
BUSINESS SERVICES -- 0.9%
Monarch Marking
Systems, Inc. Sr.
Notes
12.50%............... 07/01/03 1,050 1,233,750
Outsourcing Solutions
Corp. Sr. Sub. Notes
144A
11.00%............... 11/01/06 500 525,000
------------
1,758,750
------------
CAPITAL GOODS -- 0.3%
Australis Holdings Ltd.
Units [STEP] 144A
9.88%................ 11/01/02 1,000 580,000
------------
CHEMICALS -- 5.0%
Arcadian Partners L.P.
Sr. Notes Cl-B
10.75%............... 05/01/05 800 888,000
Astor Corp. Sr. Sub.
Notes 144A
10.50%............... 10/15/06 1,025 1,062,156
Crain Industries, Inc.
Sr. Sub. Notes
13.50%............... 08/15/05 700 792,750
Foamex L.P. Sr. Notes
11.25%............... 10/01/02 550 588,500
11.875%.............. 10/01/04 250 270,313
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Harris Chemical North
America Sr. Notes
[STEP]
10.25%............... 07/15/01 $ 1,750 $ 1,837,500
ISP Holdings, Inc. Sr.
Notes 144A
9.00%................ 10/15/03 1,275 1,300,500
Polymer Group, Inc. Sr.
Notes
12.25%............... 07/15/02 1,000 1,090,000
RBX Corp. Notes Cl-B
11.25%............... 10/15/05 1,000 851,250
Sterling Chemicals
Holdings Sr. Disc.
Notes [STEP]
12.60%............... 08/15/08 1,575 913,500
Sterling Chemicals,
Inc. Sr. Sub. Notes
11.75%............... 08/15/06 250 265,000
Uniroyal Technology
Corp. Sr. Notes
11.75%............... 06/01/03 425 426,063
------------
10,285,532
------------
CLOTHING & APPAREL -- 3.2%
Collins & Aikman
Products Sr. Sub.
Notes
11.50%............... 04/15/06 1,850 2,035,000
Hosiery Corp. of
America, Inc. Sr.
Sub. Notes
13.75%............... 08/01/02 500 552,500
Pillowtex Corp. Sr.
Sub. Notes 144A
10.00%............... 11/15/06 500 523,125
Westpoint Stevens, Inc.
Sr. Sub. Debs.
9.375%............... 12/15/05 3,250 3,371,875
------------
6,482,500
------------
COMPUTER SERVICES & SOFTWARE -- 0.8%
Alvey Systems, Inc. Sr.
Sub. Notes
11.375%.............. 01/31/03 1,500 1,586,250
------------
CONSUMER PRODUCTS & SERVICES -- 4.3%
American Safety Razor
Co. Sr. Notes
9.875%............... 08/01/05 1,250 1,326,563
Cabot Safety Corp. Sr.
Sub. Notes
12.50%............... 07/15/05 1,250 1,400,000
Herff Jones, Inc. Sr.
Sub. Notes
11.00%............... 08/15/05 550 594,688
PAR
MATURITY (000) VALUE
-------- ------- ------------
Playtex Family Products
Corp. Sr. Sub. Notes
9.00%................ 12/15/03 $ 2,100 $ 2,094,750
Rayovac Corp. Sr. Sub.
Notes 144A
10.25%............... 11/01/06 100 103,875
Revlon Consumer
Products Corp. Sr.
Notes
9.375%............... 04/01/01 500 513,125
10.50%............... 02/15/03 1,375 1,447,188
Simmons Co. Sr. Sub.
Notes
10.75%............... 04/15/06 1,250 1,321,875
------------
8,802,064
------------
CONTAINERS & PACKAGING -- 4.1%
Container Corp. of
America Sr. Notes
9.75%................ 04/01/03 250 263,750
11.25%............... 05/01/04 250 272,813
Four M Corp. Sr. Notes
12.00%............... 06/01/06 750 787,500
Owens Illinois, Inc.
Sr. Sub. Notes
10.50%............... 06/15/02 250 265,625
9.75%................ 08/15/04 200 210,000
9.95%................ 10/15/04 2,750 2,921,875
Packaging Resources,
Inc. Sr. Notes
11.625%.............. 05/01/03 450 477,000
Plastic Containers Sr.
Notes 144A
10.00%............... 12/15/06 450 466,875
Riverwood International
Co. Notes
10.875%.............. 04/01/08 1,500 1,395,000
Stone Container Corp.
Sr. Notes
11.50%............... 10/01/04 500 528,750
11.875%.............. 08/01/16 300 318,000
U.S. Can Corp. Sr. Sub.
Notes 144A
10.125%.............. 10/15/06 400 421,000
------------
8,328,188
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.5%
Advanced Micro Devices,
Inc. Sr. Notes
11.00%............... 08/01/03 900 981,000
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 2.8%
AMF Group, Inc. Notes
10.875%.............. 03/15/06 $ 400 $ 423,000
AMF Group, Inc. Sr.
Disc. Notes [STEP]
12.28%............... 03/15/06 1,850 1,225,625
Cobblestone Golf Group
Sr. Notes
11.50%............... 06/01/03 750 784,688
Premier Parks Corp. Sr
Notes Cl-A
12.00%............... 08/15/03 600 658,500
Six Flags Theme Parks
Sr. Sub. Notes Cl-A
[STEP]
9.94%................ 06/15/05 2,825 2,683,750
------------
5,775,563
------------
ENVIRONMENTAL SERVICES -- 1.4%
Allied Waste North
America Sr. Sub.
Notes 144A
10.25%............... 12/01/06 600 631,500
Envirosource, Inc. Sr.
Notes
9.75%................ 06/15/03 1,400 1,316,000
ICF Kaiser
International, Inc.
Sr. Sub. Notes
13.00%............... 12/31/03 600 567,000
Mid-American Waste
Systems, Inc. Sr.
Sub. Notes*
12.25%............... 02/15/03 900 360,000
------------
2,874,500
------------
EQUIPMENT SERVICES -- 0.8%
Coinmach Corp. Sr.
Notes
11.75%............... 11/15/05 781 845,433
Primeco, Inc. Sr. Sub.
Notes
12.75%............... 03/01/05 667 763,715
------------
1,609,148
------------
FARMING & AGRICULTURE -- 0.6%
Dimon, Inc. Sr. Notes
8.875%............... 06/01/06 1,150 1,201,750
------------
FINANCIAL-BANK & TRUST -- 1.3%
First Nationwide Escrow
Sr. Sub. Notes 144A
10.625%.............. 10/01/03 1,750 1,890,000
First Nationwide
Holdings Sr. Notes
12.25%............... 05/15/01 750 849,375
------------
2,739,375
------------
PAR
MATURITY (000) VALUE
-------- ------- ------------
FINANCIAL SERVICES -- 2.1%
Contifinancial Corp.
Sr. Notes
8.375%............... 08/15/03 $ 750 $ 775,313
Intertek Finance PLC
Sr. Sub. Notes 144A
10.25%............... 11/01/06 600 627,000
Mesa Operating Co.
Disc. Notes [STEP]
10.11%............... 07/01/06 1,000 695,000
Mesa Operating Co. Sr.
Sub. Notes
10.625%.............. 07/01/06 500 545,000
Unifrax Investment
Corp. Sr. Notes
10.50%............... 11/01/03 1,650 1,687,125
------------
4,329,438
------------
FOOD -- 3.7%
Carr-Gottstein Foods
Co. Sr. Sub. Notes
12.00%............... 11/15/05 900 959,625
Curtice-Burns Foods,
Inc. Sr. Sub. Notes
12.25%............... 02/01/05 850 884,000
International Home
Foods Sr. Sub. Notes
144A
10.375%.............. 11/01/06 1,500 1,567,500
PMI Acquisition Corp.
Sr. Sub. Notes
10.25%............... 09/01/03 750 778,125
Smith's Food & Drug
Centers Sr. Sub.
Notes
11.25%............... 05/15/07 1,300 1,439,750
Specialty Foods Corp.
Sr. Notes Cl-B
11.125%.............. 10/01/02 400 378,000
11.25%............... 08/15/03 600 459,000
Van de Kamps, Inc. Sr.
Sub. Notes
12.00%............... 09/15/05 950 1,052,125
------------
7,518,125
------------
HEALTHCARE SERVICES -- 2.1%
Genesis Health
Ventures, Inc. Sr.
Sub. Notes
9.75%................ 06/15/05 1,250 1,321,875
Icon Fitness Corp.
Notes [STEP] 144A
14.00%............... 11/15/06 1,100 592,625
Icon Health & Fitness
Sr. Sub. Notes
13.00%............... 07/15/02 530 602,213
Tenet Healthcare Corp.
Sr. Sub. Notes
10.125%.............. 03/01/05 1,700 1,887,000
------------
4,403,713
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
HOTELS & MOTELS -- 0.7%
Courtyard By Mariott
Sr. Notes
10.75%............... 02/01/08 $ 1,250 $ 1,328,125
------------
INDUSTRIAL PRODUCTS -- 1.6%
American Standard Debs.
11.375%.............. 05/15/04 250 268,125
Bar Technologies, Inc.
Notes
13.50%............... 04/01/01 300 308,250
IMO Industries, Inc.,
Sr. Sub. Notes
11.75%............... 05/01/06 900 846,000
International Knife &
Saw, Inc. Sr. Sub.
Notes 144A
11.375%.............. 11/15/06 600 621,000
Prime Succession
Acquisition Co. Sr.
Sub. Notes 144A
10.75%............... 08/15/04 350 380,625
Ryerson Tull, Inc.
Notes
9.125%............... 07/15/06 700 738,500
------------
3,162,500
------------
MACHINERY & EQUIPMENT -- 1.8%
Clark Materials
Handling Sr. Notes
144A
10.75%............... 11/15/06 300 312,750
Fairfield Manufacturing
Co. Sr. Sub. Notes
11.375%.............. 07/01/01 500 525,000
Mettler-Toledo, Inc.
Notes
9.75%................ 10/01/06 1,000 1,057,500
Ryder TRS, Inc. Sr.
Sub. Notes 144A
10.00%............... 12/01/06 675 703,688
Tokheim Corp. Sr. Sub.
Notes 144A
11.50%............... 08/01/06 1,100 1,174,250
------------
3,773,188
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.0%
Dade International,
Inc. Sr. Sub. Notes
11.125%.............. 05/01/06 1,900 2,066,250
------------
METALS & MINING -- 3.5%
Acme Metals, Inc. Sr.
Disc. Notes [STEP]
10.71%............... 08/01/04 825 853,875
Armco, Inc. Sr. Notes
9.375%............... 11/01/00 250 254,375
Bayou Steel Corp. First
Mtge.
10.25%............... 03/01/01 750 693,750
PAR
MATURITY (000) VALUE
-------- ------- ------------
Euramax International
Ltd. Sr. Sub. Notes
144A
11.25%............... 10/01/06 $ 1,250 $ 1,300,000
GS Technologies
Operating Corp. Sr.
Notes
12.00%............... 09/01/04 725 756,719
12.25%............... 10/01/05 1,200 1,263,000
Republic Engineered
Steel First Mtge.
9.875%............... 12/15/01 750 705,938
Royal Oak Mines, Inc.
Sr. Sub. Notes
11.00%............... 08/15/06 1,400 1,428,000
------------
7,255,657
------------
OFFICE EQUIPMENT -- 1.2%
Knoll, Inc. Sr. Sub.
Notes
10.875%.............. 03/15/06 1,150 1,273,625
United Stationery
Supply Sr. Sub. Notes
12.75%............... 05/01/05 1,100 1,226,500
------------
2,500,125
------------
OIL & GAS -- 2.8%
Abraxas Petroleum Corp.
Sr. Notes 144A
11.50%............... 11/01/04 1,150 1,233,375
Falcon Drilling Co.,
Inc. Sr. Notes
9.75%................ 01/15/01 350 368,375
12.50%............... 03/15/05 300 336,375
Forcenergy, Inc. Sr.
Sub. Notes
9.50%................ 11/01/06 1,500 1,567,500
Giant Industries, Inc.
Sr. Sub. Notes
9.75%................ 11/15/03 550 574,750
HS Resources, Inc. Sr.
Sub. Notes
9.875%............... 12/01/03 250 262,500
United Meridian Corp.
Sr. Sub. Notes
10.375%.............. 10/15/05 1,300 1,433,250
------------
5,776,125
------------
PAPER & FOREST PRODUCTS -- 1.6%
Buckeye Cellulos Corp.
Sr. Sub. Notes
9.25%................ 09/15/08 1,000 1,037,500
Repap New Brunswick Sr.
Notes
10.625%.............. 04/15/05 500 525,000
S.D. Warren Co. Sr.
Sub. Notes
12.00%............... 12/15/04 800 865,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
Uniforet, Inc. Sr.
Notes 144A
11.125%.............. 10/15/06 $ 950 $ 888,250
------------
3,315,750
------------
PRINTING & PUBLISHING -- 2.0%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
13.61%............... 07/01/06 1,850 1,526,250
Garden State Newspapers
Sr. Sub. Notes
12.00%............... 07/01/04 200 219,000
Hollinger International
Publishing Co. Notes
9.25%................ 02/01/06 1,000 993,750
K-III Communications
Corp. Sr. Notes
8.50%................ 02/01/06 500 493,125
Petersen Publishing Sr.
Sub. Notes 144A
11.125%.............. 11/15/06 800 838,000
------------
4,070,125
------------
REAL ESTATE -- 1.0%
Trizec Finance Ltd. Sr.
Notes
10.875%.............. 10/15/05 1,925 2,129,531
------------
RETAIL & MERCHANDISING -- 1.8%
Brylane L.P. Sr. Sub.
Notes Cl-B
10.00%............... 09/01/03 1,325 1,364,750
Ralph's Grocery Co. Sr.
Notes
10.45%............... 06/15/04 1,950 2,076,750
11.00%............... 06/15/05 325 342,875
------------
3,784,375
------------
TELECOMMUNICATIONS -- 21.9%
Arch Communications
Group Sr. Disc. Notes
[STEP]
10.88%............... 03/15/08 525 303,188
Bell Cablemedia PLC Sr.
Disc. Notes [STEP]
11.81%............... 07/15/04 850 748,000
Brooks Fiber Properties
Sr. Disc. Notes
[STEP]
13.19%............... 03/01/06 2,900 1,943,000
Cablevision Systems
Corp. Sr. Sub. Debs.
9.875%............... 02/15/13 500 493,750
Cablevision Systems
Corp. Sr. Sub. Notes
9.25%................ 11/01/05 1,850 1,831,500
9.875%............... 05/15/06 300 309,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
CAI Wireless Systems,
Inc. Sr. Notes
12.25%............... 09/15/02 $ 250 $ 122,500
Cellular Communications
International, Inc.
Notes [ZCB]
12.17%............... 08/15/00 1,100 767,250
CF Cable TV, Inc. Sr.
Notes
11.625%.............. 02/15/05 500 583,750
Charter Communications
Southeast L.P. Sr.
Notes
11.25%............... 03/15/06 1,000 1,041,250
Comcast U.K. Cable
Corp. Debs. [STEP]
11.56%............... 11/15/07 2,150 1,526,500
CS Wireless Systems,
Inc. Units [STEP]
11.38%............... 03/01/06 500 182,500
Diamond Cable
Communications PLC
Sr. Disc. Notes
[STEP]
12.07%............... 09/30/04 250 205,000
12.16%............... 12/15/05 1,750 1,246,875
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
13.34%............... 03/15/04 1,725 1,311,000
Fonorola, Inc. Sr.
Notes
12.50%............... 08/15/02 150 164,063
Insight Communications
Co. Sr. Sub. Notes
[STEP]
11.25%............... 03/01/00 400 414,500
Intermedia
Communications of
Florida, Inc. Sr.
Disc. Notes [STEP]
11.94%............... 05/15/06 2,475 1,639,688
International Cabletel,
Inc. Sr. Notes [STEP]
13.57%............... 10/15/03 500 421,250
10.15%............... 04/15/05 1,050 787,500
12.22%............... 02/01/06 1,775 1,211,438
Jacor Communications
Co. Notes
9.75%................ 12/15/06 500 513,750
Millicom International
Cellular Sr. Disc.
Notes [STEP]
13.17%............... 06/01/06 2,350 1,462,875
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
12.94%............... 09/01/03 300 234,750
12.76%............... 08/15/04 1,350 926,438
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
Nextlink
Communications, Inc.
Sr. Notes
12.50%............... 04/15/06 $ 500 $ 538,750
Paging Network, Inc.
Sr. Sub. Notes
10.125%.............. 08/01/07 1,750 1,791,563
Panamsat L.P. Sr. Sub.
Notes [STEP]
9.97%................ 08/01/03 1,400 1,305,500
Park Communications,
Inc. Sr. Notes [PIK]
13.75%............... 05/15/04 450 510,750
Pegasus Media &
Communications, Inc.
Notes
12.50%............... 07/01/05 975 1,057,875
Peoples Choice T.V.
Corp. Units [STEP]
12.74%............... 06/01/04 1,150 494,500
Phonetel Technologies
Sr. Notes
12.00%............... 12/15/06 800 830,000
Rogers Cablesystems Sr.
Notes
10.00%............... 03/15/05 800 858,000
10.00%............... 12/01/07 600 640,500
11.00%............... 12/01/15 750 810,000
Sygnet Wireless, Inc.
Sr. Notes
11.50%............... 10/01/06 1,425 1,478,438
Teleport Communications
Group, Inc. Sr. Notes
9.875%............... 07/01/06 225 241,313
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
10.22%............... 07/01/07 3,675 2,544,938
Telewest PLC Debs.
[STEP]
11.09%............... 10/01/07 3,625 2,523,906
UIH Australia Pacific
Sr. Disc. Notes
[STEP]
14.10%............... 05/15/06 1,600 840,000
USA Mobile Communi-
cations Sr. Notes
9.50%................ 02/01/04 1,050 997,500
Vanguard Cellular
System Debs.
9.375%............... 04/15/06 2,000 2,025,000
Viacom, Inc. Sub. Debs.
8.00%................ 07/07/06 3,425 3,326,531
Videotron Holdings PLC
Sr. Notes
10.625%.............. 02/15/05 1,000 1,102,500
Wireless One, Inc. Sr.
Notes
13.00%............... 10/15/03 500 490,000
PAR
MATURITY (000) VALUE
-------- ------- ------------
Wireless One, Inc.
Units [STEP]
13.50%............... 08/01/06 $ 300 $ 147,000
------------
44,945,879
------------
TRANSPORTATION -- 3.4%
Ameritruck Distribution
Sr. Sub. Notes
12.25%............... 11/15/05 1,200 1,212,000
Gearbulk Holding Ltd.
Sr. Notes
11.25%............... 12/01/04 1,250 1,381,250
Great Dane Holdings Sr.
Sub. Debs.
12.75%............... 08/01/01 500 503,750
Johnstown America, Inc.
Sr. Sub. Notes
11.75%............... 08/15/05 350 337,750
Statia Terminals First
Mtge. Notes 144A
11.75%............... 11/15/03 1,000 1,030,000
Stena AB Sr. Notes
10.50%............... 12/15/05 1,625 1,763,125
Trism, Inc. Sr. Sub.
Notes
10.75%............... 12/15/00 725 699,625
------------
6,927,500
------------
UTILITIES -- 2.0%
California Energy Co.,
Inc. Disc. Notes
[STEP]
10.25%............... 01/15/04 2,800 2,968,000
El Paso Electric Co.
First Mtge. Cl-E
9.40%................ 05/01/11 1,075 1,143,767
------------
4,111,767
------------
TOTAL CORPORATE OBLIGATIONS
(COST $178,719,854)................ 187,149,606
------------
U.S. TREASURY OBLIGATIONS -- 1.7%
U.S. Treasury Notes
6.375%
(COST $3,452,895).... 08/15/02 3,500 3,523,065
------------
REPURCHASE AGREEMENTS -- 3.1%
HSBC Securities, Inc.
5.50% dated 12/31/96,
repurchase price
$6,436,966
(Collateralized by
U.S. Treasury Note,
par value $6,325,000,
market value
$6,595,409 due
04/15/98)
(COST $6,435,000).... 01/02/97 6,435 6,435,000
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 0.2%
BROADCASTING -- 0.0%
Sullivan Broadcasting Holdings
Co.*........................... 2,400 $ 24,600
------------
CHEMICALS -- 0.0%
Sterling Chemicals Holdings
Warrants*...................... 1,075 37,625
Uniroyal Technology Corp.
Warrants*...................... 2,500 3,125
------------
40,750
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America,
Inc.*.......................... 400 2,200
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants*...................... 1,200 600
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Warrants
144A*.......................... 250 15,031
------------
INDUSTRIAL PRODUCTS -- 0.0%
Bar Technologies, Inc. Warrants
144A*.......................... 300 18,000
------------
PRINTING & PUBLISHING -- 0.1%
Affiliated Newspaper Investments,
Inc.*.......................... 1,000 60,000
------------
RETAIL & MERCHANDISING -- 0.0%
Grand Union Co.*................. 7,069 34,907
------------
TELECOMMUNICATIONS -- 0.1%
Cellular Communications
International, Inc.
Warrants*...................... 1,100 22,000
CS Wireless Systems, Inc.
144A*.......................... 137 0
Park Communications, Inc.
Warrants*...................... 4,500 90,000
Pegasus Media & Communications,
Inc. 144A*..................... 50 15,000
Wireless One, Inc. Warrants*..... 1,500 1,500
------------
128,500
------------
TOTAL COMMON STOCK
(COST $418,079).................. 324,588
------------
SHARES VALUE
------- ------------
PREFERRED STOCK -- 2.0%
BROADCASTING -- 0.4%
Chancellor Broadcasting Co.
12.25% [PIK]................... 7,500 $ 840,000
------------
PRINTING & PUBLISHING -- 0.9%
K-III Communications Corp. Cl-B
11.625% [PIK].................. 8,709 886,172
K-III Communications Corp. Cl-C
10.00% [CVT]................... 10,750 1,056,188
------------
1,942,360
------------
TELECOMMUNICATIONS -- 0.1%
Panamsat Corp.
12.75%......................... 225 275,419
------------
UTILITIES -- 0.6%
El Paso Electric Co.
11.40% [PIK]................... 10,300 1,147,163
------------
TOTAL PREFERRED STOCK
(COST $3,702,173)................ 4,204,942
------------
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund... 238 238
Temporary Investment Fund........ 238 238
------------
(COST $476)...................... 476
------------
TOTAL INVESTMENTS -- 98.2%
(COST $192,728,477)................ 201,637,677
OTHER ASSETS LESS
LIABILITIES -- 1.8%................ 3,623,899
------------
NET ASSETS -- 100.0%................. $205,261,576
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 9.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
COMMON STOCK -- 48.9%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ................ 1,500 $ 68,625
-----------
AEROSPACE -- 0.9%
Boeing Co. ......................... 3,184 338,697
Lockheed Martin Corp. .............. 1,500 137,250
McDonnell Douglas Corp. ............ 2,000 128,000
Northrop Grumman Corp. ............. 800 66,200
Raytheon Co. ....................... 1,800 86,625
Rockwell International Corp.*....... 2,400 146,100
United Technologies Corp. .......... 2,800 184,800
-----------
1,087,672
-----------
AIRLINES -- 0.2%
Alaska Air Group, Inc.*............. 2,700 56,700
AMR Corp.*.......................... 1,600 141,000
-----------
197,700
-----------
AUTOMOBILE MANUFACTURERS -- 0.7%
Ford Motor Co. ..................... 11,100 353,812
General Motors Corp. ............... 6,400 356,800
Honda Motor Co. Ltd. [ADR] ......... 3,200 181,200
-----------
891,812
-----------
AUTOMOTIVE PARTS -- 0.3%
Arvin Industries, Inc. ............. 1,300 32,175
Echlin, Inc. ....................... 3,100 98,037
Genuine Parts Co. .................. 2,400 106,800
Goodyear Tire & Rubber Co. ......... 1,200 61,650
TRW, Inc. .......................... 2,200 108,900
-----------
407,562
-----------
BEVERAGES -- 1.5%
Anheuser-Busch Companies, Inc. ..... 5,400 216,000
Cadbury Schweppes PLC [ADR] ........ 3,473 118,516
Coca-Cola Co. ...................... 19,100 1,005,137
Coca-Cola Enterprises, Inc. ........ 2,300 111,550
Pepsico, Inc. ...................... 12,000 351,000
-----------
1,802,203
-----------
BROADCASTING -- 0.3%
Chris-Craft Industries, Inc.*....... 1,300 54,437
TCA Cable TV, Inc. ................. 1,600 48,200
U.S. West, Inc.*.................... 6,500 120,250
Viacom, Inc. Cl-B*.................. 4,000 139,500
-----------
362,387
-----------
BUILDING MATERIALS -- 0.1%
Calmat Co. ......................... 1,700 31,875
Masco Corp. ........................ 3,600 129,600
-----------
161,475
-----------
BUSINESS SERVICES -- 0.2%
Cognizant Corp. .................... 1,500 49,500
Equifax, Inc. ...................... 3,900 119,437
Flightsafety International, Inc. ... 1,600 76,600
Olsten Corp. ....................... 2,000 30,250
-----------
275,787
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
CHEMICALS -- 1.7%
Akzo-Nobel NV [ADR]................. 1,000 67,500
Cabot Corp. ........................ 2,300 $ 57,787
Crompton & Knowles Corp. ........... 3,800 73,150
Dow Chemical Co. ................... 2,600 203,775
Dupont, (E.I.) de Nemours & Co. .... 4,900 462,437
FMC Corp.*.......................... 1,200 84,150
Great Lakes Chemical Corp. ......... 1,300 60,775
Hanna, (M.A.) Co. .................. 2,100 45,937
IMC Global, Inc. ................... 2,000 78,250
Loctite Corp. ...................... 1,200 73,050
Lubrizol Corp. ..................... 2,200 68,200
Millennium Chemicals, Inc.*......... 192 3,407
Monsanto Co. ....................... 5,000 194,375
Morton International, Inc. ......... 2,800 114,100
Olin Corp. ......................... 1,200 45,150
PPG Industries, Inc. ............... 2,800 157,150
Rohm & Haas Co. .................... 1,300 106,112
Witco Corp. ........................ 3,400 103,700
-----------
1,999,005
-----------
CLOTHING & APPAREL -- 0.4%
Cintas Corp. ....................... 1,800 105,750
Jones Apparel Group, Inc.*.......... 3,400 127,075
Nike, Inc. Cl-B .................... 2,400 143,400
Springs Industries, Inc. Cl-A ...... 2,000 86,000
-----------
462,225
-----------
COMPUTER HARDWARE -- 1.5%
Bay Networks, Inc.*................. 1,900 39,662
Compaq Computer Corp.*.............. 2,100 155,925
Dell Computer Corp.*................ 2,600 138,125
Digital Equipment Corp.*............ 1,400 50,925
Hewlett-Packard Co. ................ 7,200 361,800
International Business Machines
Corp. ............................ 3,900 588,900
Seagate Technology, Inc.*........... 3,600 142,200
Stratus Computer, Inc.*............. 1,100 29,975
Sun Microsystems, Inc.*............. 3,200 82,200
3Com Corp.*......................... 2,148 157,610
-----------
1,747,322
-----------
COMPUTER SERVICES & SOFTWARE -- 2.0%
America Online, Inc.*............... 1,900 63,175
Automatic Data Processing, Inc. .... 3,300 141,487
BMC Software, Inc.*................. 3,400 140,675
Cadence Design Systems, Inc.*....... 1,550 61,612
Ceridian Corp.*..................... 1,500 60,750
Cisco Systems, Inc.*................ 4,600 292,675
Computer Associates International,
Inc. ............................. 3,175 157,956
First Data Corp. ................... 4,100 149,650
Informix Corp.*..................... 5,600 114,100
Microsoft Corp.*.................... 7,400 611,425
Novell, Inc.*....................... 2,900 27,459
Oracle Corp.*....................... 5,600 233,800
Parametric Technology Corp.*........ 2,400 123,300
Paychex, Inc. ...................... 2,400 123,450
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Storage Technology Corp.*............... 1,200 $ 57,150
Structural Dynamics Research
Corp.*............................ 1,300 26,000
-----------
2,384,664
-----------
CONGLOMERATES -- 0.9%
Hanson PLC [ADR].................... 2,700 18,225
Minnesota Mining & Manufacturing
Co. .............................. 4,100 339,787
Philip Morris Companies, Inc. ...... 6,400 720,800
-----------
1,078,812
-----------
CONSTRUCTION -- 0.0%
Granite Construction, Inc. ......... 1,100 20,900
Jacobs Engineering Group, Inc.*..... 1,000 23,625
-----------
44,525
-----------
CONSUMER PRODUCTS & SERVICES -- 1.1%
A.C. Nielson Corp.*................. 1 15
American Brands, Inc. .............. 2,400 119,100
Colgate-Palmolive Co. .............. 2,000 184,500
Cross, (A.T.) Co. Cl-A ............. 1,400 16,275
CUC International, Inc.*............ 2,700 64,125
Eastman Kodak Co. .................. 3,000 240,750
National Presto Industries, Inc. ... 800 29,900
Pittston Brink Group ............... 1,300 35,100
Procter & Gamble Co. ............... 5,700 612,750
Tambrands, Inc. .................... 1,500 61,312
-----------
1,363,827
-----------
CONTAINERS & PACKAGING -- 0.2%
Bemis Co., Inc. .................... 2,700 99,563
Sealed Air Corp.*................... 2,700 112,387
-----------
211,950
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.2%
Altera Corp.*....................... 1,400 101,762
Applied Materials, Inc.*............ 1,100 39,531
Arrow Electronics, Inc.*............ 900 48,150
Diebold, Inc. ...................... 1,800 113,175
Emerson Electric Co. ............... 2,000 193,500
General Electric Co. ............... 13,000 1,285,375
Hitachi Ltd. [ADR].................. 1,600 148,000
Honeywell, Inc. .................... 1,500 98,625
Hubbell, Inc. Cl-B ................. 2,000 86,500
Molex, Inc. ........................ 2,800 109,550
Philips Electronics NV [ADR]........ 3,600 144,000
Solectron Corp.*.................... 1,500 80,062
Sundstrand Corp. ................... 2,200 93,500
Symbol Technologies, Inc.*.......... 700 30,975
Tandy Corp. ........................ 600 26,400
Teleflex, Inc. ..................... 900 46,912
Varian Associates, Inc. ............ 700 35,612
-----------
2,681,629
-----------
ENTERTAINMENT & LEISURE -- 0.8%
Brunswick Corp. .................... 2,000 48,000
Callaway Golf Co. .................. 1,900 54,625
Circus Circus Enterprises*.......... 2,700 92,812
Harley-Davidson, Inc. .............. 1,900 89,300
Mattel, Inc. ....................... 1,900 52,725
Mirage Resorts, Inc.*............... 3,800 82,175
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
President Casinos, Inc. Warrants*... 883 $ 221
Time Warner, Inc. .................. 5,500 206,250
Walt Disney Co. .................... 5,464 380,431
-----------
1,006,539
-----------
ENVIRONMENTAL SERVICES -- 0.3%
Browning-Ferris Industries, Inc. ... 3,100 81,375
USA Waste Services, Inc.*........... 2,600 82,875
WMX Technologies, Inc............... 4,500 146,812
-----------
311,062
-----------
FINANCIAL-BANK & TRUST -- 4.0%
Australia and New Zealand Banking
Group Ltd. [ADR].................. 3,600 112,050
Banc One Corp. ..................... 4,300 184,900
Banco Bilbao Vizcaya [ADR].......... 3,000 160,125
Banco Frances del Rio de la Plata SA
[ADR]............................. 5,060 139,150
Bancorp Hawaii, Inc. ............... 1,500 63,000
Chase Manhattan Corp. .............. 3,956 353,072
Citicorp ........................... 4,300 442,900
City National Corp. ................ 1,800 38,925
CoreStates Financial Corp. ......... 2,900 150,437
Crestar Financial Corp. ............ 1,300 96,687
Fifth Third Bancorp ................ 2,100 131,906
First Bank System, Inc. ............ 2,000 136,500
First Chicago NBD Corp. ............ 3,400 182,750
First Security Corp. ............... 3,150 106,313
First Tennessee National Corp. ..... 3,200 120,000
First Union Corp. .................. 2,500 185,000
Fleet Financial Group, Inc. ........ 2,900 144,637
Keycorp ............................ 3,000 151,500
Mellon Bank Corp. .................. 2,200 156,200
Mercantile Bancorporation, Inc. .... 1,400 71,925
Mercantile Bankshares Corp. ........ 1,800 57,600
Morgan, (J.P.) & Co., Inc. ......... 2,000 195,250
NationsBank Corp. .................. 2,900 283,475
Northern Trust Corp. ............... 3,800 137,750
Norwest Corp. ...................... 4,000 174,000
PNC Bank Corp. ..................... 4,820 181,352
Southtrust Corp. ................... 3,000 104,625
State Street Boston Corp. .......... 1,800 116,100
U.S. Bancorp ....................... 2,852 128,162
Wells Fargo & Co. .................. 900 242,775
-----------
4,749,066
-----------
FINANCIAL SERVICES -- 1.6%
American Express Co. ............... 3,900 220,350
Bear Stearns Companies, Inc. ....... 2,300 64,112
Charles Schwab Corp. ............... 3,200 102,400
Comdisco, Inc. ..................... 1,900 60,325
Dean Witter Discover & Co. ......... 2,000 132,500
Echelon International Corp.*........ 147 2,292
Edwards (A.G.), Inc. ............... 1,500 50,437
Federal Home Loan Mtge. Corp. ...... 1,700 187,212
Federal National Mtge. Assoc. ...... 6,000 223,500
Franklin Resources, Inc. ........... 1,900 129,912
Green Tree Financial Corp. ......... 2,500 96,562
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Grupo Financiero Bancomer
[ADR] 144A*....................... 1,400 $ 11,200
H & R Block, Inc. .................. 1,500 43,500
Household International, Inc. ...... 1,600 147,600
Merrill Lynch & Co., Inc. .......... 1,300 105,950
Morgan Stanley Group, Inc. ......... 900 51,412
Paine Webber Group, Inc. ........... 2,400 67,500
Salomon, Inc. ...................... 1,400 65,975
SunAmerica, Inc. ................... 2,400 106,500
-----------
1,869,239
-----------
FOOD -- 1.5%
Archer-Daniels-Midland Co. ......... 7,412 163,064
Conagra, Inc. ...................... 2,900 144,275
CPC International, Inc. ............ 1,800 139,500
Dole Food Co. ...................... 1,700 57,587
Earthgrains Co. .................... 148 7,732
General Mills, Inc. ................ 2,000 126,750
Grand Metropolitan PLC [ADR]........ 2,800 88,550
Heinz, (H.J.) Co. .................. 3,750 134,062
IBP, Inc. .......................... 2,400 58,200
Kellogg Co. ........................ 2,400 157,500
McCormick & Co., Inc. .............. 2,600 61,262
Ralston Purina Group ............... 1,800 132,075
Sara Lee Corp. ..................... 5,500 204,875
Smucker, (J.M.) Co. ................ 1,600 28,200
Unilever PLC [ADR].................. 1,100 192,775
Universal Corp. .................... 1,000 32,125
Universal Foods Corp. .............. 1,300 45,825
-----------
1,774,357
-----------
FURNITURE -- 0.1%
Legget & Platt, Inc. ............... 2,000 69,250
-----------
HEALTHCARE SERVICES -- 0.6%
Apria Healthcare Group, Inc.*....... 2,000 37,500
Columbia-HCA Healthcare Corp........ 6,096 248,412
Healthsouth Corp.*.................. 3,400 131,325
Pacificare Health Systems, Inc.
Cl-A*............................. 400 32,500
Pacificare Health Systems, Inc.
Cl-B*............................. 1,000 85,250
United Healthcare Corp.............. 2,100 94,500
Vencor, Inc.*....................... 2,200 69,575
-----------
699,062
-----------
HOTELS & MOTELS -- 0.2%
HFS, Inc.*.......................... 2,400 143,400
ITT Corp.*.......................... 900 39,037
-----------
182,437
-----------
INDUSTRIAL PRODUCTS -- 0.4%
Corning, Inc. ...................... 2,600 120,250
Dexter Corp. ....................... 1,500 47,812
Harsco Corp. ....................... 1,000 68,500
Measurex Corp....................... 1,300 31,200
Pall Corp. ......................... 2,900 73,950
Tomkins PLC [ADR]................... 6,000 111,000
-----------
452,712
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
INSURANCE -- 1.8%
Aetna, Inc. ........................ 2,102 $ 168,160
AFLAC, Inc. ........................ 2,550 109,012
American Financial Group, Inc. ..... 1,700 64,175
American General Corp. ............. 3,600 147,150
American International Group,
Inc. ............................. 4,100 443,825
Chubb Corp. ........................ 2,600 139,750
CIGNA Corp. ........................ 1,100 150,288
General Re Corp. ................... 1,100 173,525
Hartford Steam Boiler Inspection &
Insurance Co. .................... 1,100 51,013
Loews Corp. ........................ 1,700 160,225
Progressive Corp. .................. 1,300 87,588
Selective Insurance Group .......... 1,000 38,000
Torchmark Corp. .................... 1,800 90,900
Transatlantic Holdings, Inc. ....... 700 56,350
Travelers Group, Inc. .............. 4,700 213,258
UNUM Corp. ......................... 1,700 122,825
-----------
2,216,044
-----------
MACHINERY & EQUIPMENT -- 1.0%
AlliedSignal, Inc. ................. 2,900 194,300
Black & Decker Corp. ............... 1,800 54,225
Caterpillar, Inc. .................. 2,400 180,600
Danaher Corp. ...................... 1,100 51,288
Deere & Co. ........................ 3,300 134,063
Duriron Co., Inc. .................. 2,900 78,663
Federal Signal Corp. ............... 1,700 43,988
Gencorp, Inc. ...................... 2,800 50,750
Illinois Tool Works, Inc. .......... 1,800 143,775
Sequa Corp. Cl-A*................... 700 27,475
Tecumseh Products Co. Cl-A ......... 1,400 80,325
Thermo Electron Corp.*.............. 4,050 167,063
-----------
1,206,515
-----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Baxter International, Inc. ......... 2,400 98,400
Becton Dickinson & Co. ............. 2,700 117,113
Boston Scientific Corp.*............ 1,700 102,000
Guidant Corp. ...................... 500 28,500
Medtronic, Inc. .................... 2,000 136,000
Stryker Corp........................ 3,400 101,575
-----------
583,588
-----------
METALS & MINING -- 0.5%
Aluminum Co. of America ............ 2,700 172,125
Barrick Gold Corp. ................. 4,700 135,125
Brush Wellman, Inc. ................ 1,300 21,288
Carpenter Technology Corp. ......... 2,600 95,225
Nucor Corp. ........................ 1,600 81,600
Placer Dome, Inc. .................. 4,700 102,225
-----------
607,588
-----------
MISCELLANEOUS -- 0.1%
Imperial Tobacco Group PLC [ADR]*... 675 8,710
International Flavors & Fragrances,
Inc. ............................. 2,600 117,000
-----------
125,710
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
OFFICE EQUIPMENT -- 0.5%
Alco Standard Corp. ................ 2,300 $ 118,738
Pitney Bowes, Inc. ................. 1,900 103,550
Standard Register Co. .............. 1,100 35,750
Staples, Inc.*...................... 2,900 52,381
Viking Office Products, Inc.*....... 2,100 56,044
Wallace Computer Service, Inc....... 3,000 103,500
Xerox Corp. ........................ 2,600 136,825
-----------
606,788
-----------
OIL & GAS -- 5.4%
Amerada Hess Corp. ................. 4,700 272,013
Atlantic Richfield Co. ............. 1,800 238,500
BJ Services Co.*.................... 3,300 168,300
British Petroleum Co. PLC [ADR]..... 1,100 155,513
Chevron Corp........................ 5,100 331,500
El Paso Natural Gas Co. ............ 1,400 70,700
Enron Corp. ........................ 3,800 163,875
Ensco International, Inc.*.......... 2,100 101,850
Ente Nazionale Idrocarbure SPA
[ADR]............................. 3,500 180,688
Exxon Corp. ........................ 10,000 980,000
Global Marine, Inc.* ............... 4,200 86,625
Halliburton Co. .................... 800 48,200
Helmerich & Payne, Inc. ............ 900 46,913
MCN Corp. .......................... 2,400 69,300
Mobil Corp. ........................ 3,400 415,650
Murphy Oil Corp. ................... 1,200 66,750
National Fuel Gas Co. .............. 1,600 66,000
Noble Affiliates, Inc. ............. 2,600 124,475
Occidental Petroleum Corp. ......... 5,500 128,563
Phillips Petroleum Co. ............. 4,000 177,000
Ranger Oil Ltd. .................... 5,400 53,325
Repsol SA [ADR] .................... 3,000 114,375
Royal Dutch Petroleum Co. [ADR]..... 4,600 785,450
Schlumberger Ltd. .................. 1,700 169,788
Shell Transport & Trading Co.
[ADR]............................. 1,400 143,325
Societe Nationale Elf Aquitaine SA
[ADR]............................. 2,000 90,500
Sonat, Inc. ........................ 2,100 108,150
Texaco, Inc. ....................... 2,800 274,750
Tidewater, Inc. .................... 3,100 140,275
Tosco Corp.......................... 1,000 79,125
Total SA [ADR]...................... 3,000 120,750
Union Pacific Resources Group,
Inc. ............................. 4,609 134,813
Unocal Corp. ....................... 3,000 121,875
USX Marathon Group.................. 4,500 107,438
Valero Energy Corp. ................ 3,000 85,875
Washington Gas Light Co. ........... 2,200 49,775
-----------
6,472,004
-----------
PAPER & FOREST PRODUCTS -- 0.6%
Georgia Pacific Corp. .............. 1,500 108,000
Glatfelter, (P.H.) Co. ............. 2,600 46,800
International Paper Co. ............ 3,800 153,425
Kimberly-Clark Corp. ............... 2,700 257,175
Wausau Paper Mills Co. ............. 1,900 35,150
Weyerhaeuser Co. ................... 3,200 151,600
-----------
752,150
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
PERSONAL SERVICES -- 0.1%
Service Corp. International......... 3,800 $ 106,400
-----------
PHARMACEUTICALS -- 3.5%
Abbott Laboratories................. 5,900 299,425
American Home Products Corp. ....... 4,900 287,263
Amgen, Inc.*........................ 2,300 125,063
Bristol-Meyers Squibb Co. .......... 3,700 402,375
Cardinal Health, Inc. .............. 2,400 139,800
Carter-Wallace, Inc. ............... 3,900 60,938
Centocor, Inc.*..................... 1,200 42,900
Genzyme Corp.*...................... 2,100 45,675
Glaxo Wellcome PLC [ADR]............ 4,500 142,875
Ivax Corp........................... 2,200 22,550
Johnson & Johnson Co. .............. 10,200 507,450
Lilly, (Eli) & Co. ................. 3,900 284,700
McKesson Corp. ..................... 1,300 72,800
Merck & Co., Inc. .................. 9,300 737,025
Perrigo Co.* ....................... 3,600 32,850
Pfizer, Inc. ....................... 4,400 364,650
Pharmacia & Upjohn, Inc............. 4,300 170,388
Scherer, (R.P.) Corp.*.............. 1,000 50,250
Schering-Plough Corp. .............. 2,800 181,300
Warner-Lambert Co. ................. 3,000 225,000
Watson Pharmaceuticals, Inc.*....... 1,500 67,406
-----------
4,262,683
-----------
PRINTING & PUBLISHING -- 0.4%
Banta Corp. ........................ 2,900 66,338
Belo, (A.H.) Corp. Cl-A............. 1,300 45,338
Dun & Bradstreet Corp. ............. 1,500 35,625
Gannett Co., Inc. .................. 2,200 164,725
McGraw-Hill Co., Inc. .............. 2,400 110,700
-----------
422,726
-----------
RAILROADS -- 0.5%
Burlington Northern Santa Fe........ 1,300 112,288
Conrail, Inc. ...................... 836 83,287
CSX Corp. .......................... 2,300 97,175
Kansas City Southern Industries,
Inc. ............................. 1,800 81,000
Norfolk Southern Corp. ............. 900 78,750
Union Pacific Corp. ................ 1,900 114,238
-----------
566,738
-----------
RESTAURANTS -- 0.4%
Brinker International, Inc.*........ 7,300 116,800
Cracker Barrel Old Country Store,
Inc. ............................. 2,700 68,513
Darden Restaurants, Inc. ........... 2,900 25,375
McDonald's Corp. ................... 4,800 217,200
Outback Steakhouse, Inc.*........... 1,900 50,825
-----------
478,713
-----------
RETAIL & MERCHANDISING -- 2.1%
Albertson's, Inc. .................. 4,200 149,625
Ann Taylor Stores Corp.*............ 1,600 28,000
Bed, Bath & Beyond, Inc.* .......... 2,200 53,350
Circuit City Stores, Inc. .......... 900 27,113
Dayton-Hudson Corp. ................ 2,400 94,200
Fastenal Co......................... 1,400 64,050
Federated Department Stores,
Inc.* ............................ 1,900 64,838
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Gap, Inc............................ 2,900 $ 87,363
Home Depot, Inc. ................... 4,500 225,563
J.C. Penney Co., Inc................ 2,800 136,500
Kohls Corp.*........................ 3,100 121,675
Kroger Co.*......................... 2,200 102,300
Lands' End, Inc.*................... 1,800 47,700
May Department Stores Co. .......... 3,300 154,275
Meyer, (Fred), Inc.*................ 1,500 53,250
Micro Warehouse, Inc.*.............. 1,500 17,625
Payless Shoesource, Inc.*........... 672 25,200
Petrie Stores Corp.*................ 2,700 7,425
Price Costco, Inc.*................. 3,900 97,988
Revco D.S., Inc.*................... 2,800 103,600
Tiffany & Co........................ 1,200 43,950
TJX Companies, Inc.................. 900 42,638
Toys 'R' Us, Inc.*.................. 3,820 114,600
Vons Companies, Inc.*............... 1,600 95,800
Wal-Mart Stores, Inc. .............. 19,200 439,200
Walgreen Co. ....................... 2,700 108,000
-----------
2,505,828
-----------
SEMI-CONDUCTORS -- 1.3%
Analog Devices, Inc.*............... 5,650 191,394
Atmel Corp.*........................ 2,000 66,250
Intel Corp. ........................ 6,300 824,906
Linear Technology Corp. ............ 1,900 83,363
Maxim Integrated Products, Inc.*.... 2,000 86,500
Motorola, Inc. ..................... 4,300 263,913
Xilinx, Inc.*....................... 3,100 114,119
-----------
1,630,445
-----------
TELECOMMUNICATIONS -- 4.2%
ADC Telecommunications, Inc.*....... 3,400 105,825
Airtouch Communications, Inc.*...... 5,000 126,250
Ameritech Corp. .................... 3,800 230,375
AT&T Corp. ......................... 12,400 539,400
Bell Atlantic Corp. ................ 4,000 259,000
BellSouth Corp. .................... 7,100 286,663
British Telecommunications PLC
[ADR]............................. 2,000 137,250
Century Telephone Enterprises,
Inc. ............................. 2,800 86,450
Cia de Telecomunicaciones de Chile
SA [ADR] ......................... 400 40,450
Comcast Corp. Cl-A.................. 5,700 101,531
GTE Corp. .......................... 7,200 327,600
Hong Kong Telecommunications Ltd.
[ADR]............................. 9,245 150,231
Lucent Technologies, Inc. .......... 4,676 216,265
MCI Communications Corp. ........... 6,700 219,006
Nextel Communications, Inc. Cl-A*... 3,600 47,025
Nokia Corp. Cl-A [ADR].............. 1,800 103,725
Northern Telecom Ltd. .............. 3,400 210,375
NYNEX Corp. ........................ 3,200 154,000
Pacific Telesis Group .............. 4,300 158,025
SBC Communications, Inc............. 4,500 232,875
Southern New England
Telecommunications Corp........... 2,400 93,300
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Sprint Corp......................... 3,300 $ 131,588
Telebras SA [ADR]................... 3,300 252,450
Telefonaktiebolaget LM Ericsson
[ADR] ............................ 4,800 144,900
Telefonica de Espana [ADR].......... 1,600 110,800
Telefonos de Mexico SA Cl-L [ADR]... 1,800 59,400
Telephone & Data Systems, Inc. ..... 2,000 72,500
Tellabs, Inc.*...................... 2,000 75,250
U.S. Robotics Corp.*................ 1,600 115,200
U.S. West Communications Group...... 3,100 99,975
Vodafone Group PLC [ADR]............ 2,000 82,750
Worldcom, Inc.*..................... 3,100 80,794
360 Communications Co.*............. 2,300 53,188
-----------
5,104,416
-----------
TRANSPORTATION -- 0.0%
Alexander & Baldwin, Inc. .......... 1,800 45,000
-----------
UTILITIES -- 2.2%
Allegheny Power System, Inc. ....... 2,700 82,013
American Water Works Co., Inc....... 1,200 24,750
Calenergy, Inc.* ................... 2,400 80,700
CMS Energy Corp. ................... 2,800 94,150
Duke Power Co....................... 3,100 143,375
Edison International, Inc........... 7,800 155,025
Empresa Nacional de Electridad SA
[ADR]............................. 1,900 133,000
Empresa Nacional Electridad SA
[ADR]............................. 2,000 31,000
Entergy Corp. ...................... 4,800 133,200
Florida Progress Corp. ............. 2,200 70,950
FPL Group, Inc. .................... 3,100 142,600
Idaho Power Co. .................... 2,600 80,925
Illinova Corp. ..................... 2,700 74,250
IPALCO Enterprises, Inc. ........... 2,400 65,400
Midamerican Energy Co. ............. 3,800 60,325
New York State Electric & Gas
Corp. ............................ 3,400 73,525
Niagara Mohawk Power Corp. ......... 9,200 90,850
NIPSCO Industries, Inc. ............ 2,300 91,138
Pacific Gas & Electric Co. ......... 6,800 142,800
Portland General Corp. ............. 2,700 113,400
Potomac Electric Power Co. ......... 3,200 82,400
Public Service Co. of New Mexico ... 1,000 19,625
Scana Corp.......................... 2,700 72,225
Southern Co. ....................... 8,700 196,838
Southwestern Public Service Co. .... 2,100 74,288
Teco Energy, Inc. .................. 3,100 74,788
Texas Utilities Co.................. 3,700 150,775
Unicom Corp. ....................... 4,200 113,925
-----------
2,668,240
-----------
TOTAL COMMON STOCK
(COST $49,680,204).................... 58,704,482
-----------
FOREIGN STOCK -- 10.9%
AEROSPACE -- 0.1%
Mitsubishi Heavy Industries
Ltd. -- (JPY)..................... 17,000 135,236
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
AIRLINES -- 0.2%
KLM Royal Dutch Airlines
NV -- (NLG)....................... 3,000 $ 84,532
Singapore Airlines Ltd. -- (SGD).... 15,000 136,208
-----------
220,740
-----------
AUTOMOBILE MANUFACTURERS -- 0.2%
Man AG -- (DEM)..................... 1,000 241,705
-----------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY).......... 15,000 285,344
-----------
BEVERAGES -- 0.3%
Lion Nathan Ltd. -- (NZD)........... 50,000 119,830
Louis Vuitton Moet
Hennessy -- (FRF)................. 660 184,611
-----------
304,441
-----------
BUILDING MATERIALS -- 0.2%
Holderbank Financiere Glarus AG --
(CHF)............................. 200 142,868
Malayan Cement BHD -- (MYR)......... 41,000 94,167
-----------
237,035
-----------
CHEMICALS -- 0.5%
AKZO Nobel NV -- (NLG).............. 400 54,731
BASF AG -- (DEM).................... 5,600 214,964
Bayer AG -- (DEM)................... 3,200 130,020
L'Air Liquide -- (FRF).............. 660 103,199
Sumitomo Chemical Co. -- (JPY)...... 26,000 103,191
-----------
606,105
-----------
CLOTHING & APPAREL -- 0.2%
Benetton Group SPA -- (ITL)......... 4,000 50,367
Kuraray Co. Ltd. -- (JPY)........... 16,000 148,033
-----------
198,400
-----------
COMPUTER SERVICES & SOFTWARE -- 0.2%
Getronics NV -- (NLG)............... 7,268 197,628
-----------
CONGLOMERATES -- 0.9%
Cycle & Carriage Ltd. -- (SGD)...... 15,000 183,398
GKN PLC -- (GBP).................... 6,000 102,874
Hutchison Whampoa Ltd. -- (HKD)..... 56,000 439,847
Sime Darby BHD -- (MYR)............. 50,000 197,006
United Engineers Ltd. -- (MYR)...... 15,000 135,429
Valmet Corp. -- (FIM)............... 4,000 70,573
-----------
1,129,127
-----------
CONSTRUCTION -- 0.2%
Matsushita Electric
Works -- (JPY).................... 15,000 129,313
Societe Technip -- (FRF)............ 1,700 159,817
-----------
289,130
-----------
CONSUMER PRODUCTS & SERVICES -- 0.2%
Kao Corp. -- (JPY).................. 17,000 198,444
Orkla AS Cl-A -- (NOK).............. 1,000 69,963
-----------
268,407
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Mitsubishi Electric
Corp. -- (JPY).................... 17,000 101,427
Sharp Corp. -- (JPY)................ 9,000 128,405
Siemans AG -- (DEM)................. 2,000 92,934
-----------
322,766
-----------
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 2.5%
Abbey National PLC -- (GBP)......... 18,000 $ 235,860
ABN AMRO Holding NV -- (NLG)........ 2,000 130,334
Banca Commerciale Italia
NA -- (ITL)....................... 30,000 54,331
Bank of Scotland -- (GBP)........... 20,208 106,782
Bankgesellschaft Berlin
AG -- (DEM)....................... 5,450 99,284
Barclays PLC -- (GBP)............... 15,191 260,330
DCB Holdings BHD -- (MYR)........... 33,000 113,036
Deutsche Bank AG -- (DEM)........... 2,600 121,457
Developmental Bank of Singapore Ltd.
Cl-F -- (SGD)..................... 7,000 94,595
HSBC Holdings PLC -- (GBP).......... 18,000 402,658
ING Groep NV -- (NLG)............... 10,153 366,139
Kredietbank NV -- (BEF)............. 300 98,531
Oversea-Chinese Banking Corp.
Ltd. -- (SGD)..................... 10,000 124,410
Schweizerischer
Bankverein -- (CHF)............... 1,200 228,200
Societe Generale -- (BEF)........... 1,000 78,636
Svenska Handlesbanken
Cl-A -- (SEK)..................... 5,000 144,290
Toronto Dominion Bank -- (CAD)...... 4,100 105,397
Union Bank of Switzerland Cl-B --
(CHF)............................. 200 175,297
Westpac Banking Corp.
Ltd. -- (AUD)..................... 10,000 56,956
-----------
2,996,523
-----------
FINANCIAL SERVICES -- 0.2%
Gemina SPA -- (ITL)*................ 50,000 24,475
Mediobanca -- (ITL)................. 7,000 37,595
Societe Generale -- (FRF)........... 1,212 131,253
-----------
193,323
-----------
FOOD -- 0.6%
CSM NV -- (NLG)..................... 2,400 133,581
Danisco AS -- (DKK)................. 3,000 182,796
Eridania Beghin-Say SA -- (FRF)..... 1,300 209,544
Huhtamaki Group -- (FIM)............ 1,500 69,919
Nestle SA -- (CHF).................. 150 161,063
-----------
756,903
-----------
INSURANCE -- 0.3%
AXA SA -- (FRF)..................... 2,900 184,738
CKAG Colonia Konzern AG -- (DEM).... 1,500 125,211
-----------
309,949
-----------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF)..................... 80 99,529
SIG Holding AG -- (CHF)............. 70 177,314
-----------
276,843
-----------
METALS & MINING -- 0.1%
CRA Ltd. -- (AUD)................... 6,000 94,265
Lonrho PLC -- (GBP)................. 22,000 46,915
-----------
141,180
-----------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)................ 6,000 132,815
Ricoh Corp. Ltd. -- (JPY)........... 13,000 149,503
-----------
282,318
-----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
OIL & GAS -- 0.1%
Societe Nationale Elf Aquitaine
SA -- (FRF)....................... 1,100 $ 100,290
-----------
PAPER & FOREST PRODUCTS -- 0.1%
Bobst SA -- (CHF)................... 60 81,148
Kimberly-Clark de Mexico SA Cl-A --
(MXP)............................. 2,000 39,507
-----------
120,655
-----------
PHARMACEUTICALS -- 0.8%
Altana AG -- (DEM).................. 110 85,810
Astra AB Cl-B -- (SEK).............. 5,500 266,420
Gehe AG -- (DEM).................... 1,250 80,392
Novartis AG -- (CHF)*............... 160 183,158
Roussel-Uclaf -- (FRF).............. 500 147,385
Takeda Chemical
Industries -- (JPY)............... 10,000 210,117
-----------
973,282
-----------
PRINTING & PUBLISHING -- 0.4%
Dai Nippon Printing Co.
Ltd. -- (JPY)..................... 12,000 210,636
Elsevier NV -- (NLG)................ 12,000 203,154
Pearson PLC -- (GBP)................ 5,600 71,892
-----------
485,682
-----------
REAL ESTATE -- 0.4%
Cheung Kong Holdings
Ltd. -- (HKD)..................... 38,000 337,772
DBS Land Ltd. -- (SGD).............. 25,000 92,056
Hopewell Holdings Ltd. -- (HKD)..... 59,463 38,440
-----------
468,268
-----------
RETAIL & MERCHANDISING -- 0.4%
Carrefour Supermarche SA -- (FRF)... 150 97,755
Mauri Co. Ltd. -- (JPY)............. 7,000 126,502
Pinault-Printemps Redoute
SA -- (FRF)....................... 250 99,319
Tesco PLC -- (GBP).................. 25,443 154,492
-----------
478,068
-----------
TELECOMMUNICATIONS -- 0.5%
Telecom Corp. of New Zealand Ltd. --
(NZD)............................. 22,000 112,294
Telecom Italia Mobile
SPA -- (ITL)...................... 75,000 188,730
Telecom Italia SPA -- (ITL)......... 75,000 193,898
Telekom Malaysia BHD -- (MYR)....... 16,000 142,557
-----------
637,479
-----------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP).................... 12,000 99,997
-----------
UTILITIES -- 0.3%
Electrabel SA -- (BEF).............. 420 99,612
Hong Kong Electric Holdings Ltd. --
(HKD)............................. 30,000 99,683
Veba AG -- (DEM).................... 2,500 143,949
-----------
343,244
-----------
TOTAL FOREIGN STOCK
(COST $11,201,323).................... 13,100,068
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 15.9%
ADVERTISING -- 0.1%
Outdoor Systems, Inc.
Sr. Sub. Notes
9.375%................... 10/15/06 $ 150 $ 154,875
AEROSPACE -- 0.9%
BE Aerospace, Inc. Sr. Sub.
Notes
9.875%................... 02/01/06 $ 150 $ 156,938
Boeing Co. Notes
6.35%.................... 06/15/03 120 118,500
K&F Industries, Inc. Sr.
Sub. Notes
10.375%.................. 09/01/04 150 158,250
Raytheon Co. Notes
6.50%.................... 07/15/05 350 342,125
Tracor, Inc. Sr. Sub. Notes
10.875%.................. 08/15/01 150 160,313
UNC, Inc. Sr. Sub. Notes
11.00%................... 06/01/06 150 160,500
------------
1,096,626
------------
AIRLINES -- 0.0%
Southwest Airlines Co.
Debs.
9.25%.................... 02/15/98 25 25,844
------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Daimler-Benz Auto Grantor
Trust
3.90%.................... 10/15/98 21 21,004
------------
AUTOMOTIVE PARTS -- 0.4%
Hayes Wheels International,
Inc. Notes
11.00%................... 07/15/06 150 163,125
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%................... 12/15/06 150 154,500
Speedy Muffler King, Inc.
Notes
10.875%.................. 10/01/06 150 160,875
------------
478,500
------------
BEVERAGES -- 0.5%
Anheuser-Busch Companies,
Inc. Debs.
7.00%.................... 12/01/25 150 142,500
Coca-Cola Bottling Group
Sr. Sub. Notes
9.00%.................... 11/15/03 100 102,250
Dr. Pepper Bottling Holding
Co. Sr. Notes [STEP]
11.625%.................. 02/15/03 140 123,900
Texas Bottling Group, Inc.
Sr. Sub. Notes
9.00%.................... 11/15/03 100 101,250
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
TLC Beatrice International
Holdings Sr. Notes
11.50%................... 10/01/05 $ 150 $ 159,375
------------
629,275
------------
BROADCASTING -- 0.2%
Chancellor Broadcasting Co.
Sr. Sub. Notes
9.375%................... 10/01/04 175 178,063
Young Broadcasting Corp.
Sr. Sub. Notes
10.125%.................. 02/15/05 100 102,500
------------
280,563
------------
BUILDING MATERIALS -- 0.1%
Building Materials Corp.
Sr. Notes [STEP]
6.56%.................... 07/01/04 150 129,750
------------
CHEMICALS -- 0.2%
Agricultural Minerals &
Chemicals, Inc. Sr. Notes
10.75%................... 09/30/03 100 106,875
Scotts Co. Sr. Sub. Notes
9.875%................... 08/01/04 100 105,125
------------
212,000
------------
CLOTHING & APPAREL -- 0.5%
Dan River, Inc. Sr. Sub.
Notes
10.125%.................. 12/15/03 100 101,500
Dominion Textile USA, Inc.
Sr. Notes
9.25%.................... 04/01/06 150 153,375
Loehmann's Holdings, Inc.
Sr. Notes
11.875%.................. 05/15/03 125 131,250
Pillowtex Corp. Sr. Sub.
Notes 144A
10.00%................... 11/15/06 150 156,375
------------
542,500
------------
COMPUTER HARDWARE -- 0.1%
International Business
Machines Corp. Notes
6.375%................... 11/01/97 100 100,451
------------
CONGLOMERATES -- 0.1%
Jordan Industries Sr. Notes
10.375%.................. 08/01/03 125 123,750
------------
CONSUMER PRODUCTS & SERVICES -- 0.4%
American Safety Razor Co.
Sr. Notes
9.875%................... 08/01/05 150 159,188
Herff Jones, Inc. Sr. Sub.
Notes Cl-B
11.00%................... 08/15/05 125 135,000
MAFCO, Inc. Sr. Sub. Notes
11.875%.................. 11/15/02 100 106,000
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
Revlon Worldwide Corp. Sr.
Disc. Notes [ZCB]
11.29%................... 03/15/98 $ 150 $ 129,375
------------
529,563
------------
CONTAINERS & PACKAGING -- 0.8%
Container Corp. of America
Sr. Notes
11.25%................... 05/01/04 100 108,500
Gaylord Container Corp. Sr.
Sub. Debs.
12.75%................... 05/15/05 150 165,000
Owens Illinois, Inc. Debs.
11.00%................... 12/01/03 150 167,625
Plastic Containers Sr.
Notes 144A
10.00%................... 12/15/06 150 155,250
Portola Packaging, Inc. Sr.
Notes
10.75%................... 10/01/05 150 156,375
U.S. Can Corp. Sr. Sub.
Notes 144A
10.125%.................. 10/15/06 150 157,875
910,625
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.4%
Alpine Group, Inc. Sr.
Notes
12.25%................... 07/15/03 50 54,875
Ametek, Inc. Sr. Notes
9.75%.................... 03/15/04 100 107,125
Celestica International Sr.
Sub. Notes 144A
10.50%................... 12/31/06 150 158,063
Westinghouse Electric Corp.
Debs.
8.875%................... 06/01/01 200 209,250
------------
529,313
------------
ENTERTAINMENT & LEISURE -- 0.6%
Rio Hotel & Casino, Inc.
Sr. Sub. Notes
10.625%.................. 07/15/05 150 157,125
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
8.44%.................... 06/15/05 150 141,188
Time Warner Entertainment
Debs.
7.25%.................... 09/01/08 100 96,500
Trump Atlantic City First
Mtge.
11.25%................... 05/01/06 125 123,750
United Artists Theatre Pass
Through Trust
9.30%.................... 07/01/15 248 231,204
------------
749,767
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste North America
Sr. Sub. Notes 144A
10.25%................... 12/01/06 $ 100 $ 105,500
------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%................... 11/15/05 125 134,688
------------
FINANCIAL-BANK & TRUST -- 1.1%
Airplanes Pass Through
Trust
10.875%.................. 03/15/19 150 165,460
Aristar, Inc. Sr. Notes
8.875%................... 08/15/98 200 208,000
7.875%................... 02/15/99 200 206,250
Banesto Delaware Sub. Notes
8.25%.................... 07/28/02 50 53,313
Bank of Nova Scotia Sub.
Notes
6.25%.................... 09/15/08 50 46,563
CoreStates Home Equity
Trust Cl-A
6.65%.................... 05/15/09 71 69,990
Export-Import Bank of Korea
Notes
6.50%.................... 05/15/00 40 39,800
First Federal Financial
Notes
11.75%................... 10/01/04 125 122,969
NationsBank Texas Sr. Notes
6.75%.................... 08/15/00 150 151,125
Provident Bank Corp. Sub.
Notes
7.125%................... 03/15/03 175 176,969
U.S. Bancorp Notes
6.72%.................... 06/01/98 100 101,000
------------
1,341,439
------------
FINANCIAL SERVICES -- 2.1%
Aames Financial Corp. Sr.
Notes
9.125%................... 11/01/03 150 153,375
Advanta Corp. Notes
7.07%.................... 09/15/97 235 236,727
Ahmanson, (H.F.) & Co. Sr.
Notes
9.875%................... 11/15/99 100 108,125
Associates Corp. of North
America Sr. Notes
8.625%................... 06/15/97 10 10,132
7.70%.................... 03/15/00 50 51,813
Chrysler Financial Corp.
Notes
8.46%.................... 01/19/00 200 210,500
Ciesco L.P. Notes
7.38%.................... 04/19/00 250 255,312
Commercial Credit Co. Debs.
8.125%................... 03/01/97 5 5,019
Enhance Financial Services
Group Debs.
6.75%.................... 03/01/03 300 300,000
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
Ford Motor Credit Co. Notes
9.45%.................... 05/20/97 $ 50 $ 50,720
General Motors Acceptance
Corp. Grantor Trust
6.30%.................... 06/15/99 21 20,969
General Motors Acceptance
Corp. Notes
7.75%.................... 04/15/97 50 50,314
8.375%................... 05/01/97 10 10,092
Household Finance Corp. Sr.
Notes
6.96%.................... 04/27/98 300 303,750
Intertek Finance PLC Sr.
Sub. Notes 144A
10.25%................... 11/01/06 150 155,625
Lehman Brothers Holdings
Notes
7.625%................... 06/15/97 65 65,497
Ocwen Financial Corp. Notes
11.875%.................. 10/01/03 150 162,187
Salomon, Inc. Sr. Notes
6.75%.................... 02/15/03 184 179,860
Smith Barney Holdings Notes
6.625%................... 06/01/00 200 200,750
------------
2,530,767
------------
FOOD -- 0.1%
Keebler Corp. Sr. Sub.
Notes
10.75%................... 07/01/06 150 162,375
------------
HOTELS & MOTELS -- 0.1%
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%.................... 05/15/05 150 156,750
------------
INDUSTRIAL PRODUCTS -- 0.5%
American Standard Debs.
11.375%.................. 05/15/04 150 162,000
9.25%.................... 12/01/16 25 26,188
Hawk Corp. 144A
10.25%................... 12/01/03 150 154,500
International Knife & Saw,
Inc. Sr. Sub. Notes 144A
11.375%.................. 11/15/06 150 156,000
Synthetic Industries Debs.
12.75%................... 12/01/02 125 137,500
------------
636,188
------------
INSURANCE -- 0.1%
New York Life Insurance
Notes 144A
7.50%.................... 12/15/23 100 97,125
------------
MACHINERY & EQUIPMENT -- 0.3%
Mettler-Toledo, Inc. Notes
9.75%.................... 10/01/06 150 158,250
Tokheim Corp. Sr. Sub.
Notes 144A
11.50%................... 08/01/06 150 159,000
------------
317,250
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.1%
Dade International, Inc.
Sr. Sub. Notes
11.125%.................. 05/01/06 $ 125 $ 135,312
-------------
METALS & MINING -- 0.3%
Freeport-McMoran Resource
Sr. Notes
7.00%.................... 02/15/08 150 144,562
Haynes International, Inc.
Sr. Notes
11.625%.................. 09/01/04 150 158,250
-------------
302,812
-------------
MISCELLANEOUS -- 0.3%
Consolidated Cigar Sr. Sub.
Notes
10.50%................... 03/01/03 125 131,406
Doane Products Co. Sr.
Notes
10.625%.................. 03/01/06 150 160,125
-------------
291,531
-------------
OIL & GAS -- 1.1%
Dual Drilling Co. Sr. Sub.
Notes
9.875%................... 01/15/04 125 135,625
Falcon Drilling Co., Inc.
Sr. Notes
8.875%................... 03/15/03 150 152,625
Ferrellgas L.P. Financial
Corp. Sr. Notes
10.00%................... 08/01/01 100 105,500
Flores & Rucks Sr. Sub.
Notes
9.75%.................... 10/01/06 50 52,875
Kelley Oil & Gas Corp. Sr.
Sub. Notes 144A
10.375%.................. 10/15/06 125 130,000
Maxus Energy Corp. Notes
9.375%................... 11/01/03 50 51,000
Petroleum Heat & Power Sub.
Notes
10.125%.................. 04/01/03 100 101,125
12.25%................... 02/01/05 188 210,090
Rowan Co. Sr. Notes
11.875%.................. 12/01/01 150 160,312
Tenneco, Inc. Notes
8.20%.................... 11/15/99 55 57,337
8.075%................... 10/01/02 150 157,500
-------------
1,313,989
-------------
PAPER & FOREST PRODUCTS -- 0.2%
Celulosa Arauco Notes
7.00%.................... 12/15/07 250 241,562
-------------
PHARMACEUTICALS -- 0.1%
Owens & Minor, Inc. Sr.
Sub. Notes
10.875%.................. 06/01/06 150 161,250
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
REAL ESTATE -- 0.3%
B.F. Saul Sr. Notes
11.625%.................. 04/01/02 $ 150 $ 161,625
HMC Acquisition Properties
Sr. Notes Cl-B
9.00%.................... 12/15/07 150 152,250
-------------
313,875
-------------
RESTAURANTS -- 0.1%
McDonald's Corp. Notes
6.625%................... 09/01/05 100 98,625
-------------
RETAIL & MERCHANDISING -- 0.2%
Grand Union Co. Sr. Notes
12.00%................... 09/01/04 150 159,750
Wal-Mart Stores, Inc. Debs.
7.25%.................... 06/01/13 85 85,212
-------------
244,962
-------------
TELECOMMUNICATIONS -- 1.3%
Communication & Power
Industries Sr. Sub. Notes
Cl-B
12.00%................... 08/01/05 150 167,625
Frontiervision Sr. Sub.
Notes
11.00%................... 10/15/06 150 150,375
Fundy Cable Ltd. Sr. Notes
11.00%................... 11/15/05 150 159,375
Lucent Technologies, Inc.
Notes
6.90%.................... 07/15/01 200 202,500
Rogers Cablesystems Sr.
Notes
10.00%................... 03/15/05 125 133,906
TCI Communications, Inc.
Sr. Notes
8.65%.................... 09/15/04 200 205,250
Tele-Communications, Inc.
Notes
8.75%.................... 02/15/23 175 166,687
Teleport Communications,
Inc. Notes
9.875%................... 07/01/06 50 53,250
United Telecommunications
Debs.
9.75%.................... 04/01/00 250 273,437
-------------
1,512,405
-------------
TRANSPORTATION -- 0.1%
Federal Express Notes
6.25%.................... 04/15/98 70 70,175
Sea Containers Ltd. Sr.
Sub. Notes
12.50%................... 12/01/04 70 77,350
-------------
147,525
-------------
UTILITIES -- 2.0%
Citizens Utilities Co.
Debs.
8.45%.................... 09/01/01 335 360,962
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C>
Commonwealth Edison Notes
7.00%.................... 02/15/97 $ 50 $ 50,062
9.00%.................... 10/15/99 250 264,375
Consumers Power Co. First
Mtge.
6.00%.................... 07/01/97 65 64,919
6.625%................... 10/01/98 50 50,125
El Paso Electric Co. First
Mtge.
8.90%.................... 02/01/06 150 156,750
Florida Power & Light First
Mtge.
5.70%.................... 03/05/98 200 199,250
Gulf States Utilities First
Mtge.
5.375%................... 02/01/97 128 128,000
Monongahela Power First
Mtge.
8.50%.................... 06/01/22 150 159,375
Pacific Gas & Electric Co.
First Mtge.
6.75%.................... 12/01/00 200 200,500
Potomac Capital Investment
Corp. Notes 144A
6.19%.................... 04/28/97 250 250,170
Public Service Electric &
Gas First Mtge.
7.00%.................... 09/01/24 300 278,625
Southern California Edison
Notes
6.50%.................... 06/01/01 100 99,500
Wisconsin Electric Power
Co. First Mtge.
5.875%................... 10/01/97 100 100,125
------------
2,362,738
------------
TOTAL CORPORATE OBLIGATIONS
(COST $18,713,428).................... 19,123,074
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 10.6%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.2%
7.00%.................... 11/01/97 180 181,745
7.50%.................... 07/15/20 15 15,164
------------
196,909
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.0%
6.02%.................... 01/20/98 60 60,160
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 10.4%
9.50%.................... 10/15/09 $ 23 $ 25,292
10.00%................... 11/15/09 22 24,450
11.50%................... 06/15/10 42 46,906
12.00%................... 09/15/13 1 1,496
12.00%................... 01/15/14 7 7,479
10.50%................... 08/15/15 13 14,735
11.50%................... 09/15/15 97 110,150
11.50%................... 11/15/15 37 41,630
8.00%.................... 05/15/16 26 26,491
8.50%.................... 06/15/16 35 36,195
9.00%.................... 07/15/16 16 16,618
8.00%.................... 12/15/16 50 50,975
8.00%.................... 02/15/17 97 99,265
8.00%.................... 05/15/17 63 63,898
9.00%.................... 05/15/17 77 81,167
8.00%.................... 06/15/17 27 28,009
9.50%.................... 11/15/18 4 4,827
9.50%.................... 03/15/19 17 18,344
9.50%.................... 01/15/20 8 8,441
9.50%.................... 06/15/20 14 15,192
8.00%.................... 06/15/22 143 145,533
8.00%.................... 09/15/22 31 31,443
8.00%.................... 07/15/23 81 82,357
7.00%.................... 09/15/23 373 365,062
6.50%.................... 02/15/24 701 669,248
6.50%.................... 04/15/24 85 80,896
6.50%.................... 05/15/24 882 841,651
7.50%.................... 06/15/24 86 85,719
7.00%.................... 12/15/25 291 284,784
7.00%.................... 01/15/26 41 40,060
6.00%.................... 02/15/26 402 373,515
7.00%.................... 02/15/26 40 39,339
7.00%.................... 03/15/26 110 107,225
7.00%.................... 04/15/26 899 879,887
7.50%.................... 04/15/26 144 144,486
6.00%.................... 05/15/26 327 303,633
7.00%.................... 05/15/26 904 884,854
7.50%.................... 05/15/26 1,086 1,086,998
7.00%.................... 06/15/26 1,093 1,069,318
7.50%.................... 06/15/26 297 297,347
8.00%.................... 06/15/26 804 820,332
8.50%.................... 06/15/26 618 641,035
8.50%.................... 07/15/26 1,045 1,082,982
7.00%.................... 08/15/26 888 869,291
8.50%.................... 10/15/26 494 512,109
------------
12,460,664
------------
TENNESSEE VALLEY AUTHORITY NOTES -- 0.0%
7.75%.................... 12/15/22 10 10,263
7.25%.................... 07/15/43 20 19,475
6.875%................... 12/15/43 40 37,350
------------
67,088
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $12,702,002)............................ 12,784,821
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS
-- 7.6%
U.S. TREASURY BONDS -- 0.9%
11.625%.................. 11/15/02 $ 100 $ 126,337
7.125%................... 02/15/23 240 250,649
7.625%................... 02/15/25 300 333,249
6.875%................... 08/15/25 300 305,844
6.00%.................... 02/15/26 100 91,076
-------------
1,107,155
-------------
U.S. TREASURY NOTES -- 6.7%
6.125%................... 05/15/98 100 100,517
6.00%.................... 05/31/98 450 451,539
5.125%................... 12/31/98 50 49,335
6.375%................... 05/15/99 1,950 1,967,881
6.75%.................... 05/31/99 460 468,128
6.875%................... 03/31/00 250 255,745
6.25%.................... 05/31/00 100 100,479
6.125%................... 09/30/00 150 150,006
5.625%................... 11/30/00 275 270,217
5.625%................... 02/28/01 1,100 1,078,605
5.75%.................... 08/15/03 665 645,396
7.50%.................... 02/15/05 250 267,340
5.875%................... 11/15/05 425 410,036
5.625%................... 02/15/06 500 473,165
6.50%.................... 10/15/06 1,350 1,357,587
-------------
8,045,976
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $9,060,043)..................... 9,153,131
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.6%
AUSTRALIA -- 0.0%
Australian Government
9.50%................. 08/15/03 20 17,808
------------
BELGIUM -- 0.1%
Belgium Kingdom
Government
7.25%................. 04/29/04 1,550 54,119
------------
CANADA -- 0.2%
Canadian Government
8.50%................. 04/01/02 130 107,097
6.50%................. 06/01/04 110 82,190
9.75%................. 06/01/21 10 9,555
------------
198,842
------------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%................. 12/15/04 275 48,785
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- --------- ------------
<S> <C> <C> <C>
FRANCE -- 0.3%
French O.A.T.
8.50%................. 11/25/02 1,406 $ 319,317
8.25%................. 02/27/04 264 59,728
8.50%................. 04/25/23 50 11,775
French Treasury Bill
8.50%................. 03/12/97 75 14,614
------------
405,434
------------
GERMANY -- 0.6%
Deutscheland Republic
8.50%................. 08/21/00 375 277,285
8.375%................ 05/21/01 410 305,619
6.50%................. 07/15/03 110 76,105
------------
659,009
------------
ITALY -- 0.2%
Italian Government
11.50%................ 03/01/03 275,000 219,242
8.50%................. 08/01/04 45,000 31,570
------------
250,812
------------
JAPAN -- 0.8%
European Investment Bank
4.625%................ 02/26/03 53,000 523,584
International Bank
Recovery & Development
Global Bond
6.75%................. 03/15/00 14,000 142,239
Japanese Government
4.50%................. 06/20/03 33,500 329,438
------------
995,261
------------
NETHERLANDS -- 0.1%
Netherlands Government
5.75%................. 01/15/04 115 68,141
------------
SPAIN -- 0.0%
Spanish Government
8.00%................. 05/30/04 6,400 53,636
------------
UNITED KINGDOM -- 0.3%
United Kingdom Gilt
9.00%................. 03/03/00 85 153,236
United Kingdom Treasury
8.00%................. 06/10/03 91 160,838
------------
314,074
------------
TOTAL FOREIGN BONDS
(COST $2,866,664)................... 3,065,921
-------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 3.1%
Temporary Investment Fund
(COST $3,725,574).............. 3,725,574 $ 3,725,574
------------
TOTAL INVESTMENTS -- 99.6%
(COST $107,949,238)................ 119,657,071
OTHER ASSETS LESS
LIABILITIES -- 0.4%................ 492,003
------------
NET ASSETS -- 100.0%................. $120,149,074
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.7% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 11.4%
AIRLINES -- 3.2%
American Airlines
Notes
10.19%.............. 05/26/15 $ 250 $ 304,488
United Air Lines, Inc.
Notes
10.36%.............. 11/13/12 6,925 8,342,686
10.36%.............. 11/27/12 500 588,685
10.02%.............. 03/22/14 2,000 2,322,180
------------
11,558,039
------------
ENTERTAINMENT & LEISURE -- 1.1%
Time Warner, Inc.
Notes
7.45%............... 02/01/98 2,000 2,027,500
6.46% [VR].......... 08/15/00 437 438,639
7.975%.............. 08/15/04 262 267,895
8.11%............... 08/15/06 525 540,094
8.18%............... 08/15/07 525 542,063
------------
3,816,191
------------
FOOD -- 1.9%
RJR Nabisco, Inc.
Notes
8.625%.............. 12/01/02 6,500 6,703,125
------------
OIL & GAS -- 0.1%
Arkla, Inc. Notes
9.20%............... 12/18/97 500 514,375
------------
REAL ESTATE -- 1.4%
Spieker Properties
Notes
6.95%............... 12/15/02 5,000 4,968,750
------------
TELECOMMUNICATIONS -- 1.5%
Cablevision Industries
Sr. Notes
10.75%.............. 01/30/02 5,000 5,306,250
------------
UTILITIES -- 2.2%
Cleveland Electric
Illumination Co.
Notes
8.75%............... 11/15/05 100 101,168
CMS Energy Corp. First
Mtge.
9.50%............... 10/01/97 150 154,125
Commonwealth Edison
Notes
6.50%............... 07/15/97 750 751,875
Long Island Lighting
Co. Notes
7.85%............... 05/15/99 7,000 7,131,250
------------
8,138,418
------------
TOTAL CORPORATE OBLIGATIONS
(COST $40,334,319)................ 41,005,148
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 50.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 3.0%
8.25%............... 08/01/17 $ 610 $ 626,871
7.00% [IO].......... 04/25/19 411 40,801
7.55% [VR].......... 02/01/24 3,213 3,321,350
6.50%............... 12/01/25 2,951 2,822,541
6.50% [TBA]......... 02/13/27 4,000 3,843,750
------------
10,655,313
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 2.6%
9.40%............... 07/25/03 311 325,714
6.50% [IO].......... 05/25/08 236 73,363
6.50% [IO].......... 06/25/14 2,091 122,981
6.90%............... 05/25/23 192 160,029
7.96% [VR].......... 01/01/24 448 464,831
7.50%............... 04/01/24 4,041 4,041,091
7.00%............... 04/25/24 602 541,365
7.76% [VR].......... 04/01/25 790 821,623
6.12% [TBA]......... 01/23/27 3,000 2,985,000
------------
9,535,997
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 45.2%
6.50% [VR].......... 03/20/17 754 768,196
7.125% [VR]......... 06/20/22 2,517 2,568,571
7.125% [VR]......... 04/20/23 3,157 3,214,157
7.125% [VR]......... 09/20/23 7,090 7,213,976
7.00% [VR].......... 10/20/23 694 705,576
7.50%............... 12/20/23 445 442,916
6.50%............... 01/15/24 502 478,970
6.50%............... 04/15/24 368 350,637
6.50%............... 05/15/24 304 290,066
7.125% [VR]......... 09/20/24 1,451 1,486,080
7.00% [VR].......... 10/20/24 3,831 3,912,431
6.50%............... 08/15/25 1,328 1,267,424
6.50%............... 09/15/25 1,805 1,722,355
6.50%............... 10/15/25 1,242 1,184,778
6.50%............... 11/15/25 611 583,183
6.50%............... 12/15/25 3,371 3,216,363
6.50%............... 01/15/26 3,563 3,399,354
6.50%............... 02/15/26 8,825 8,419,214
6.50%............... 03/15/26 10,207 9,738,049
6.50%............... 04/15/26 10,803 10,306,417
6.50%............... 05/15/26 4,942 4,714,549
6.50%............... 06/15/26 556 530,071
6.50%............... 07/15/26 668 636,871
6.50%............... 08/15/26 1,551 1,479,726
6.50%............... 10/15/26 535 510,081
7.00%............... 12/20/26 24,950 25,481,435
6.50% [TBA]......... 01/21/27 25,000 23,843,750
7.00% [TBA]......... 01/21/27 30,000 29,343,900
6.00% [TBA]......... 01/23/27 15,000 15,004,688
------------
162,813,784
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $181,149,967)............... 183,005,094
------------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 6.1%
Citicorp Mtge.
Securities, Inc.
[VR]
7.452%.............. 09/25/22 $ 666 $ 682,320
Collateralized Mtge.
Securities Corp.
[VR]
7.985%.............. 05/01/17 536 541,059
Countrywide Adjustable
Rate Mtge. [VR]
7.8499%............. 03/25/24 894 915,802
8.2169%............. 11/25/24 1,000 1,026,522
Guardian Adjustable
Rate Mtge.[VR]
6.7963%............. 12/25/19 86 57,035
Mortgage Capital Trust
VI
9.50%............... 02/01/18 856 862,736
Prudential Home Mtge.
Securities
6.50%............... 01/25/00 10,000 9,971,800
Prudential-Bache CMO
Trust
8.40%............... 03/20/21 3,236 3,324,816
Resolution Trust Corp.
8.00%............... 09/25/21 476 481,454
Rothschild L.F. Mtge.
Trust
9.95%............... 08/01/17 2,747 2,930,809
Ryland Mtge.
Securities Corp.
[VR]
7.843%.............. 09/25/23 1,215 1,236,642
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $21,832,471)................ 22,030,995
-----------
U.S. TREASURY OBLIGATIONS -- 45.6%
U.S. TREASURY BILLS -- 0.6%
4.975% #............ 01/23/97 300 299,065
5.01% #............. 03/06/97 70 69,372
5.025% #............ 03/06/97 800 792,821
5.06% #............. 03/06/97 20 19,821
4.81% #............. 03/13/97 305 301,956
5.00% #............. 03/13/97 530 524,710
-----------
2,007,745
-----------
U.S. TREASURY NOTES -- 45.0%
5.875%.............. 07/31/97 78,000 78,209,032
5.625%.............. 10/31/97 50,000 50,021,500
5.375%.............. 11/30/97 30,000 29,939,100
6.00%............... 09/30/98 4,000 4,012,640
-----------
162,182,272
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $163,910,566)............... 164,190,017
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 2.1%
ARGENTINA -- 1.4%
Republic of Argentina
[BRB,FRB]
6.625%.............. 03/31/05 $ 5,880 $ 5,122,950
-----------
MEXICO -- 0.7%
United Mexican States
Cl-B [BRB,FRB] (with
Value Recovery
Rights Attached)
6.25%............... 12/31/19 1,500 1,098,750
United Mexican States
Cl-C [BRB,FRB] (with
Value Recovery
Rights Attached)
6.375%.............. 12/31/19 1,000 861,250
United Mexican States
Cl-D [BRB,FRB] (with
Value Recovery
Rights Attached)
6.4531%............. 12/31/19 500 430,625
-----------
2,390,625
-----------
TOTAL SOVEREIGN ISSUES
(COST $6,676,521)................. 7,513,575
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
----------
<S> <C> <C> <C>
FOREIGN BONDS -- 3.3%
CANADA -- 1.1%
Canadian Government
4.25%............... 12/01/26 5,086 3,857,126
-----------
NEW ZEALAND -- 2.2%
New Zealand Government
10.00%.............. 03/15/02 10,000 7,941,668
-----------
TOTAL FOREIGN BONDS
(COST $11,283,283)................ 11,798,794
-----------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
MATURITY (000) VALUE
-------- ---------- -------------
<S> <C> <C>
OTC INTEREST RATE CAPS -- 0.0%
Three-Month Libor
Strike at $90.65.... 06/16/97 $ 325,000 $ 3,380
Strike at $85.50.... 06/16/97 46,000 468
Strike at $86.50.... 06/16/97 100,000 1,021
Strike at $91.80.... 06/16/97 100,000 794
Strike at $82.00.... 06/16/97 100,000 1,107
Strike at $89.30.... 12/15/97 375,000 7,028
------------
TOTAL OTC INTEREST RATE CAPS
(COST $13,798).................... 13,798
------------
<CAPTION>
SHARES
----------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.5%
Temporary Investment Cash
Fund.......................... 903,112 903,112
Temporary Investment Fund....... 903,112 903,112
------------
(COST $1,806,224)............... 1,806,224
------------
TOTAL INVESTMENTS -- 119.8%
(COST $427,007,149)............... 431,363,645
------------
<CAPTION>
NOTIONAL
AMOUNT
(000)
----------
<S> <C> <C>
WRITTEN OPTIONS -- 0.0%
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.00, Expire
03/17/97...................... $ 62,000 (1,550)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.50, Expire
06/16/97...................... 600,000 (45,000)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.25, Expire
06/16/97...................... 300,000 (15,000)
------------
TOTAL WRITTEN OPTIONS
(COST ($668,559))................. (61,550)
------------
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (19.8%)................. (71,292,134)
------------
NET ASSETS -- 100.0%................ $ 360,009,961
=============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy CAD $2,283,957 1.3135 05/97 $ (74,028)
Buy DEM 4,742,424 1.4984 01/97 (114,163)
---------
$(188,191)
=========
Sell CAD $3,916,230 1.3370 01/97 $ 85,580
Sell CAD 2,196,193 1.3660 05/97 (13,735)
Sell DEM 4,996,105 1.4309 01/97 337,845
Sell NZD 7,697,105 1.4149 01/97 9,257
---------
$ 418,947
=========
</TABLE>
# Securities with an aggregate market value of $2,007,745 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 5 Year
Note 03/97 $ 5,000 $ (25,000)
U.S. Treasury 10 Year
Note 03/97 68,100 (778,595)
U.S. Treasury 30 Year
Bond 03/97 25,900 (152,218)
Eurodollar 03/97 50,000 270,000
Eurodollar 06/97 50,000 155,000
-------------
$ (530,813)
=============
</TABLE>
Interest rate swap agreements outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATON
- -----------------------------------------------------------------
<S> <C> <C> <C>
Receive variable rate
payments on the
three-month USD-LIBOR-BBA
floating rate and pay
fixed rate payments on the
then current U.S. Treasury
10 Year Note. 03/97 $13,000 $ 12,276
======= ========
</TABLE>
- --------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 70.4%
AEROSPACE -- 2.0%
General Motors Corp. Cl-H ........ 20,000 $ 1,125,000
Lockheed Martin Corp. ............ 20,000 1,830,000
Northrop Grumman Corp. ........... 49,000 4,054,750
------------
7,009,750
------------
AIRLINES -- 0.2%
KLM Royal Dutch Airlines NV ...... 30,000 836,250
------------
AUTOMOBILE MANUFACTURERS -- 0.7%
Chrysler Corp. ................... 40,000 1,320,000
Ford Motor Co. ................... 30,000 956,250
------------
2,276,250
------------
AUTOMOTIVE PARTS -- 0.6%
Borg Warner Automotive, Inc. ..... 50,000 1,925,000
------------
BEVERAGES -- 2.0%
Anheuser-Busch Companies, Inc. ... 140,000 5,600,000
Coors, (Adolph) Co. Cl-B ......... 70,000 1,330,000
------------
6,930,000
------------
BROADCASTING -- 0.6%
News Corp. Ltd. [ADR] ............ 100,000 2,087,500
------------
CHEMICALS -- 3.7%
Agrium, Inc. ..................... 210,000 2,887,500
Air Products & Chemicals, Inc. ... 50,000 3,456,250
Arco Chemical Co. ................ 20,000 980,000
General Chemical Group, Inc. ..... 60,000 1,417,500
Lawter International, Inc. ....... 100,000 1,262,500
Olin Corp. ....................... 80,000 3,010,000
------------
13,013,750
------------
COMPUTER HARDWARE -- 2.1%
Hewlett-Packard Co. .............. 40,000 2,010,000
International Business Machines
Corp. .......................... 35,000 5,285,000
------------
7,295,000
------------
COMPUTER SERVICES & SOFTWARE -- 0.4%
Reynolds & Reynolds Co. Cl-A ..... 60,000 1,560,000
------------
CONGLOMERATES -- 0.5%
Philip Morris Companies, Inc. .... 15,000 1,689,375
------------
CONSTRUCTION -- 1.0%
Fluor Corp. ...................... 54,000 3,388,500
Newport News Shipbuilding,
Inc.* .......................... 6,500 97,500
------------
3,486,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.0%
Emerson Electric Co. ............. 40,000 3,870,000
General Electric Co. ............. 37,000 3,658,375
Honeywell, Inc. .................. 40,000 2,630,000
Polaroid Corp. ................... 30,000 1,305,000
Sundstrand Corp. ................. 140,000 5,950,000
Texas Instruments, Inc. .......... 55,000 3,506,250
------------
20,919,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 3.5%
Bank of New York Co., Inc. ....... 60,000 $ 2,025,000
BankAmerica Corp. ................ 20,000 1,995,000
CoreStates Financial Corp. ....... 60,000 3,112,500
First Chicago NBD Corp. .......... 56,200 3,020,750
Mellon Bank Corp. ................ 30,000 2,130,000
------------
12,283,250
------------
FINANCIAL SERVICES -- 2.7%
Associates First Capital Corp. ... 100,000 4,412,500
Beneficial Corp. ................. 50,000 3,168,750
Dean Witter Discover & Co. ....... 30,000 1,987,500
------------
9,568,750
------------
FOOD -- 3.0%
General Mills, Inc. .............. 35,000 2,218,125
Heinz, (H.J.) Co. ................ 73,000 2,609,750
Kellogg Co. ...................... 70,000 4,593,750
Quaker Oats Co. .................. 30,000 1,143,750
------------
10,565,375
------------
HOTELS & MOTELS -- 1.1%
Hilton Hotels Corp. .............. 150,000 3,918,750
------------
INDUSTRIAL PRODUCTS -- 0.7%
Albany International Corp.
Cl-A ........................... 100,000 2,312,500
------------
INSURANCE -- 6.8%
Allmerica Financial Corp. ........ 60,000 2,010,000
Allmerica Property & Casualty
Companies, Inc. ................ 100,000 3,037,500
American States Financial
Corp. .......................... 150,800 3,996,200
Ohio Casualty Corp. .............. 50,000 1,775,000
Safeco Corp. ..................... 100,000 3,943,750
St. Paul Companies, Inc. ......... 50,000 2,931,250
Travelers-Aetna Property Casualty
Corp. Cl-A ..................... 167,500 5,925,312
------------
23,619,012
------------
MACHINERY & EQUIPMENT -- 1.3%
AlliedSignal, Inc. ............... 50,000 3,350,000
Cooper Industries, Inc. .......... 25,000 1,053,125
------------
4,403,125
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.8%
Becton Dickinson & Co. ........... 60,000 2,602,500
------------
METALS & MINING -- 0.4%
Newmont Mining Corp. ............. 30,994 1,386,982
------------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
OIL & GAS -- 6.8%
Amoco Corp. ...................... 15,000 $ 1,207,500
Burlington Resources, Inc. ....... 40,000 2,020,000
Chevron Corp. .................... 30,000 1,950,000
Dresser Industries, Inc. ......... 70,000 2,170,000
Exxon Corp. ...................... 20,000 1,960,000
Halliburton Co. .................. 25,000 1,506,250
Mobil Corp. ...................... 12,000 1,467,000
Schlumberger Ltd. ................ 21,000 2,097,375
Sonat, Inc. ...................... 35,000 1,802,500
Tenneco, Inc.* ................... 32,500 1,466,563
Union Pacific Resources Group,
Inc. ........................... 91,173 2,666,810
Unocal Corp. ..................... 40,000 1,625,000
USX Marathon Group ............... 80,000 1,910,000
------------
23,848,998
------------
PAPER & FOREST PRODUCTS -- 2.2%
Champion International Corp. ..... 60,000 2,595,000
James River Corp. of Virginia .... 50,000 1,656,250
Kimberly-Clark Corp. ............. 35,000 3,333,750
------------
7,585,000
------------
PERSONAL SERVICES -- 0.4%
Service Corp. International ...... 52,000 1,456,000
------------
PHARMACEUTICALS -- 4.0%
American Home Products Corp. ..... 25,000 1,465,625
Glaxo Wellcome PLC [ADR] ......... 100,000 3,175,000
Novo Nordisk AS [ADR] ............ 20,000 935,000
Pfizer, Inc. ..................... 30,000 2,486,250
Smithkline Beecham PLC [ADR] ..... 30,000 2,040,000
Warner-Lambert Co. ............... 50,000 3,750,000
------------
13,851,875
------------
PRINTING & PUBLISHING -- 0.7%
Belo, (A.H.) Corp. Cl-A .......... 35,000 1,220,625
R.R. Donnelley & Sons Co. ........ 40,000 1,255,000
------------
2,475,625
------------
RAILROADS -- 2.2%
Conrail, Inc. .................... 26,792 2,669,153
Kansas City Southern Industries,
Inc. ........................... 80,000 3,600,000
Union Pacific Corp. .............. 25,000 1,503,125
------------
7,772,278
------------
REAL ESTATE -- 1.0%
Patriot American Hospitality, Inc.
[REIT] ......................... 80,000 3,450,000
------------
RETAIL & MERCHANDISING -- 2.6%
Dayton-Hudson Corp. .............. 60,000 2,355,000
J.C. Penney Co., Inc. ............ 90,000 4,387,500
May Department Stores Co. ........ 50,000 2,337,500
------------
9,080,000
------------
SEMI-CONDUCTORS -- 2.1%
Intel Corp. ...................... 40,000 5,237,500
Motorola, Inc. ................... 35,000 2,148,125
------------
7,385,625
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
TELECOMMUNICATIONS -- 7.8%
Ameritech Corp. .................. 50,000 $ 3,031,250
AT&T Corp. ....................... 40,000 1,740,000
Bell Atlantic Corp. .............. 30,000 1,942,500
BellSouth Corp. .................. 20,000 807,500
Deutsche Telekom AG [ADR]* ....... 100,000 2,037,500
Frontier Corp. ................... 125,000 2,828,125
GTE Corp. ........................ 30,000 1,365,000
Lucent Technologies, Inc. ........ 112,963 5,224,539
Nokia Corp. Cl-A [ADR] ........... 30,000 1,728,750
NYNEX Corp. ...................... 25,000 1,203,125
SBC Communications, Inc. ......... 50,000 2,587,500
U.S. West Communications Group ... 80,000 2,580,000
------------
27,075,789
------------
UTILITIES -- 0.5%
IES Industries, Inc. ............. 60,000 1,792,500
------------
TOTAL COMMON STOCK
(COST $203,578,320) .............. 245,462,434
------------
PREFERRED STOCK -- 0.3%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575) .................. 20,000 1,052,500
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 12.9%
AIRLINES -- 0.2%
Delta Air Lines, Inc.
Equipment Trust
9.30% ................. 01/02/11 $ 500 574,766
-----------
BROADCASTING -- 1.2%
Allbritton Communications
Co. Sr. Sub. Debs.
11.50% ................ 08/15/04 1,000 1,060,000
-----------
9.75% ................. 11/30/07 1,000 972,500
American Radio Systems
Notes
9.00% ................. 02/01/06 1,000 985,000
Benedek Broadcasting
Corp. Sr. Notes
11.875% ............... 03/01/05 1,000 1,043,750
-----------
4,061,250
-----------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Rayovac Corp. Sr. Sub.
Notes 144A
10.25% ................ 11/01/06 1,000 1,032,500
-----------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.3%
Station Casinos Sr. Sub.
Notes
9.625% ................ 06/01/03 $ 500 $ 489,375
Time Warner, Inc. Notes
6.85% ................. 01/15/26 1,000 982,500
Trump Atlantic City
Assoc., Inc. Notes
11.25% ................ 05/01/06 1,000 990,000
Trump Castle Funding
Mtge.
11.75%................. 11/15/03 1,000 885,000
United Artists
Sr. Notes Cl-B
11.50%................. 05/01/02 1,000 1,065,000
------------
4,411,875
------------
FINANCIAL SERVICES -- 1.7%
Donaldson, Lufkin &
Jenrette, Inc. Notes
5.625%................. 02/15/16 1,000 966,250
DQU II Funding Corp.
8.70%.................. 06/01/16 2,000 2,080,000
Export Import Bank of
Korea Notes
6.50%.................. 11/15/06 1,000 979,596
General Motors Acceptance
Corp. Notes
7.125%................. 06/01/99 500 509,375
6.70%.................. 04/25/01 1,000 1,000,000
Tembec Finance Corp. Sr.
Notes
9.875%................. 09/30/05 500 472,500
-----------
6,007,721
-----------
HEALTHCARE SERVICES -- 0.3%
Tenet Healthcare Corp.
Sr. Sub. Notes
10.125%................ 03/01/05 900 995,625
-----------
LUMBER & WOOD PRODUCTS -- 0.3%
Malette, Inc.
12.25%................. 07/15/04 1,000 1,070,000
-----------
METALS & MINING -- 0.8%
Freeport-McMoran Copper &
Gold Debs.
7.20%.................. 11/15/26 1,900 1,878,625
USX Corp. Sub. Debs.
5.75%.................. 07/01/01 1,025 957,094
-----------
2,835,719
-----------
OIL & GAS -- 0.6%
Clark Oil & Refining
Corp. Sr. Notes
10.50%................. 12/01/01 1,000 1,045,000
Veritas Holdings Sr.
Notes 144A
9.625%................. 12/15/03 1,000 1,012,500
-----------
2,057,500
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
PAPER & FOREST PRODUCTS -- 0.3%
S.D. Warren Co. Sr. Sub.
Notes Cl-B
12.00%................. 12/15/04 $ 1,000 $ 1,082,500
-----------
PHARMACEUTICALS -- 0.3%
McKesson Corp.
4.50%.................. 03/01/04 1,225 1,085,656
-----------
PRINTING & PUBLISHING -- 0.2%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
8.28%.................. 07/01/06 1,000 832,500
-----------
TELECOMMUNICATIONS -- 4.1%
Centennial Cellular Sr.
Notes
8.875%................. 11/01/01 1,000 967,500
Commnet Cellular, Inc.
Sub. Notes
11.25%................. 07/01/05 1,000 1,062,500
Continental Cablevision
Sr. Sub. Debs.
11.00%................. 06/01/07 1,500 1,708,125
EZ Communications, Inc.
Sr. Sub. Notes
9.75%.................. 12/01/05 1,500 1,567,500
International Cabletel,
Inc. Sr. Notes [STEP]
11.75%................. 02/01/06 1,000 680,000
Marcus Cable Co. Sr.
Notes [STEP]
11.61%................. 12/15/05 900 639,000
MFS Communications Co.,
Inc. Sr. Notes [STEP]
8.85%.................. 01/15/06 1,000 730,000
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
12.48%................. 08/15/04 1,000 682,500
Paging Network, Inc. Sr.
Sub. Notes 144A
10.00%................. 10/15/08 1,000 1,013,750
Panamsat L.P. Sr. Sub.
Notes [STEP]
5.06%.................. 08/01/03 1,500 1,391,250
Viacom, Inc. Sub. Debs.
8.00%.................. 07/07/06 1,500 1,462,500
Videotron Holdings PLC
Sr. Notes [STEP]
7.94%.................. 07/01/04 1,650 1,443,750
Western Wireless Corp.
Sr. Sub. Notes
10.50%................. 06/01/06 1,000 1,037,500
-----------
14,385,875
-----------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C>
TRANSPORTATION -- 0.2%
Teekay Shipping Corp.
Notes
8.32%.................. 02/01/08 $ 500 $ 501,250
------------
UTILITIES -- 1.1%
Enersis SA Notes
6.90%.................. 12/01/06 1,000 976,250
North Atlantic Energy
First Mtge.
9.05%.................. 06/01/02 1,000 1,002,500
Penn Power Co. First
Mtge.
6.375%................. 09/01/04 1,000 945,000
PSI Energy, Inc. Debs.
6.35%.................. 11/15/06 1,000 991,250
------------
3,915,000
------------
TOTAL CORPORATE OBLIGATIONS
(COST $44,477,078)................... 44,849,737
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.9%
Federal Home Loan Mtge. Corp.
6.50%.................. 10/01/10 1,791 1,759,991
6.50%.................. 11/01/10 1,825 1,793,600
6.50%.................. 04/01/11 2,873 2,823,265
6.50%.................. 08/01/11 2,950 2,899,153
6.50%.................. 09/01/11 15,093 14,833,675
------------
(COST $24,038,422)................. 24,109,684
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 1.7%
U.S. Treasury Notes
5.50%.................. 12/31/00 $ 2,000 $ 1,955,220
6.50%.................. 05/15/05 4,000 4,027,759
------------
(COST $6,159,503).................. 5,982,979
------------
COMMERCIAL PAPER -- 4.4%
General Electric Capital
Corp.
5.7555%................ 01/02/97 5,562 5,562,000
General Motors Acceptance
Corp.
7.0027%................ 01/02/97 9,600 9,600,000
------------
(COST $15,162,000)................. 15,162,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund.... 32,428 $ 32,428
Temporary Investment Fund......... 32,428 32,428
------------
(COST $64,856).................... 64,856
------------
TOTAL INVESTMENTS -- 96.6%
(COST $294,476,754)................. 336,684,190
OTHER ASSETS LESS
LIABILITIES -- 3.4%................. 11,995,787
------------
NET ASSETS -- 100.0%.................. $348,679,977
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 85.8%
AEROSPACE -- 0.9%
Remec, Inc.*................... 97,400 $ 1,911,475
------------
BROADCASTING -- 0.5%
SFX Broadcasting, Inc. Cl-A*... 34,025 1,012,244
------------
BUSINESS SERVICES -- 1.6%
Caribiner International,
Inc.*........................ 31,900 1,602,975
Teletech Holdings, Inc.*....... 77,450 2,013,700
------------
3,616,675
------------
CHEMICALS -- 0.8%
Crompton & Knowles Corp........ 87,025 1,675,231
------------
CLOTHING & APPAREL -- 0.5%
Mens Warehouse, Inc.*.......... 45,450 1,113,525
------------
COMPUTER SERVICES &
SOFTWARE -- 19.9%
Avant Corp.*................... 198,100 6,289,675
BA Merchant Services, Inc.*.... 123,250 2,203,094
CDW Computers Centers, Inc.*... 50,000 2,965,625
CSG Systems International,
Inc.*........................ 27,750 426,656
Cybercash, Inc.*............... 31,825 731,975
Dendrite International,
Inc.*........................ 60,300 497,475
Farallon Communications*....... 23,375 149,016
Geoworks*...................... 201,125 4,927,563
HCIA, Inc.*.................... 34,500 1,190,250
HPR, Inc.*..................... 109,675 1,508,031
Network General Corp.*......... 121,000 3,660,250
Parametric Technology Corp.*... 28,000 1,438,500
PRI Automation, Inc.*.......... 39,050 1,776,775
Ross Systems, Inc.*............ 276,925 2,665,403
Scopus Technology, Inc.*....... 79,400 3,692,100
Sterling Commerce, Inc.*....... 69,075 2,434,894
Summit Design, Inc.*........... 126,150 1,293,038
Sync Research, Inc.*........... 143,725 1,976,219
Synopsys, Inc.*................ 50,000 2,312,500
Vanstar Corp.*................. 68,275 1,672,738
------------
43,811,777
------------
CONSUMER PRODUCTS &
SERVICES -- 4.2%
Nautica Enterprises, Inc.*..... 60,000 1,515,000
Protection One, Inc.*.......... 120,750 1,192,406
Quicksilver, Inc.*............. 79,800 1,705,725
Rexall Sundown, Inc.*.......... 71,450 1,942,547
Warnaco Group, Inc. Cl-A....... 100,000 2,962,500
------------
9,318,178
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.1%
Berg Electronics Corp.*........ 48,250 1,417,344
Concord EFS, Inc.*............. 64,550 1,823,538
Cypress Semiconductor Corp.*... 64,925 917,066
Fore Systems, Inc.*............ 56,000 1,841,000
Premenos Technology Corp.*..... 52,075 449,147
Sanmina Corp.*................. 48,850 2,760,025
Sawtek, Inc.*.................. 80,775 3,200,709
Ultrak, Inc.*.................. 32,875 1,002,688
------------
13,411,517
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 1.9%
Fairfield Communities, Inc.*... 66,350 $ 1,642,163
Midway Games, Inc.*............ 47,125 954,281
Signature Resorts, Inc.*....... 45,150 1,591,538
------------
4,187,982
------------
ENVIRONMENTAL SERVICES -- 1.6%
United Waste Systems, Inc.*.... 104,525 3,593,047
------------
FINANCIAL-BANK & TRUST -- 0.7%
Banco Latinoamericano de
Exportaciones SA Cl-E [ADR].. 29,400 1,492,050
------------
FINANCIAL SERVICES -- 1.7%
Credit Acceptance Corp.*....... 40,075 941,763
First USA Paymentech, Inc.*.... 82,525 2,795,534
------------
3,737,297
------------
FOOD -- 1.3%
JP Foodservice, Inc.*.......... 77,500 2,160,313
United Natural Foods, Inc.*.... 46,225 785,825
------------
2,946,138
------------
HEALTHCARE SERVICES -- 4.5%
Advance Paradigm, Inc.*........ 49,525 1,027,644
Multicare Companies, Inc.*..... 74,000 1,498,500
Omnicare, Inc.................. 93,800 3,013,325
Orthodontic Centers of America,
Inc.*........................ 125,150 2,002,400
Pediatrix Medical Group,
Inc.*........................ 35,000 1,290,625
Sunrise Assisted Living,
Inc.*........................ 39,900 1,112,213
------------
9,944,707
------------
HOTELS & MOTELS -- 2.1%
Doubletree Corp.*.............. 102,150 4,596,750
------------
INDUSTRIAL PRODUCTS -- 1.1%
Harsco Corp. .................. 35,000 2,397,500
------------
INSURANCE -- 1.6%
Executive Risk, Inc. .......... 22,800 843,600
Reliastar Financial Corp. ..... 45,000 2,598,750
------------
3,442,350
------------
MACHINERY & EQUIPMENT -- 0.6%
Asyst Technologies, Inc.*...... 22,500 385,313
Rental Service Corp.*.......... 35,125 965,937
------------
1,351,250
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 3.6%
Express Scripts, Inc. Cl-A*.... 26,500 950,687
Gulf South Medical Supply,
Inc.*........................ 45,000 1,153,125
Henry Schein, Inc.*............ 60,725 2,087,422
Physio-Control International
Corp.*....................... 77,925 1,753,312
Sola International, Inc.*...... 48,000 1,824,000
Visible Genetics, Inc.*........ 25,925 226,844
------------
7,995,390
------------
OFFICE EQUIPMENT -- 1.1%
American Pad & Paper Co.*...... 107,675 2,436,147
------------
OIL & GAS -- 0.9%
Falcon Drilling Co., Inc.*..... 50,000 1,962,500
------------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PERSONAL SERVICES -- 0.2%
Sylvan Learning Systems,
Inc.*........................ 17,500 $ 498,750
------------
PHARMACEUTICALS -- 6.0%
Genelabs Technologies, Inc.*... 271,000 1,659,875
Medicis Pharmaceutical Cl-A*... 9,575 421,300
NCS Healthcare, Inc. Cl-A*..... 41,950 1,221,794
Nexstar Pharmaceuticals,
Inc.*........................ 25,250 378,750
Paraxel International Corp.*... 49,050 2,532,206
Pharmaceutical Product
Development, Inc.*........... 46,200 1,166,550
SEQUUS Pharmaceuticals,
Inc.*........................ 102,450 1,639,200
Watson Pharmaceuticals,
Inc.*........................ 93,950 4,221,877
------------
13,241,552
------------
PRINTING & PUBLISHING -- 1.0%
World Color Press, Inc.*....... 116,900 2,250,325
------------
RETAIL & MERCHANDISING -- 6.4%
Consolidated Stores Corp.*..... 32,718 1,051,066
Corporate Express, Inc.*....... 31,000 912,562
Insight Enterprises, Inc.*..... 43,000 1,204,000
Kenneth Cole Productions, Inc.
Cl-A*........................ 85,100 1,319,050
Proffitt's, Inc.*.............. 58,550 2,159,031
The Sports Authority, Inc.*.... 100,550 2,186,962
Williams-Sonoma, Inc.*......... 26,000 945,750
Wolverine World Wide, Inc. .... 145,212 4,211,147
------------
13,989,568
------------
SEMI-CONDUCTORS -- 1.9%
International Rectifier
Corp.*....................... 64,175 978,669
Speedfam International,
Inc.*........................ 46,875 1,335,937
Vitesse Semiconductor, Inc.*... 38,900 1,769,950
------------
4,084,556
------------
TELECOMMUNICATIONS -- 10.9%
Cellular Communications
International, Inc.*......... 35,375 1,025,875
Digital Microwave Corp.*....... 124,700 3,476,012
Heartport, Inc.*............... 68,025 1,556,072
Intermedia Communications of
Florida, Inc.*............... 44,125 1,136,219
LCI International, Inc.*....... 21,600 464,400
McLeod, Inc. Cl-A*............. 34,500 879,750
Omnipoint Corp.*............... 14,000 269,500
P-Com, Inc.*................... 176,525 5,229,552
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Pacific Gateway Exchange,
Inc.*........................ 43,200 $ 1,576,800
Periphonics Corp.*............. 100,000 2,925,000
Picturetel Corp.*.............. 46,750 1,215,500
Tel-Save Holdings, Inc.*....... 47,375 1,373,875
Telco Communications Group*.... 35,975 629,562
Teltrend, Inc.*................ 21,525 597,319
Winstar Communications,
Inc.*........................ 70,925 1,489,425
------------
23,844,861
------------
TRANSPORTATION -- 2.2%
Atlas Air, Inc.*............... 54,675 2,610,731
Mark VII, Inc.*................ 60,000 1,661,250
Rural Metro Corp.*............. 14,800 532,800
------------
4,804,781
------------
TOTAL COMMON STOCK
(COST $155,183,424).............. 188,668,123
------------
FOREIGN STOCK -- 5.2%
BROADCASTING -- 1.0%
Flextech PLC -- (GBP)*......... 187,000 2,170,061
------------
BUILDING MATERIALS -- 0.7%
Hunter Douglas NV -- (NLG)..... 23,356 1,577,559
------------
CONTAINERS & PACKAGING -- 0.8%
Hoya Corp. -- (JPY)............ 45,000 1,770,428
------------
RESTAURANTS -- 0.8%
J.D. Wetherspoon PLC -- (GBP).. 89,533 1,794,279
------------
RETAIL & MERCHANDISING -- 0.8%
Next PLC -- (GBP).............. 190,000 1,846,888
------------
TRANSPORTATION -- 1.1%
IHC Caland NV -- (NLG)......... 40,000 2,288,961
------------
TOTAL FOREIGN STOCK
(COST $7,551,483)................ 11,448,176
------------
SHORT TERM INVESTMENTS -- 0.0%
Temporary Investment Cash
Fund......................... 500 500
Temporary Investment Fund...... 500 500
------------
(COST $1,000).................. 1,000
------------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 12.8%
American Express Credit
Corp.
6.30%................ 01/03/97 $ 8,398 $ 8,395,061
McCormick and Co., Inc.
6.00%................ 01/02/97 10,000 9,998,333
Merrill Lynch & Co.,
Inc.
5.80%................ 01/06/97 9,851 9,843,065
------------
(COST $28,236,459)................ 28,236,459
------------
TOTAL INVESTMENTS -- 103.8%
(COST $190,972,366)................. 228,353,758
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (3.8%).............. (8,285,476)
------------
NET ASSETS -- 100.0%.................. $220,068,282
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
FOREIGN STOCK -- 95.4%
ARGENTINA -- 0.7%
Banco de Galicia Buenos Aires
SA [ADR]...................... 14,268 $ 345,999
Banco Frances del Rio de la
Plata SA [ADR]................ 16,411 451,303
Compania Naviera Perez Companc
SA............................ 90,361 635,238
Enron Global Power & Pipelines
LLC........................... 1,356 36,612
Sociedad Comercial del Plata SA
[ADR]*........................ 1,640 42,328
Sociedad Comercial del Plata SA
[ADR] 144A*................... 14,380 36,813
Telecom Argentina Stet SA Cl-B
[ADR]......................... 941 37,993
Telecom Argentina Stet-Fran Tel
SA Cl-B....................... 10,450 43,054
Telefonica de Argentina SA Cl-B
[ADR]......................... 22,810 590,209
Transportadora de Gas del Sur SA
Cl-B [ADR].................... 2,632 32,242
YPF SA [ADR].................... 18,679 471,645
------------
2,723,436
------------
AUSTRALIA -- 1.7%
Australia & New Zealand Bank
Group Ltd..................... 59,000 372,182
Australian Gas Light Co. Ltd.... 124,945 711,643
Broken Hill Proprietary Co.
Ltd........................... 60,747 865,950
Coca-Cola Amatil Ltd............ 4,251 45,482
Commonwealth Installments
Receipts...................... 60,900 379,323
Fletcher Challenge Forest
Ltd........................... 1,702 2,870
Howard Smith Ltd................ 30,929 254,646
Lend Lease Corp. Ltd............ 14,486 281,170
National Australia Bank Ltd..... 35,291 415,485
National Mutual Holdings
Ltd.*......................... 130,000 194,416
News Corp. Ltd.................. 158,178 835,496
Publishing & Broadcasting
Ltd........................... 64,300 313,035
Sydney Harbour Casino Holdings
Ltd.*......................... 182,000 280,869
Tabcorp Holdings Ltd............ 99,000 472,516
Westpac Banking Corp. Ltd....... 101,000 575,261
WMC Ltd......................... 42,377 267,321
Woodside Petroleum Ltd.......... 86,000 628,701
------------
6,896,366
------------
AUSTRIA -- 0.0%
Energie-Versorgung
Niederoesterreich AG.......... 624 94,134
Flughafen Wien AG............... 1,581 80,769
------------
174,903
------------
BELGIUM -- 1.0%
Credit Communal Holding Dexia
SA*........................... 2,026 185,229
Generale de Banque SA*.......... 2,834 1,018,056
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Generale de Banque SA-Strip*.... 214 $ 122
Kredietbank NV.................. 6,500 2,134,849
UCB SA.......................... 251 655,541
------------
3,993,797
------------
BRAZIL -- 2.5%
Brazil Fund, Inc.**............. 29,290 651,703
Centrais Electrobras SA [ADR]... 44,628 798,841
Cesp-Cia Energetica de Sao Paolo
[ADR]*........................ 5,020 58,714
Companhia Energetica de Minas
Geras [ADR]................... 44,868 1,528,563
Lojas Americanas SA [ADR]....... 23,000 303,255
Pao de Acucar SA [ADR]*......... 21,420 374,850
Telebras SA [ADR]............... 64,490 4,933,485
Telebras SA [ADR] 144A.......... 217 16,707
Uniao Siderurgicas de Minas
Gerais SA [ADR]............... 78,390 799,656
Usinas Siderurgicas de Minas
Gerais SA [ADR]............... 61,345 625,780
Usinas Siderurgicas de Minas
Gerais SA [ADR] 144A.......... 11,100 113,231
------------
10,204,785
------------
CANADA -- 0.3%
Alcan Aluminium Ltd............. 26,420 892,372
Royal Bank of Canada............ 10,980 385,699
------------
1,278,071
------------
CHILE -- 0.5%
A.F.P. Provida SA [ADR]......... 1,152 21,600
Chile Fund, Inc.**.............. 9,294 194,012
Chilectra Metropolitana SA
[ADR]......................... 4,136 213,451
Chilgener SA [ADR].............. 6,371 132,995
Cia de Telecomunicaciones de
Chile SA [ADR]................ 2,390 241,689
Compania Cervecerias Unidas SA
[ADR]......................... 3,628 58,501
Empresa Nacional Electridad SA
[ADR]......................... 18,526 287,153
Enersis SA [ADR]................ 12,553 348,346
Five Arrows Chile Fund Ltd.**... 89,390 250,739
Five Arrows Chile Investment
Trust**....................... 29,340 82,445
Genesis Chile Fund**............ 9,350 343,613
------------
2,174,544
------------
CHINA -- 0.3%
Huaneng Power International,
Inc. [ADR]*................... 51,000 1,147,500
------------
CZECH REPUBLIC -- 0.0%
SPT Telecom AS*................. 1,360 168,433
------------
DENMARK -- 0.2%
Den Danske Bank................. 6,380 515,795
Tele Danmark AS Cl-B............ 2,030 112,290
Unidanmark AS Cl-A.............. 6,110 317,178
------------
945,263
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
FINLAND -- 0.2%
Nokia AB Cl-A................... 14,644 $ 851,017
------------
FRANCE -- 8.6%
Accor SA........................ 4,320 547,891
Alcatel Alsthom................. 7,720 621,141
Assurances Generales de
France........................ 7,533 243,572
AXA SA.......................... 6,898 439,422
Canal Plus...................... 3,880 858,344
Carrefour Supermarche SA........ 5,637 3,673,631
Chargeurs International SA*..... 2,331 115,643
Cie de Gaz Petrole Warrants*.... 217 5,404
CLF Dexia France Reg'd.......... 1,928 167,853
Compagnie de Saint-Gobain....... 11,740 1,663,448
Compagnie Generale Des Eaux..... 41,960 5,208,247
Credit Local de France.......... 5,200 453,719
GTM Entrepose SA................ 4,510 208,945
Guilbert SA..................... 5,003 980,261
Havas SA........................ 2,940 206,583
L'Oreal......................... 1,607 606,158
Lapeyre SA...................... 8,105 466,245
Legrand SA...................... 3,823 652,382
Louis Vuitton Moet Hennessy..... 10,760 3,009,718
Pathe*.......................... 2,331 562,467
Pinault-Printemps Redoute SA.... 7,663 3,044,313
Primagaz Cie.................... 5,902 696,122
Rexel SA........................ 2,365 719,046
Sanofi SA....................... 12,329 1,228,069
Schneider SA.................... 14,250 659,918
Societe Generale................ 2,050 222,005
Societe Nationale Elf Aquitaine
SA............................ 15,090 1,375,790
Societe Television Francaise.... 11,080 1,060,881
Sodexho SA...................... 4,210 2,348,686
Total SA Cl-B................... 30,884 2,515,887
------------
34,561,791
------------
GERMANY -- 3.8%
Allianz AG...................... 754 1,358,868
Altana AG....................... 216 168,500
Bayer AG........................ 82,973 3,371,284
Bilfinger & Berger Bau AG....... 10,700 402,381
Buderus AG...................... 807 390,636
Deutsche Bank AG................ 7,757 362,363
Fielmann AG Pfd................. 5,723 180,589
Gehe AG......................... 41,391 2,662,004
Hoechst AG...................... 12,980 602,130
Hornbach Baumarkt AG............ 1,300 41,275
Hornbach Holdings AG Pfd........ 5,870 420,104
Krones AG Hermann Kronseder
Maschinenfabrik Pfd........... 456 165,548
Mannesmann AG................... 1,880 809,978
Praktiker Bau-Und
Heimwerkemaerkte AG*.......... 3,779 75,728
Rhoen-Klinikum AG............... 7,030 750,111
SAP AG.......................... 2,110 288,975
SAP AG Pfd...................... 2,368 326,313
Schering AG..................... 3,695 312,284
Veba AG......................... 33,965 1,955,695
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Veba AG Warrants*............... 1,220 $ 391,321
Volkswagen AG................... 619 256,742
Volkswagen AG Warrants*......... 370 55,849
------------
15,348,678
------------
HONG KONG -- 5.0%
Cathay Pacific Air.............. 464,000 731,890
Dao Heng Bank Group Ltd......... 243,000 1,165,596
First Pacific Co. Ltd........... 926,954 1,204,459
Guangdong Investments Ltd....... 813,000 783,095
Guangzhou Investment Co. Ltd.... 1,616,000 773,056
Guoco Group Ltd................. 276,000 1,545,129
Hong Kong Land Holdings Ltd..... 929,582 2,584,238
Hopewell Holdings Ltd........... 1,740,000 1,124,830
Hutchison Whampoa Ltd........... 329,000 2,584,104
New World Development Co. Ltd... 367,141 2,480,201
Shanghai Petrochemical Co. Ltd.
Cl-H.......................... 1,660,000 504,364
Swire Pacific Ltd. Cl-A......... 208,000 1,983,321
Wharf Holdings Ltd.............. 449,000 2,240,791
Yizheng Chemical Fibre Co. Ltd.
Cl-H.......................... 1,306,000 317,445
------------
20,022,519
------------
INDONESIA -- 0.0%
PT Telekomunikasi Indonesia..... 88,000 151,756
------------
ITALY -- 1.8%
Banca Fideuram SPA.............. 178,490 390,593
Ente Nazionale Idrocarburi
SPA........................... 205,366 1,049,064
Finanziaria Autogrill SPA*...... 36,752 35,450
Industrie Natuzzi SPA [ADR]..... 15,260 350,980
Istituto Mobiliare Italiano
SPA........................... 68,710 586,109
Istituto Nazionale Delle
Assicurazioni................. 106,480 138,061
Italgas......................... 112,936 469,455
La Rinascente SPA............... 22,800 131,654
La Rinascente SPA Warrants*..... 1,140 500
Mediolanum SPA*................. 38,440 362,204
Sasib SPA....................... 39,177 73,136
Stet di Risp SPA................ 139,220 468,177
Stet Societa' Finanziaria
Telefonica SPA................ 272,480 1,233,669
Telecom Italia Mobile SPA....... 604,848 1,398,169
Telecom Italia SPA.............. 202,673 523,971
Unicem SPA*..................... 8,642 56,139
------------
7,267,331
------------
JAPAN -- 20.9%
Advantest Corp.................. 6,400 300,493
Alps Electric Co. Ltd........... 50,000 544,747
Amada Co. Ltd................... 109,000 848,249
Canon, Inc...................... 162,000 3,585,992
Citizen Watch Co. Ltd........... 68,000 488,024
Dai Nippon Screen Manufacturing
Co. Ltd....................... 88,000 650,584
Daifuku Co. Ltd................. 18,000 227,237
Daiichi Pharmaceutical Co.
Ltd........................... 112,000 1,801,297
Daiwa House Industry Co. Ltd.... 141,000 1,816,602
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
DDI Corp........................ 170 $ 1,125,984
Denso Corp. Ltd................. 145,000 3,498,054
East Japan Railway Co........... 358 1,612,780
Fanuc Co........................ 26,000 834,068
Hitachi Ltd..................... 193,000 1,802,335
Hitachi Zosen Corp.............. 181,000 704,280
Honda Motor Co.................. 11,000 314,829
Inax............................ 46,000 341,271
Ishihara Sangyo Kaisha Ltd.*.... 56,000 135,581
Ito-Yokado Co. Ltd.............. 42,000 1,830,350
Kao Corp........................ 47,000 548,638
Kawada Industries............... 14,000 85,949
Kokuyo.......................... 58,000 1,434,328
Komatsu Ltd..................... 135,000 1,108,949
Komori Corp..................... 49,000 1,042,283
Kumagai Gumi Co. Ltd............ 88,000 218,383
Kuraray Co. Ltd................. 126,000 1,165,759
Kyocera Corp.................... 51,000 3,183,917
Makita Corp..................... 84,000 1,176,654
Matsushita Electric Industrial
Co............................ 153,000 2,500,389
Mauri Co. Ltd................... 101,000 1,825,249
Mitsubishi Corp................. 65,000 674,449
Mitsubishi Heavy Industries
Ltd........................... 454,000 3,611,587
Mitsubishi Paper Mills Ltd...... 64,000 250,687
Mitsui Fudosan.................. 243,000 2,437,354
Mitsui Petrochemical
Industries.................... 43,000 223,087
Murata Manufacturing Co. Ltd.... 56,000 1,864,246
National House Industrial....... 26,000 346,217
NEC Corp........................ 288,000 3,486,381
Nippon Hodo..................... 22,000 254,907
Nippon Steel Co................. 705,000 2,084,825
Nippon Telegraph & Telephone
Corp.......................... 142 1,078,046
Nomura Securities Co. Ltd....... 150,000 2,256,809
Pioneer Electronic Corp......... 68,000 1,299,438
Sangetsu Co. Ltd................ 11,000 230,177
Sankyo Co. Ltd.................. 104,000 2,949,589
Sega Enterprises................ 15,700 529,442
Sekisui Chemical Co. Ltd........ 165,000 1,669,261
Sekisui House Ltd............... 107,000 1,091,742
Seven Eleven Japan.............. 16,000 938,003
Sharp Corp...................... 135,000 1,926,070
Shin-Etsu Chemical Co........... 95,000 1,733,247
Shiseido Co. Ltd................ 30,000 347,601
Sony Corp....................... 37,700 2,474,215
Sumitomo Corp................... 218,000 1,721,003
Sumitomo Electric Industries.... 211,000 2,955,642
Sumitomo Forestry Co............ 73,000 890,013
TDK Corp........................ 37,000 2,415,478
Teijin Ltd...................... 303,000 1,325,707
Tokio Marine & Fire Insurance
Co............................ 47,000 442,974
Tokyo Electron Ltd.............. 17,000 521,833
Tokyo Steel Manufacturing....... 56,500 806,096
Toppan Printing Co. Ltd......... 95,000 1,191,094
UNY Co. Ltd..................... 51,000 934,890
Yurtec Corp..................... 22,050 299,339
------------
84,014,704
------------
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
KOREA -- 0.7%
Cho Hung Bank Co. Ltd........... 41,600 $ 334,670
Hanil Bank...................... 25,200 173,814
Hanil Securities Co.*........... 14,060 102,662
Kookmin Bank.................... 14,003 229,903
Korea Electric Power Corp....... 22,700 664,074
Pohang Iron & Steel Co. Ltd..... 6,030 346,802
Samsung Electronics Co.*........ 8,702 468,397
Samsung Electronics Co. [GDR]
144A*......................... 1,986 24,209
Samsung Electronics Co. [GDS]
144A*......................... 108 2,787
Samsung Fire and Marine
Insurance..................... 165 67,519
Seoul Bank*..................... 11,000 55,595
Shinhan Bank.................... 7,110 114,737
Yukong Ltd...................... 8,383 159,505
Yukong Ltd. Cl-F*............... 525 9,989
------------
2,754,663
------------
MALAYSIA -- 3.3%
Affin Holdings BHD.............. 614,000 1,689,819
Berjaya Sports Toto BHD......... 268,000 1,337,188
Commerce Asset Holding BHD...... 136,000 1,023,245
MBF Capital BHD................. 526,000 853,998
Multi-Purpose Holdings BHD...... 673,000 1,305,865
Multi-Purpose Holdings BHD
Rights*....................... 673,000 0
Renong BHD...................... 680,000 1,206,352
Renong BHD Iculs*............... 79,000 33,160
Resorts World BHD............... 161,000 733,180
Tanjong PLC..................... 329,000 1,315,844
Technology Resources Industries
BHD*.......................... 247,000 487,095
Time Engineering BHD............ 190,000 352,117
United Engineers Ltd. .......... 307,000 2,771,789
------------
13,109,652
------------
MEXICO -- 1.6%
Cementos de Mexico
SA de CV [ADS]................ 65,090 464,092
Cemex SA [ADS] 144A............. 50,068 356,985
Cemex SA Cl-B................... 67,925 264,038
Cifra SA de CV Cl-B [ADR]*...... 575,870 703,713
Fomento Economico Mexicano
SA Cl-B....................... 46,409 157,998
Gruma SA Cl-B................... 110,638 671,811
Gruma SA de CV [ADS] 144A*...... 8,835 212,482
Grupo Embotelladoras de Mexico
SA Cl-B*...................... 10,080 3,829
Grupo Financiero Banamex SA
Cl-B*......................... 146,200 305,698
Grupo Financiero Banamex SA
Cl-L*......................... 4,184 7,951
Grupo Financiero Bancomer SA
Cl-B [GDR]*................... 2,330 18,780
Grupo Financiero Bancomer SA
Cl-L*......................... 1,725 563
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Grupo Industrial Maseca SA
de CV Cl-B.................... 218,095 $ 274,281
Grupo Modelo SA Cl-C............ 48,506 279,131
Grupo Televisia SA [GDR]*....... 5,034 128,996
Kimberly-Clark de Mexico SA
Cl-A.......................... 22,464 436,610
Panamerica Beverages, Inc.
Cl-A.......................... 14,270 668,906
Telefonos de Mexico SA
Cl-L [ADR].................... 42,014 1,386,462
------------
6,342,326
------------
NETHERLANDS -- 10.4%
ABN AMRO Holding NV............. 33,903 2,209,356
AKZO Nobel NV................... 1,902 260,246
CSM NV.......................... 30,721 1,709,889
Elsevier NV..................... 446,712 7,562,610
Fortis Amev NV.................. 38,702 1,357,532
Gucci Group NV.................. 2,782 177,353
Hagemeyer NV.................... 7,792 623,884
ING Groep NV.................... 95,792 3,454,466
ING Groep Warrants*............. 79,813 573,795
Koninklijke Ahold NV............ 27,381 1,714,487
Koninklijke PTT Nederland NV.... 11,749 448,898
Nutricia Verenigde Bedrijven
NV............................ 6,130 932,934
Otra NV......................... 6,490 111,754
Polygram NV..................... 47,347 2,415,663
Royal Dutch Petroleum Co. NV.... 45,766 8,037,176
Unilever NV..................... 14,440 2,558,479
Wolters Kluwer NV............... 57,727 7,681,091
------------
41,829,613
------------
NEW ZEALAND -- 0.6%
Air New Zealand Ltd. ........... 72,545 196,941
Carter Holt Harvey Ltd. ........ 79,700 180,867
Fernz Corp. Ltd. ............... 45,100 154,638
Fletcher Challenge Building
Ltd. ......................... 98,250 302,147
Fletcher Challenge Energy
Ltd. ......................... 18,250 52,899
Fletcher Challenge Forest
Ltd. ......................... 341,573 572,307
Fletcher Challenge Paper
Ltd. ......................... 29,500 60,689
Telecom Corp. of New Zealand
Ltd. ......................... 185,000 944,291
------------
2,464,779
------------
NORWAY -- 1.7%
Bergesen D.Y. AS Cl-A........... 5,170 126,801
Norsk Hydro AS.................. 64,870 3,518,615
Orkla AS Cl-A................... 40,140 2,808,317
Saga Petroleum AS Cl-B.......... 15,160 238,346
------------
6,692,079
------------
PANAMA -- 0.1%
Banco Latinamericano de
Exportaciones SA Cl-E......... 4,035 204,776
------------
PERU -- 0.0%
Telefonica del Peru SA C1-B
[ADR]......................... 5,598 106,362
Telefonica del Peru SA Cl-B..... 26,690 49,957
------------
156,319
------------
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
PHILIPPINES -- 0.1%
Philippine National Bank*....... 43,400 $ 515,684
------------
PORTUGAL -- 0.5%
Estabelecimentos Jeronimo
Martins & Filho............... 16,550 853,983
Estabelecimentos Jeronimo
Martins & Filho Bond Warrants
[CVT]*........................ 16,550 146,011
Estabelecimentos Jeronimo
Martins & Filho Bonus
Rights*....................... 16,550 284,661
Estabelecimentos Jeronimo
Martins & Filho New Shares*... 16,550 569,519
------------
1,854,174
------------
RUSSIA -- 0.0%
Gazprom [ADS]*.................. 5,750 101,488
------------
SINGAPORE -- 2.3%
City Developments............... 33,000 297,297
DBS Land Ltd. .................. 190,000 699,628
Developmental Bank of Singapore
Ltd. Cl-F..................... 41,000 554,054
Far East Levingston Shipbuilding
Ltd. ......................... 52,000 271,414
Fraser & Neave Ltd. ............ 81,000 833,977
Keppel Corp. Ltd. .............. 44,000 342,914
Overseas Union Bank Ltd. Cl-F... 222,000 1,714,286
Singapore Airlines Ltd. ........ 10,000 90,805
Singapore Land Ltd. ............ 161,000 892,142
Singapore Press Holdings
Ltd. ......................... 63,000 1,243,243
Total Access Communication
Ltd. ......................... 12,000 82,800
United Industrial Corp. Ltd. ... 327,000 275,890
United Overseas Bank Ltd. ...... 164,400 1,833,719
United Overseas Bank Ltd.
Warrants*..................... 27,092 95,692
------------
9,227,861
------------
SPAIN -- 2.6%
Aquas de Barcelona Rfd.*........ 58 2,406
Argentaria SA................... 12,814 575,165
Banco Popular Espanol SA........ 5,190 1,022,443
Banco Santander SA.............. 16,946 1,087,927
Centros Comerciales Continente
SA............................ 6,360 130,698
Centros Comerciales Pryca SA.... 14,319 304,212
Empresa Nacional de
Electridad SA................. 31,785 2,268,954
Fomento de Construcciones y
Contratas SA.................. 1,297 121,243
Gas Natural SDG................. 6,233 1,454,238
General de Aguas de Barcelona
SA............................ 4,081 170,252
Iberdrola SA.................... 86,553 1,230,358
Repsol SA....................... 43,588 1,676,980
Repsol SA [ADR]................. 110 4,194
Telefonica de Espana SA......... 18,270 425,557
------------
10,474,627
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
SWEDEN -- 2.7%
ABB AB Cl-A..................... 6,680 $ 757,314
Astra AB Cl-B................... 95,480 4,625,056
Atlas Copco AB Cl-B............. 40,130 980,812
Electrolux AB Cl-B.............. 22,740 1,325,850
Esselte AB...................... 5,800 128,948
Hennes & Mauritz AB Cl-B........ 10,350 1,438,537
Sandvik AB Cl-A................. 6,140 166,339
Sandvik AB Cl-B................. 43,420 1,182,688
Scribona AB Cl-B................ 5,500 61,949
Stora Kopparbergs Bergslags
Aktiebolag AB Cl-B............ 20,740 283,988
------------
10,951,481
------------
SWITZERLAND -- 4.2%
ABB AG.......................... 2,439 3,034,398
CS Holding AG................... 7,130 732,552
Nestle SA....................... 3,048 3,272,791
Novartis AG*.................... 3,960 4,536,042
Roche Holding AG................ 525 4,085,687
Swiss Bank Corp................. 5,920 1,125,786
------------
16,787,256
------------
THAILAND -- 0.4%
Advanced Information
Services PLC.................. 26,700 228,961
Bangkok Bank PLC................ 67,400 651,538
Siam Cement Co. PLC............. 3,000 94,017
Siam Commercial Bank PLC........ 34,300 248,677
Thai Farmers Bank PLC........... 41,400 258,195
------------
1,481,388
------------
UNITED KINGDOM -- 16.6%
Abbey National PLC.............. 304,000 3,983,420
Argos PLC....................... 158,749 2,089,661
Asda Group PLC.................. 704,450 1,484,145
British Gas PLC................. 126,210 485,323
British Petroleum Co. PLC....... 124,840 1,497,900
Cable & Wireless PLC............ 267,000 2,220,350
Cadbury Schweppes PLC........... 205,456 1,733,190
Caradon PLC..................... 315,700 1,292,390
Coats Viyella PLC............... 91,270 207,922
Compass Group PLC............... 117,000 1,237,496
David Smith Holdings PLC........ 197,900 1,064,379
East Midlands Electricity PLC... 48,385 551,544
Electrocomponents PLC........... 100,000 791,340
GKN PLC......................... 17,000 291,477
Glaxo Wellcome PLC.............. 189,000 3,068,960
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Grand Metropolitan PLC.......... 336,300 $ 2,643,995
Guinness PLC.................... 267,640 2,097,313
Heywood Williams Group PLC...... 32,010 130,218
Hillsdown Holdings PLC.......... 95,160 325,991
Kingfisher PLC.................. 281,950 3,049,766
Ladbroke Group PLC.............. 150,000 593,505
Laing, (John) PLC Cl-A.......... 70,000 335,120
London Electricity PLC.......... 105,517 1,229,905
National Westminster Bank PLC... 542,670 6,371,832
Rank Group PLC.................. 207,120 1,545,010
Reed International PLC.......... 258,370 4,874,697
Rolls-Royce PLC................. 78,140 344,645
RTZ Corp. PLC................... 136,600 2,191,187
Safeway PLC..................... 254,660 1,762,232
Sears PLC....................... 75,490 122,838
Shell Transport & Trading Co.
PLC........................... 225,000 3,898,248
Smithkline Beecham PLC.......... 449,220 6,228,694
T & N PLC....................... 181,680 539,918
Tesco PLC....................... 208,000 1,262,992
Tomkins PLC..................... 584,220 2,686,840
United News & Media PLC......... 231,470 2,757,483
------------
66,991,926
------------
VENEZUELA -- 0.1%
Cia Anonima Nacional Tele
Venezuela [ADS]*.............. 8,050 226,406
------------
TOTAL FOREIGN STOCK
(COST $337,575,748)............... 384,091,392
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000)
-------- --------
<S> <C> <C> <C>
FOREIGN BONDS -- 0.0%
BELGIUM -- 0.0%
Kredietbank NV
5.75%.............. 11/30/03 900 39,413
------------
ITALY -- 0.0%
Danieli & Co.
7.25%.............. 01/01/00 4,380 2,903
------------
TOTAL FOREIGN BONDS
(COST $29,477)................... 42,316
------------
TOTAL INVESTMENTS -- 95.4%
(COST $337,605,225).............. 384,133,708
OTHER ASSETS LESS
LIABILITIES -- 4.6%.............. 18,425,379
------------
NET ASSETS -- 100.0%............... $402,559,087
============
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Buy ESP $ 260,551 130.8050 01/97 $ 2,745
Buy MYR 355,259 2.5270 01/97 214
---------
$ 2,959
---------
Sell FRF $ 525,531 5.2260 01/97 $ (4,734)
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 0.2% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
FOREIGN BONDS -- 82.3%
AUSTRALIA -- 3.8%
Australian Government
7.00%................... 04/15/00 4,650 $ 3,741,817
-----------
CANADA -- 6.5%
Canadian Government
6.25%................... 09/15/98 3,200 2,419,427
7.25%................... 06/01/03 1,200 935,942
8.00%................... 06/01/23 1,550 1,258,705
Province of Ontario
8.25%................... 12/01/05 1,000 820,142
Province of Quebec
7.75%................... 03/30/06 1,200 939,697
-----------
6,373,913
-----------
CZECH REPUBLIC -- 1.5%
Czech Electric Co.
14.375%................. 01/27/01 14,000 531,273
European Bank
Reconstruction &
Development
11.50%.................. 07/08/97 8,000 293,343
European Investment Bank
11.00%.................. 10/10/01 8,000 294,660
International Bank
Reconstruction &
Development Global Bond
11.50%.................. 10/09/97 8,000 293,343
-----------
1,412,619
-----------
DENMARK -- 3.9%
Kingdom of Denmark
7.00%................... 11/15/07 8,000 1,384,076
Nykredit
7.00%................... 10/01/16 11,502 1,976,252
6.00%................... 10/01/26 3,000 442,693
-----------
3,803,021
-----------
EUROPEAN CURRENCY UNIT -- 2.7%
French O.A.T.
7.50%................... 04/25/05 1,000 1,385,346
Republic of Portugal
6.00%................... 02/16/04 995 1,262,798
-----------
2,648,144
-----------
FINLAND -- 0.7%
Finnish Government
7.25%................... 04/18/06 3,000 699,605
-----------
FRANCE -- 3.4%
French Treasury Bill
4.50%................... 10/12/98 6,000 1,178,272
7.75%................... 04/12/00 8,000 1,717,275
French O.A.T. Principal
Strip
6.46%................... 10/25/05 4,000 464,915
-----------
3,360,462
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
GERMANY -- 14.5%
Bundesobligation
5.75%................... 08/22/00 3,500 $ 2,385,784
Deutscheland Republic
6.25%................... 04/26/06 2,750 1,849,317
Federal National Mtge.
Assoc. Global Bond
5.00%................... 02/16/01 3,500 2,307,905
General Electric Capital
Corp.
7.25%................... 02/03/00 1,580 1,119,258
Inter-America Development
Bank
7.00%................... 06/08/05 4,500 3,161,371
KFW International Finance,
Inc.
6.75%................... 06/20/05 3,500 2,391,021
Land Baden-Wuerttemberg
6.50%................... 07/21/06 1,500 1,004,229
-----------
14,218,885
-----------
GREECE -- 1.0%
Hellenic Republic [FRN]
14.30%.................. 08/14/03 230,000 951,128
-----------
HUNGARY -- 0.8%
Hungarian Government
23.50%.................. 11/06/97 60,000 378,267
24.00%.................. 03/21/98 45,000 288,407
21.50%.................. 10/03/98 25,000 156,900
-----------
823,574
-----------
IRELAND -- 1.1%
Irish Government Treasury
8.00%................... 10/18/00 600 1,085,588
-----------
ITALY -- 9.6%
Italian Government
9.50%................... 12/01/99 2,000,000 1,412,205
9.50%................... 02/01/01 4,700,000 3,386,529
8.25%................... 07/01/01 1,000,000 699,803
9.00%................... 10/01/03 3,000,000 2,154,528
8.75%................... 07/01/06 2,500,000 1,797,080
-----------
9,450,145
-----------
JAPAN -- 12.0%
Asian Development Bank
3.125%.................. 06/29/05 288,000 2,626,338
Export-Import Bank of
Japan
4.375%.................. 10/01/03 150,000 1,475,326
2.875%.................. 07/28/05 200,000 1,754,980
International Bank
Reconstruction &
Development Global Bond
4.75%................... 12/20/04 200,000 2,036,782
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
Japanese Government
3.10%................... 03/20/06 180,000 $ 1,608,872
Republic of Austria
5.00%................... 01/22/01 150,000 1,486,808
4.50%................... 09/28/05 80,000 801,264
-----------
11,790,370
-----------
NETHERLANDS -- 1.7%
Netherlands Government
9.00%................... 01/15/01 2,500 1,687,877
-----------
PHILIPPINES -- 0.3%
Philippines Government
12.50%.................. 04/25/01 8,000 295,867
-----------
SPAIN -- 3.7%
Spanish Government
7.90%................... 02/28/02 150,000 1,236,349
10.90%.................. 08/30/03 250,000 2,385,468
-----------
3,621,817
-----------
SWEDEN -- 1.7%
Swedish Government
10.25%.................. 05/05/00 10,000 1,700,658
-----------
UNITED KINGDOM -- 13.4%
Alliance & Leicester BHD
8.75%................... 12/07/06 500 874,627
Annington Finance
7.75%................... 10/02/11 500 859,968
Bayerische Landesbank
Girozentrale
8.50%................... 02/26/03 400 709,475
Deutsche Siedlungs Bank
Finance BV
7.50%................... 12/27/00 900 1,554,096
Dresdner Finance BV
7.125%.................. 12/28/01 500 846,258
Guaranteed Export Finance
Corp.
10.625%................. 09/15/01 750 1,432,376
Halifax Building Society
8.75%................... 07/10/06 750 1,329,605
Swiss Bank Corp.
8.75%................... 06/20/05 500 892,672
United Kingdom Treasury
7.00%................... 11/06/01 450 762,596
8.00%................... 06/10/03 560 989,774
6.75%................... 11/26/04 1,000 1,645,413
6.25%................... 11/25/10 800 1,207,564
-----------
13,104,424
-----------
TOTAL FOREIGN BONDS
(COST $79,486,836).................... 80,769,914
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 8.1%
ARGENTINA -- 1.3%
Republic of Argentina
[FRB, BRB]
6.625%.................. 03/31/05 $ 608 $ 529,751
Republic of Argentina
Bocon Pre II [FRN, PIK]
5.375%.................. 04/01/01 505 623,675
Republic of Argentina
Bocon Pre IV [FRN, PIK]
5.6875%................. 09/01/02 150 161,438
-----------
1,314,864
-----------
BRAZIL -- 0.9%
Republic of Brazil
Capitalization [FRB, BRB]
8.00%................... 04/15/14 980 723,526
Republic of Brazil Disc.
ZL [FRN, BRB]
6.50%................... 04/15/24 250 192,969
-----------
916,495
-----------
BULGARIA -- 0.2%
National Republic of
Bulgaria [FRN]
6.6875%................. 07/28/11 200 102,750
2.25%................... 07/28/12 320 123,000
-----------
225,750
-----------
ECUADOR -- 0.2%
Republic of Ecuador PDI
[FRN]
3.00%................... 02/27/15 238 146,316
-----------
MEXICO -- 0.8%
Grupo Elektra SA
12.75%.................. 05/15/01 200 214,000
United Mexican States Cl-A
[BRB, FRB] (with Value
Recovery Rights
Attached)
6.25%................... 12/31/19 250 183,438
United Mexican States
Global Bond
11.375%................. 09/15/16 375 390,000
-----------
787,438
-----------
PANAMA -- 0.3%
Republic of Panama [FRN]
6.5468%................. 05/10/02 258 249,367
-----------
PERU -- 0.2%
Peru Interest Note [WI]
3.25%................... 12/29/49 350 192,063
-----------
PHILIPPINES -- 1.6%
Philippines Peso Linked
Note
9.4678%................. 01/06/97 650 649,122
9.3253%................. 12/11/97 950 868,300
-----------
1,517,422
-----------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- -----------
<S> <C> <C> <C>
POLAND -- 0.6%
Government of Poland PDI
3.75%................... 10/27/14 $ 250 $ 211,250
4.00%................... 10/27/14 125 105,625
Poland Communication, Inc.
9.875%.................. 11/01/03 300 298,500
-----------
615,375
-----------
RUSSIA -- 1.1%
Republic of Kazakhstan
9.25%................... 12/20/99 100 100,125
Russia Loan Participation*
0.00%................... 06/20/26 1,050 835,406
Russian Interest Note [WI]
0.75%................... 12/29/49 250 173,594
-----------
1,109,125
-----------
VENEZUELA -- 0.9%
Republic of Venezuela
[FRN, BRB]
6.625%.................. 12/18/07 1,000 882,500
-----------
TOTAL SOVEREIGN ISSUES
(COST $7,344,712)..................... 7,956,715
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C>
PURCHASED OPTIONS -- 0.0%
Put Option on German
Deutschemarks,
Strike Price DEM 1.55,
Expire 01/17/97
(COST $38,720).................... 6,820 29,040
-----------
TOTAL INVESTMENTS -- 90.4%
(COST $86,870,268).................... 88,755,669
OTHER ASSETS LESS LIABILITIES -- 9.6%... 9,479,111
-----------
NET ASSETS -- 100.0%.................... $98,234,780
===========
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------
(DOLLAR BASED)
<S> <C> <C> <C> <C> <C>
Buy GBP $ 457,604 0.5894 01/97 $ 4,281
Buy IEP 199,278 0.6035 01/97 4,712
Buy ITL 500,000 1,515.2000 01/97 (2,374)
Buy JPY 13,091,589 110.9825 01/97 (473,365)
Buy MYR 525,000 2.5027 01/97 (5,087)
----------
$ (471,833)
==========
Sell MYR $ 521,251 2.5207 01/97 $ 1,339
==========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL UNREALIZED
IN LOCAL IN LOCAL EXPIRATION APPRECIATION
BUY CURRENCY SELL CURRENCY MONTH (DEPRECIATION)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUD 594,389 DEM 750,000 01/97 $ (15,437)
AUD 737,244 GBP 360,000 01/97 (30,047)
DEM 2,350,047 GBP 934,412 01/97 (67,828)
ECU 709,946 SEK 6,021,903 01/97 4,413
ESP 159,687,880 IEP 749,603 01/97 (38,058)
ITL 1,621,920,728 DEM 1,629,776 01/97 4,425
JPY 100,315,350 ECU 709,946 01/97 (23,090)
NOK 5,637,020 DKK 5,172,052 01/97 6,231
----------
$ (159,391)
==========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 90.4%
AEROSPACE -- 2.0%
Boeing Co. ........................ 25,000 $ 2,659,375
------------
AUTOMOTIVE PARTS -- 1.3%
Lear Seating Corp.*................ 50,000 1,706,250
------------
CHEMICALS -- 1.7%
Praxair, Inc....................... 50,000 2,306,250
------------
COMPUTER HARDWARE -- 1.9%
3Com Corp.*........................ 35,000 2,568,125
------------
COMPUTER SERVICES & SOFTWARE -- 11.8%
BMC Software, Inc.*................ 50,000 2,068,750
Cadence Design Systems, Inc.*...... 55,000 2,186,250
Cisco Systems, Inc.*............... 25,000 1,590,625
Computer Associates International,
Inc.............................. 45,000 2,238,750
Informix Corp.*.................... 80,000 1,630,000
Microsoft Corp.*................... 30,000 2,478,750
National Data Corp................. 50,000 2,175,000
Oracle Corp.*...................... 40,000 1,670,000
------------
16,038,125
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.0%
Altera Corp.*...................... 30,000 2,180,625
Input-Output, Inc.*................ 115,000 2,127,500
Sanmina Corp.*..................... 45,000 2,542,500
------------
6,850,625
------------
ENTERTAINMENT & LEISURE -- 1.3%
Hasbro, Inc........................ 45,000 1,749,375
------------
FARMING & AGRICULTURE -- 1.7%
Agco, Inc.......................... 80,000 2,290,000
------------
FINANCIAL-BANK & TRUST -- 3.9%
Citicorp........................... 25,000 2,575,000
Wells Fargo & Co................... 10,000 2,697,500
------------
5,272,500
------------
FINANCIAL SERVICES -- 3.9%
Federal Home Loan Mtge. Corp....... 25,000 2,753,125
Federal National Mtge. Assoc....... 70,000 2,607,500
------------
5,360,625
------------
HEALTHCARE SERVICES -- 3.0%
Oxford Health Plans, Inc.*......... 35,000 2,049,688
United Healthcare Corp............. 45,000 2,025,000
------------
4,074,688
------------
INSURANCE -- 2.1%
Conseco, Inc....................... 45,000 2,868,750
------------
MEDICAL SUPPLIES & EQUIPMENT -- 5.6%
Amerisource Health Corp. Cl-A*..... 50,000 2,412,500
Boston Scientific Corp.*........... 50,000 3,000,000
Steris Corp.*...................... 50,000 2,175,000
------------
7,587,500
------------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
OIL & GAS -- 14.0%
BJ Services Co.*................... 50,000 $ 2,550,000
Diamond Offshore Drilling*......... 20,000 1,140,000
Ensco International, Inc.*......... 40,000 1,940,000
Falcon Drilling Co., Inc.*......... 70,000 2,747,500
Petroleum Geo Services [ADR]*...... 50,000 1,950,000
Schlumberger Ltd................... 25,000 2,496,875
Tidewater, Inc..................... 40,000 1,810,000
Transocean Offshore, Inc........... 40,000 2,505,000
Western Atlas, Inc.*............... 28,000 1,984,500
------------
19,123,875
------------
PHARMACEUTICALS -- 11.7%
Biochem Pharma, Inc.*.............. 40,000 2,010,000
Biogen, Inc.*...................... 65,000 2,518,750
Cardinal Health, Inc............... 30,000 1,747,500
Incyte Pharmaceuticals, Inc.*...... 7,700 396,550
Lilly, (Eli) & Co.................. 35,000 2,555,000
McKesson Corp...................... 35,000 1,960,000
Pfizer, Inc........................ 30,000 2,486,250
Warner Lambert Co.................. 30,000 2,250,000
------------
15,924,050
------------
REAL ESTATE -- 4.7%
Innkeepers USA Trust [REIT]........ 150,000 2,081,250
Patriot American Hospitality, Inc.
[REIT]........................... 50,000 2,156,250
Starwood Lodging Trust [REIT]...... 40,000 2,205,000
------------
6,442,500
------------
RETAIL & MERCHANDISING -- 0.7%
Saks Holdings, Inc.*............... 36,600 988,200
------------
SEMI-CONDUCTORS -- 8.4%
Adaptec, Inc.*..................... 60,000 2,400,000
Analog Devices, Inc.*.............. 75,000 2,540,625
Atmel Corp.*....................... 60,000 1,987,500
Intel Corp......................... 20,000 2,618,750
VLSI Technology, Inc.*............. 80,000 1,910,000
------------
11,456,875
------------
TELECOMMUNICATIONS -- 4.5%
Boston Technology, Inc.*........... 75,000 2,156,250
Nokia Corp. Cl-A [ADR]............. 70,000 4,033,750
------------
6,190,000
------------
TRANSPORTATION -- 1.2%
Atlas Air, Inc.*................... 35,000 1,671,250
------------
TOTAL COMMON STOCK
(COST $107,785,138).................. 123,128,938
------------
PREFERRED STOCK -- 2.2%
HEALTHCARE SERVICES
Pacificare Health Systems, Inc.
Cl-B
(COST $3,031,827).................. 35,000 2,983,750
------------
</TABLE>
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.7%
Temporary Investment Cash Fund..... 506,824 $ 506,824
Temporary Investment Fund.......... 506,824 506,824
------------
(COST $1,013,648).................. 1,013,648
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 6.6%
U.S. Treasury Bill
4.77%
(COST $8,948,722)..... 02/13/97 $9,000 8,948,722
-----------
</TABLE>
<TABLE>
<CAPTION>
VALUE
------------
<S> <C>
TOTAL INVESTMENTS -- 99.9%
(COST $120,779,335)................. $136,075,058
OTHER ASSETS LESS
LIABILITIES -- 0.1%................. 171,796
-----------
NET ASSETS -- 100.0%.................. $136,246,854
===========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
FOREIGN STOCK -- 80.9%
AUSTRALIA -- 1.3%
Village Roadshow Ltd............ 396,000 $ 1,553,003
-----------
BELGIUM -- 0.7%
S.A. D'ieteren NV............... 4,250 877,783
-----------
CANADA -- 3.1%
Cinar Films, Inc. Cl-B*......... 47,500 1,235,000
Gulf Canada Resources Ltd.*..... 320,000 2,360,000
-----------
3,595,000
-----------
CHILE -- 1.1%
Banco de A. Edwards [ADR]....... 53,000 950,688
Compania Cervecerias Unidas SA
[ADR]......................... 17,900 288,638
-----------
1,239,326
-----------
DENMARK -- 1.5%
Kobenhavns Lufthavne............ 17,400 1,776,900
-----------
FINLAND -- 5.3%
Amer Group Ltd.................. 95,000 1,965,803
KCI Konecranes International*... 50,000 1,579,177
Oy Tamro AB..................... 210,800 1,409,619
Valmet Corp..................... 75,000 1,323,241
-----------
6,277,840
-----------
FRANCE -- 7.3%
Altran Technologies SA.......... 3,500 1,126,286
Dassault Systems SA*............ 21,000 970,079
Guilbert SA..................... 11,700 2,292,435
Salomon SA...................... 18,200 1,563,423
Skis Rossignol SA............... 40,000 1,109,588
Sylea SA........................ 14,208 1,560,595
-----------
8,622,406
-----------
GERMANY -- 6.9%
Marschollek Lautenschlaeger Ung
Partner AG.................... 18,150 2,527,066
Plettac AG...................... 9,370 1,725,250
Porsche AG Pfd.................. 1,400 1,252,440
Schwarz Pharma AG............... 20,700 1,521,861
Turbon International AG......... 42,000 1,087,573
-----------
8,114,190
-----------
HONG KONG -- 5.7%
Asia Satellite
Telecommunications [ADR]*..... 7,000 163,625
Guoco Group Ltd................. 360,000 2,015,386
Manhattan Card Co. Ltd.......... 3,515,500 1,783,999
New Asia Realty & Trust Co.
Cl-A.......................... 182,000 671,808
South China Morning Post Ltd.... 932,000 771,194
VTech Holdings Ltd.............. 753,000 1,353,248
-----------
6,759,260
-----------
INDONESIA -- 0.8%
London Sumatra*................. 95,000 251,270
Matahari Putra Prima............ 531,000 617,964
Sorini Corp..................... 72,000 33,517
-----------
902,751
-----------
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
ITALY -- 2.8%
Bulgari SPA..................... 85,000 $ 1,717,848
Industria Machine Automatiche
SPA........................... 140,000 546,588
Industrie Natuzzi SPA [ADR]..... 46,000 1,058,000
-----------
3,322,436
-----------
JAPAN -- 5.8%
Doutor Coffee Co. Ltd........... 47,000 1,991,353
Laox Ltd........................ 85,000 1,293,558
Noritsu Koki Co. Ltd............ 39,000 1,837,873
Paris Miki Inc.................. 47,000 1,698,746
-----------
6,821,530
-----------
MALAYSIA -- 0.4%
Chemical Co. of Malaysia BHD
Warrants*..................... 10,000 9,266
Kentucky Fried Chicken BHD...... 106,666 439,285
Kentucky Fried Chicken Holdings
Warrants*..................... 21,333 5,276
-----------
453,827
-----------
MEXICO -- 0.2%
Grupo Iusacell [ADR]*........... 33,000 251,625
-----------
NETHERLANDS -- 5.9%
Baan Company NV*................ 26,000 903,500
Grolsch NV...................... 52,000 2,019,944
Hunter Douglas NV............... 31,200 2,107,375
IHC Caland NV................... 33,000 1,888,393
-----------
6,919,212
-----------
NEW ZEALAND -- 1.1%
Tranz Rail Holdings [ADR]*...... 75,000 1,326,563
-----------
NORWAY -- 5.4%
Kverneland AS................... 85,000 2,352,016
Petroleum Geo Services [ADR]*... 50,000 1,950,000
Tomra Systems AS................ 129,500 2,025,823
-----------
6,327,839
-----------
PANAMA -- 1.4%
Banco Latinoamericano de
Exportaciones SA Cl-E......... 33,000 1,674,750
-----------
PHILIPPINES -- 0.1%
International Container Terminal
Services, Inc.*............... 197,400 103,203
-----------
SWEDEN -- 3.5%
ASG AB Cl-B..................... 76,000 1,566,572
BT Industries AB................ 77,900 1,456,632
Enator AB*...................... 41,500 1,066,233
-----------
4,089,437
-----------
UNITED KINGDOM -- 20.6%
Abacus Polar PLC................ 27,000 82,782
British-Borneo Petro Syndica
PLC........................... 103,200 1,431,811
BTG PLC......................... 49,000 380,622
Cairn Energy PLC*............... 186,000 1,328,526
Capital Radio PLC............... 114,500 1,071,807
CMG PLC......................... 121,800 1,752,458
</TABLE>
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
DFS Furniture Co. PLC........... 110,000 $ 1,137,080
Dorling Kindersly Holdings
PLC........................... 225,000 1,585,891
Flextech PLC*................... 192,800 2,237,368
J.D. Wetherspoon PLC............ 115,000 2,304,649
JBA Holdings PLC................ 200,000 1,815,628
Medeva PLC [ADR]................ 68,450 1,155,094
Misys PLC....................... 6,900 131,956
Next PLC........................ 142,000 1,380,306
Parity PLC...................... 213,800 1,620,474
Pizza Express PLC............... 156,100 1,410,413
Psion PLC....................... 226,000 1,701,329
Regent Inns PLC................. 162,000 917,081
TLG PLC......................... 396,000 715,597
-----------
24,160,872
-----------
TOTAL FOREIGN STOCK
(COST $89,519,370)................ 95,169,753
-----------
COMMON STOCK -- 4.0%
EQUIPMENT SERVICES -- 1.5%
Rofin-Sinar Technologies,
Inc.*......................... 154,000 1,809,500
-----------
TELECOMMUNICATIONS -- 2.5%
Cellular Communications
International, Inc.*.......... 56,500 1,638,500
Comcast UK Cable Partners
Cl-A*......................... 93,000 1,267,125
-----------
2,905,625
-----------
TOTAL COMMON STOCK
(COST $5,093,320)................. 4,715,125
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ ------------
<S> <C> <C>
COMMERCIAL PAPER -- 14.5%
Air Products & Chemicals,
Inc.
6.20%.................... 01/03/97 $1,156 $ 1,155,602
American Express Capital
Corp.
6.30%.................... 01/03/97 5,500 5,498,075
Lubrizol Corp.
5.90%.................... 01/02/97 5,400 5,399,115
Merrill Lynch & Co., Inc.
5.80%.................... 01/06/97 4,991 4,986,979
-------------
TOTAL COMMERCIAL PAPER
(COST $17,039,771)..................... 17,039,771
-------------
TOTAL INVESTMENTS -- 99.4%
(COST $111,652,461).................... 116,924,649
OTHER ASSETS LESS LIABILITIES -- 0.6%.... 718,053
-------------
NET ASSETS -- 100.0%..................... $117,642,702
=============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy FIM $ 211,645 4.6439 01/97 $2,478
Buy GBP 161,825 0.5935 01/97 2,670
Buy HKD 140,883 7.7345 01/97 1
Buy JPY 185,791 114.9643 01/97 (908)
---------
$4,241
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK -- 84.3%
CHEMICALS -- 5.4%
Applied Extrusion Technologies,
Inc.*.............................. 40,600 $ 426,300
Dupont, (E.I.) de Nemours & Co. ..... 3,200 302,000
FMC Corp.*........................... 7,000 490,875
Great Lakes Chemical Corp. .......... 19,300 902,275
Lyondell Petrochemical Co. .......... 54,000 1,188,000
Millennium Chemicals, Inc.*.......... 12,000 213,000
Polymer Group, Inc.*................. 40,000 555,000
Union Carbide Corp. ................. 16,400 670,350
------------
4,747,800
------------
CONSUMER & SERVICE -- 0.4%
Warner-Lambert Co. .................. 5,000 375,000
------------
DIVERSIFIED METALS -- 5.3%
Freeport-McMoran Copper & Gold, Inc.
Cl-A............................... 31,900 897,188
Freeport-McMoran Copper & Gold, Inc.
Cl-B............................... 10,000 298,750
Nucor Corp. ......................... 26,000 1,326,000
Reynolds Metals Co. ................. 21,800 1,228,975
Steel Dynamics, Inc.*................ 50,000 956,250
------------
4,707,163
------------
DIVERSIFIED RESOURCES -- 3.5%
Burlington Northern Santa Fe
Corp. ............................. 12,200 1,053,775
Canadian National Railway Co. ....... 10,500 399,000
Hanson Trust PLC [ADR]............... 60,000 405,000
Western Water Co.*................... 28,000 406,000
Zeigler Coal Holding Co. ............ 39,600 846,450
------------
3,110,225
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.2%
General Electric Co. ................ 2,000 197,750
------------
ENERGY SERVICES -- 9.8%
BJ Services Co.*..................... 13,000 663,000
Camco International, Inc. ........... 4,800 221,400
Carbo Ceramics, Inc. ................ 43,750 918,750
Coflexip SA [ADR]*................... 47,600 1,249,500
Cooper Cameron Corp.*................ 12,900 986,850
Halliburton Co. ..................... 16,800 1,012,200
McDermott International, Inc. ....... 54,000 897,750
Petrolite Corp. ..................... 19,900 955,200
Weatherford Enterra, Inc.*........... 22,800 684,000
Western Atlas, Inc.*................. 14,850 1,052,494
------------
8,641,144
------------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
INTEGRATED PETROLEUM -- 21.5%
Amerada Hess Corp. .................. 20,000 $ 1,157,500
Atlantic Richfield Co. .............. 4,500 596,250
British Petroleum Co. PLC [ADR]...... 10,000 1,413,750
Ente Nazionale Idrocarbure SPA
[ADR].............................. 13,000 671,125
Mobil Corp. ......................... 24,600 3,007,350
Phillips Petroleum Co. .............. 25,000 1,106,250
Repsol SA [ADR]...................... 63,600 2,424,750
Royal Dutch Petroleum Co. [ADR]...... 5,500 939,125
Sun Co., Inc. ....................... 35,700 870,187
Texaco, Inc. ........................ 26,000 2,551,250
Total SA [ADR]....................... 45,000 1,811,250
Ultramar Diamond Shamrock Corp. ..... 10,800 341,550
USX Marathon Group................... 90,500 2,160,687
------------
19,051,024
------------
MISCELLANEOUS ENERGY -- 2.3%
TPC Corp.*........................... 54,400 489,600
Uranium Resources, Inc.*............. 101,000 795,375
USX-Delhi Group...................... 46,000 730,250
------------
2,015,225
------------
PAPER & FOREST PRODUCTS -- 8.8%
Georgia Pacific Corp. ............... 24,300 1,749,600
International Paper Co. ............. 26,200 1,057,825
James River Corp. of Virginia........ 34,300 1,136,187
Jefferson Smurfit Corp.*............. 104,600 1,680,137
Kimberly-Clark Corp. ................ 11,600 1,104,900
Willamette Industries, Inc. ......... 15,000 1,044,375
------------
7,773,024
------------
PETROLEUM EXPLORATION &
PRODUCTION -- 11.5%
Alberta Energy Co. Ltd. ............. 41,400 993,600
Barrett Resources Corp.*............. 13,100 558,388
Enserch Exploration, Inc.*........... 77,000 904,750
Flores & Rucks, Inc.*................ 12,500 665,625
Houston Exploration Co.*............. 50,500 883,750
HS Resources, Inc.*.................. 43,300 714,450
Louisiana Land & Exploration Co. .... 10,000 536,250
Monterey Resources, Inc.*............ 26,200 422,475
Noble Affiliates, Inc. .............. 9,900 473,963
Rutherford-Moran Oil Corp.*.......... 35,300 988,400
Triton Energy Ltd.*.................. 8,300 402,550
Union Texas Petroleum Holdings,
Inc. .............................. 78,700 1,760,913
United Meridian Corp.*............... 17,800 921,150
------------
10,226,264
------------
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PRECIOUS METALS -- 10.0%
Battle Mountain Gold Co. ............ 181,000 $ 1,244,375
Cambior, Inc. ....................... 64,400 941,850
Dayton Mining Corp.*................. 60,000 401,250
Durban Roodepoort Deep Ltd. [ADR]*... 53,640 395,595
Golden Star Resources Ltd.*.......... 31,000 403,000
Newmont Mining Corp. ................ 32,100 1,436,475
Pegasus Gold, Inc.*.................. 49,100 371,319
Placer Dome, Inc. ................... 56,300 1,224,525
Santa Fe Pacific Gold Corp. ......... 83,800 1,288,425
TVX Gold, Inc.*...................... 150,900 1,169,475
------------
8,876,289
------------
REAL ESTATE -- 4.1%
Apartment Investment & Management Co.
C1-A [REIT]........................ 23,700 669,525
Beacon Properties Corp. ............. 30,800 1,128,050
Homestead Village, Inc.*............. 3,770 67,860
Homestead Village, Inc. Warrants*.... 2,529 20,548
Red Roof Inns, Inc.*................. 40,000 620,000
Security Capital Pacific Trust
[REIT]............................. 30,000 686,250
The Rouse Co. ....................... 13,200 419,100
------------
3,611,333
------------
SCIENCE & TECHNOLOGY -- 1.5%
Silicon Graphics, Inc.*.............. 40,000 1,020,000
Vodafone Group PLC [ADR]............. 7,800 322,725
------------
1,342,725
------------
TOTAL COMMON STOCK
(COST $66,445,523)..................... 74,674,966
------------
PREFERRED STOCK -- 0.3%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT] (COST $225,345).............. 9,890 299,172
------------
FOREIGN STOCK -- 7.6%
DIVERSIFIED METALS -- 1.1%
Bougainville Copper Ltd. -- (AUD)*... 382,470 139,954
Lonrho PLC -- (GBP).................. 382,600 815,897
------------
955,851
------------
PETROLEUM EXPLORATION &
PRODUCTION -- 0.9%
Anderson Exploration
Ltd. -- (CAD)*..................... 25,000 323,158
Morrison Petroleum Ltd. -- (CAD)..... 76,000 457,898
------------
781,056
------------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PRECIOUS METALS -- 5.2%
Banro Resources Corp. Special
Warrants -- (CAD) 144A*............ 83,300 $ 194,669
Barnato Exploration Ltd. -- (ZAR)*... 18,200 72,357
Delta Gold NL -- (AUD)*.............. 262,821 493,403
Highlands Gold Ltd. -- (AUD)......... 430,600 253,475
Potgietersrust Platinums
Ltd. -- (ZAR)...................... 124,730 613,186
Prime Resources Group,
Inc. -- (CAD)...................... 163,300 1,156,803
Rustenburg Platinum Holdings Ltd. --
(ZAR).............................. 80,000 1,094,368
Samax -- (CAD) 144A*................. 150,000 575,111
War Eagle Mining Co.,
Inc. -- (CAD)*..................... 118,000 155,116
War Eagle Mining Co., Inc.
Warrants -- (CAD)*................. 59,000 0
------------
4,608,488
------------
REAL ESTATE -- 0.4%
Security Capital U.S. Realty -- (NLG)
144A*.............................. 30,000 384,000
------------
TOTAL FOREIGN STOCK
(COST $7,296,839)...................... 6,729,395
------------
SHORT TERM INVESTMENTS -- 0.9%
Temporary Investment Cash Fund
(COST $773,987)...................... 773,987 773,987
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 4.8%
Federal Home Loan Mtge.
Corp. Disc. Notes
5.40% (COST $4,212,865)... 01/17/97 $4,223 4,212,865
-----------
COMMERCIAL PAPER -- 10.8%
BMW U.S. Capital Corp.
6.70%..................... 01/02/97 1,000 999,814
Ciesco, L.P. 5.90%.......... 01/07/97 5,705 5,699,390
5.80%..................... 01/16/97 376 375,091
Dover Corp.+ 5.45%.......... 02/07/97 2,500 2,485,997
TOTAL COMMERCIAL PAPER (COST
$9,560,292)............................. 9,560,292
-----------
TOTAL INVESTMENTS -- 108.7%
(COST $88,514,851)...................... 96,250,677
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (8.7%)........................ (7,716,666)
-----------
NET ASSETS -- 100.0%...................... $88,534,011
===========
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy AUD $ 57,964 1.2594 01/97 $ 106
Buy GBP 211,904 0.5905 01/97 2,380
---------
$2,486
=========
Sell AUD $ 256,649 1.2594 01/97 $ (469)
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the year, these securities amounted
to 1.3% of net assets.
+ Security is restricted as to resale and may not be resold except to qualified
institutional buyers. At the end of the year, these securities amounted to
2.8% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 68.1%
FEDERAL HOME LOAN MORTGAGE CORP. -- 4.7%
5.00%................... 02/15/11 $ 9,925 $ 9,866,208
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 45.9%
4.90%................... 12/25/12 9,825 9,742,158
6.25% [VR].............. 03/01/17 2,455 2,448,545
7.50%................... 01/25/22 4,000 4,049,992
7.50%................... 10/01/22 25,716 25,715,712
8.00%................... 11/25/23 4,823 4,961,153
7.50%................... 05/01/24 44,763 44,804,512
7.409% [VR]............. 01/01/25 681 695,271
6.557% [VR]............. 05/01/25 1,662 1,673,137
6.089% [VR]............. 12/01/27 230 229,394
6.091% [VR]............. 12/01/27 99 98,178
6.089% [VR]............. 07/01/28 1,379 1,372,548
-------------
95,790,600
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 17.5%
7.125% [VR]............. 07/20/17 338 346,097
7.125% [VR]............. 08/20/17 425 435,677
7.125% [VR]............. 09/20/17 362 371,412
7.00%................... 01/15/24 43 41,891
7.00%................... 02/15/24 58 56,763
7.00%................... 04/15/24 361 352,934
7.125% [VR]............. 05/20/24 3,670 3,754,596
7.00%................... 06/15/24 59 57,246
7.125% [TBA]............ 07/20/24 444 455,114
7.00%................... 07/15/25 436 427,077
7.00%................... 08/15/25 1,889 1,848,613
7.00% [TBA]............. 01/21/27 2,000 1,956,260
6.00% [TBA]............. 01/23/27 26,500 26,508,281
-------------
36,611,961
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $143,896,978)................... 142,268,769
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.5%
Merrill Lynch Mtge.
Investors, Inc. Cl-B
7.6077% [VR]............ 06/15/21 1,340 1,353,532
Resolution Trust Corp.
7.2825% [VR]............ 07/25/28 10,000 10,150,434
-------------
(COST $11,519,512).................. 11,503,966
-------------
CORPORATE OBLIGATIONS -- 4.6%
CONSUMER PRODUCTS & SERVICES -- 3.4%
First Brands Corp. Sr.
Sub. Notes
9.125%.................. 04/01/99 7,000 7,096,250
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C>
UTILITIES -- 1.2%
CMS Energy Corp. First Mtge.
9.50%................... 10/01/97 1,000 1,027,500
Texas Utilities Co. First Mtge.
5.89% [VR].............. 05/01/99 1,500 1,504,540
-------------
2,532,040
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $9,556,600)..................... 9,628,290
-------------
U.S. TREASURY OBLIGATIONS -- 0.1%
U.S. Treasury Bills
4.95% #................. 01/30/97 $ 50 $ 49,795
5.00% #................. 03/06/97 30 29,731
5.01% #................. 03/06/97 30 29,731
4.90% #................. 03/13/97 10 9,900
-------------
(COST $119,170)..................... 119,157
-------------
SOVEREIGN ISSUES -- 2.0%
ARGENTINA
Republic of Argentina
[FRB, BRB]
6.625%
(COST $3,812,871)......... 03/31/05 4,900 4,269,125
-------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
-------
<S> <C> <C> <C>
FOREIGN BONDS -- 7.1%
CANADA -- 3.7%
Canadian Government
8.00%................... 11/01/98 10,000 7,781,348
-------------
NEW ZEALAND -- 3.4%
New Zealand Government
10.00%.................. 03/15/02 8,900 7,068,085
-------------
TOTAL FOREIGN BONDS
(COST $14,983,669).................... 14,849,433
-------------
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 25.4%
AT&T Corp.
5.40%................... 01/30/97 $ 4,000 3,982,600
Canadian Treasury Bill
5.35%................... 01/13/97 1,400 1,397,503
Dow Jones & Co.+
5.35%................... 01/24/97 1,000 996,582
Electricite de France
5.35%................... 01/02/97 10,000 9,998,514
Ford Motor Credit Co.
6.09%................... 01/09/97 600 599,188
</TABLE>
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
General Electric Capital
Corp.
5.31%................... 01/07/97 $ 1,100 $ 1,099,027
5.42%................... 01/16/97 2,000 1,995,483
5.40%................... 01/21/97 900 897,300
General Motors Acceptance
Corp.
5.53%................... 01/29/97 900 896,129
Kellogg Co.
5.35%................... 01/30/97 1,000 995,690
KFW International
Financial Corp.
5.37%................... 01/09/97 600 599,284
5.35%................... 01/13/97 300 299,465
5.40%................... 02/19/97 1,600 1,588,044
Kingdom of Sweden
5.33%................... 01/21/97 1,500 1,495,558
Lilly, (Eli) & Co.
5.33%................... 01/06/97 5,800 5,794,872
Motorola, Inc.
5.33%................... 01/16/97 2,000 1,995,558
New Center Asset Trust
5.40%................... 01/15/97 8,500 8,482,150
Province of Alberta
5.35%................... 01/14/97 10,000 9,980,681
-------------
TOTAL COMMERCIAL PAPER
(COST $53,094,659).................... 53,093,628
-------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 0.3%
Temporary Investment Cash Fund.... 323,161 323,161
Temporary Investment Fund......... 323,161 323,161
------------
(COST $646,322)................... 646,322
------------
TOTAL INVESTMENTS -- 113.1%
(COST $237,629,781)................. 236,378,690
------------
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
(000) VALUE
-------- ------------
<S> <C> <C>
WRITTEN OPTIONS -- 0.0%
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.00, Expire
03/17/97....................... $ 43,000 $ (1,075)
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.50, Expire
06/16/97....................... 100,000 (7,500)
------------
TOTAL WRITTEN OPTIONS
(COST ($43,935))................... (8,575)
------------
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (13.1%)............ (27,357,107)
------------
NET ASSETS -- 100.0%................. $209,013,008
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell CAD $8,102,930 1.3310 02/97 $ 199,515
Sell NZD 7,002,800 1.4286 02/97 (48,319)
---------
$ 151,196
=========
</TABLE>
# Securities with an aggregate market value of $119,157 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1996:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 10 Year
Note 03/97 $ 2,000 $(35,624)
Eurodollar 06/97 25,000 77,500
--------------
$ 41,876
=============
</TABLE>
- --------------------------------------------------------------------------------
+ Security is restricted as to resale and may not be resold except to qualified
institutional buyers. At the end of the year, these securities amounted to
0.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCK -- 91.6%
AEROSPACE -- 4.5%
BE Aerospace, Inc. ................ 3,000 $ 81,375
Boeing Co. ........................ 9,700 1,031,838
Precision Castparts Corp. ......... 8,200 406,925
United Technologies Corp. ......... 10,600 699,600
------------
2,219,738
------------
AIRLINES -- 2.9%
AMR Corp.* ........................ 3,500 308,438
Continental Airlines, Inc.
Cl-B* ........................... 7,500 211,875
Delta Air Lines, Inc. ............. 5,500 389,813
UAL Corp.* ........................ 7,700 481,250
------------
1,391,376
------------
BROADCASTING -- 0.0%
Univision Communications, Inc.
Cl-A* ........................... 500 18,500
------------
CLOTHING & APPAREL -- 2.3%
Nike, Inc. Cl-B ................... 18,800 1,123,300
------------
COMPUTER HARDWARE -- 17.2%
Cabletron Systems, Inc.* .......... 34,328 1,141,406
Compaq Computer Corp.* ............ 30,828 2,288,979
Dell Computer Corp.* .............. 38,200 2,029,375
Seagate Technology, Inc.* ......... 36,300 1,433,850
3Com Corp.* ....................... 20,258 1,486,431
------------
8,380,041
------------
COMPUTER SERVICES & SOFTWARE -- 16.5%
BMC Software, Inc.* ............... 6,600 273,075
Cadence Design Systems, Inc.* ..... 45,900 1,824,525
Cisco Systems, Inc.* .............. 10,975 698,284
Computer Sciences Corp.* .......... 13,100 1,075,838
Electronic Arts, Inc.* ............ 10,000 299,375
HBO & Co. ......................... 13,000 771,875
Informix Corp.* ................... 7,200 146,700
Intelligroup, Inc.* ............... 500 5,500
Microsoft Corp.* .................. 14,800 1,222,850
Parametric Technology Corp.* ...... 33,300 1,710,788
------------
8,028,810
------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Central Garden & Pet Co.* ......... 6,100 128,481
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.0%
SCI Systems, Inc.* ................ 11,400 508,725
------------
FINANCIAL-BANK & TRUST -- 6.3%
Chase Manhattan Corp. ............. 8,200 731,850
Citicorp .......................... 7,300 751,900
Comerica, Inc. .................... 6,700 350,912
MBNA Corp. ........................ 10,200 423,300
Mellon Bank Corp. ................. 8,500 603,500
Northern Trust Corp. .............. 5,400 195,750
------------
3,057,212
------------
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
FINANCIAL SERVICES -- 10.0%
Aames Financial Corp. ............. 10,200 $ 365,925
Capital One Financial Corp. ....... 2,000 72,000
Charles Schwab Corp. .............. 18,730 599,360
First USA, Inc. ................... 24,000 831,000
Green Tree Financial Corp. ........ 9,200 355,350
Household International, Inc. ..... 7,800 719,550
Merrill Lynch & Co., Inc. ......... 19,838 1,616,797
The Money Store, Inc. ............. 10,800 298,350
------------
4,858,332
------------
HEALTHCARE SERVICES -- 6.3%
Columbia-HCA Healthcare Corp. ..... 18,100 737,575
Oxford Health Plans, Inc.* ........ 24,900 1,458,206
United Healthcare Corp. ........... 20,000 900,000
------------
3,095,781
------------
INSURANCE -- 1.1%
Conseco, Inc. ..................... 8,500 541,875
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.8%
Guidant Corp. ..................... 1,800 102,600
Medtronic, Inc. ................... 11,600 788,800
------------
891,400
------------
PHARMACEUTICALS -- 5.4%
Amgen, Inc.* ...................... 14,200 772,125
Biochem Pharma, Inc.* ............. 13,400 673,350
Biogen, Inc.* ..................... 19,500 755,625
Cardinal Health, Inc. ............. 7,050 410,662
------------
2,611,762
------------
RETAIL & MERCHANDISING -- 10.2%
Abercrombie & Fitch Co. Cl-A* ..... 5,800 95,700
CompUSA, Inc.* .................... 61,452 1,267,447
Meyer, (Fred), Inc.* .............. 7,500 266,250
Ross Stores, Inc. ................. 12,100 605,000
Safeway, Inc.* .................... 14,300 611,325
Starbucks Corp.* .................. 14,800 423,650
TJX Companies, Inc. ............... 11,700 554,287
Walgreen Co. ...................... 12,500 500,000
Williams-Sonoma, Inc.* ............ 17,500 636,563
------------
4,960,222
------------
SEMI-CONDUCTORS -- 5.6%
Intel Corp. ....................... 15,500 2,029,531
Micron Technology, Inc. ........... 24,900 725,212
------------
2,754,743
------------
TELECOMMUNICATIONS -- 0.2%
LCI International, Inc.* .......... 4,800 103,200
------------
TOTAL COMMON STOCK
(COST $41,858,965) .................. 44,673,498
------------
</TABLE>
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 7.5%
Temporary Investment Cash Fund .... 1,841,169 $ 1,841,169
Temporary Investment Fund ......... 1,841,168 1,841,168
------------
(COST $3,682,337) ............... 3,682,337
------------
TOTAL INVESTMENTS -- 99.1%
(COST $45,541,302)................... 48,355,835
OTHER ASSETS LESS
LIABILITIES -- 0.9%.................. 434,061
------------
NET ASSETS -- 100.0%................... $48,789,896
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
See Notes to Financial Statements.
<PAGE>
DEFINITION OF ABBREVIATIONS
- --------------------------------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
- -----------------------
ADR-American Depository Receipt
ADS-American Depository Shares
BRB-Brady Bond
CVT-Convertible Security
FRB-Floating Rate Bond (1)
FRN-Floating Rate Note (1)
GDR-Global Depository Receipt
GDS-Global Depository Shares
IO-Interest Only Security
PIK-Payment in Kind
REIT-Real Estate Investment Trust
STEP-Stepped Coupon Security (2)
TBA-To be Announced Security
VR-Variable Rate Security (1)
WI-When Issued Security (2)
ZCB-Zero Coupon Security (2)
(1)- Rates shown for variable and floating rate securities are the coupon rates
as of December 31, 1996.
(2)- Rates shown are the effective yields at purchase date.
COUNTRIES/CURRENCIES:
- -----------------------
ATS-Austria/Austrian Schilling
AUD-Australia/Australian Dollar
BEF-Belgium/Belgium Franc
CAD-Canada/Canadian Dollar
CHF-Switzerland/Swiss Franc
DEM-Germany/German Deutschemark
DKK-Denmark/Danish Krone
ECU-Europe/European Currency Unit
ESP-Spain/Spanish Peseta
FIM-Finland/Finnish Markka
FRF-France/French Franc
GBP-United Kingdom/British Pound
HKD-Hong Kong/Hong Kong Dollar
IEP-Ireland/Irish Punt
ITL-Italy/Italian Lira
JPY-Japan/Japanese Yen
MXP-Mexico/Mexican Peso
MYR-Malaysia/Malaysian Ringgit
NLG-Netherlands/Netherland Guilder
NOK-Norway/Norwegian Kroner
NZD-New Zealand/New Zealand Dollar
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Kroner
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
T. ROWE
AST PUTNAM LORD ABBETT AST FEDERATED AST PRICE
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED ASSET
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD ALLOCATION
------------- ----------- -------- -------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in
securities at
value (A)....... $345,881 $ 528,558 $872,986 $548,206 $122,651 $296,051 $201,638 $119,657
Cash in bank,
including
foreign currency
holdings........ 283 18 -- 4 -- 451 -- 94
Receivable for:
Securities
sold.......... 378 -- -- -- 450 5,749 -- --
Dividends and
interest...... 924 1,325 397 3,637 383 1,719 3,800 890
Fund shares
sold.......... -- 15,791 19,521 -- -- 78 803 105
Other assets...... 38 8 15 9 2 5 3 2
Unrealized
appreciation on
foreign currency
exchange
contracts....... 1,004 -- 248 -- -- 144 -- --
-------- --------- -------- -------- -------- -------- -------- --------
TOTAL
ASSETS...... 348,508 545,700 893,167 551,856 123,486 304,197 206,244 120,748
-------- --------- -------- -------- -------- -------- -------- --------
LIABILITIES
Cash overdraft.... -- -- 255 -- -- -- -- --
Written options
outstanding, at
value........... -- -- -- -- -- -- -- --
Sale commitments,
at value........ -- -- -- -- -- 2,418 -- --
Payable for:
Securities
purchased..... 1,045 14,873 -- -- -- 14,955 851 506
Fund shares
redeemed...... 266 -- -- -- 269 -- -- --
Futures
variation
margin........ -- -- -- -- -- -- -- --
Advisory fees... 169 194 387 70 34 104 54 34
Shareholder
servicing
fees.......... 28 43 74 45 10 24 17 10
Accrued
expenses...... 64 93 127 95 35 66 60 49
Accrued
dividends..... -- -- -- 2,176 -- -- -- --
Unrealized
depreciation on
foreign currency
exchange
contracts....... 725 -- -- -- -- 151 -- --
-------- --------- -------- -------- -------- -------- -------- --------
TOTAL
LIABILITIES... 2,297 15,203 843 2,386 348 17,718 982 599
-------- --------- -------- -------- -------- -------- -------- --------
NET ASSETS........... $346,211 $ 530,497 $892,324 $549,470 $123,138 $286,479 $205,262 $120,149
======== ========= ======== ======== ======== ======== ======== ========
COMPONENTS OF NET
ASSETS
Common stock
(unlimited number of
shares authorized,
$.001 par value per
share).............. $ 18 $ 31 $ 47 $ 549 $ 10 $ 22 $ 17 $ 9
Additional paid-in
capital............. 299,358 439,062 667,184 548,841 102,352 241,860 184,462 103,476
Undistributed net
investment income... 2,686 7,379 1,593 -- 3,613 7,010 10,610 2,578
Accumulated net
realized gain (loss)
on investments and
foreign currency
transactions........ 19,995 13,059 42,753 80 5,063 29,891 1,264 2,380
Accumulated net
unrealized
appreciation
(depreciation) on
investments, foreign
currency
transactions, and
forward currency
contracts........... 24,154 70,966 180,747 -- 12,100 7,696 8,909 11,706
-------- --------- -------- -------- -------- -------- -------- --------
NET ASSETS........... $346,211 $ 530,497 $892,324 $549,470 $123,138 $286,479 $205,262 $120,149
======== ========= ======== ======== ======== ======== ======== ========
Shares of common
stock outstanding... 18,010 30,896 47,495 549,390 9,596 21,722 16,918 9,051
Net asset value,
offering and
redemption price per
share............... $ 19.22 $ 17.17 $ 18.79 $ 1.00 $ 12.83 $ 13.19 $ 12.13 $ 13.27
======== ========= ======== ======== ======== ======== ======== ========
(A) Investments at
cost................ $322,003 $ 457,592 $692,485 $548,206 $110,555 $288,351 $192,728 $107,949
======== ========= ======== ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------------------------------------------------------------------
PIMCO T. ROWE T. ROWE T. ROWE PIMCO
TOTAL INVESCO FOUNDERS PRICE PRICE BERGER PRICE LIMITED
RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS NATURAL MATURITY
BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT RESOURCES BOND
-------- -------- ------------ ------------- ------------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$431,364 $336,684 $228,354 $384,134 $ 88,756 $136,075 $116,925 $96,251 $236,379
-- -- -- 19,733 19,561 -- 2,329 584 --
3,846 159 441 348 -- -- 57 263 --
4,486 1,343 28 612 2,222 122 184 49 1,308
475 14,890 26 999 27 288 288 383 --
18 6 3 7 2 2 2 1 4
419 -- -- 3 1 -- 4 2 151
-------- -------- -------- -------- -------- -------- -------- ------- --------
440,608 353,082 228,852 405,836 110,569 136,487 119,789 97,533 237,842
-------- -------- -------- -------- -------- -------- -------- ------- --------
-- -- -- -- -- -- -- -- --
62 -- -- -- -- -- -- -- 9
-- -- -- -- -- -- -- -- --
79,238 4,194 7,632 2,969 11,591 144 2,022 8,931 28,585
-- -- 977 -- -- -- -- -- 82
919 -- -- -- -- -- -- -- 28
87 112 106 171 34 51 57 35 52
31 29 17 33 8 11 10 7 18
73 67 52 99 70 34 57 26 55
-- -- -- -- -- -- -- -- --
188 -- -- 5 631 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- --------
80,598 4,402 8,784 3,277 12,334 240 2,146 8,999 28,829
-------- -------- -------- -------- -------- -------- -------- ------- --------
$360,010 $348,680 $220,068 $402,559 $ 98,235 $136,247 $117,643 $88,534 $209,013
======== ======== ======== ======== ======== ======== ======== ======= ========
$ 32 $ 25 $ 13 $ 33 $ 9 $ 9 $ 10 $ 6 $ 19
344,223 289,356 183,200 352,380 92,256 119,436 111,455 78,336 200,615
15,700 7,107 -- 1,993 3,522 223 971 423 10,849
(4,622) 9,984 (527) 1,612 1,133 1,283 (66) 2,034 (1,446)
4,677 42,208 37,382 46,541 1,315 15,296 5,273 7,735 (1,024)
-------- -------- -------- -------- -------- -------- -------- ------- --------
$360,010 $348,680 $220,068 $402,559 $ 98,235 $136,247 $117,643 $88,534 $209,013
======== ======== ======== ======== ======== ======== ======== ======= ========
32,405 24,923 13,102 33,340 9,015 9,469 10,113 6,117 19,333
$ 11.11 $ 13.99 $ 16.80 $ 12.07 $ 10.90 $ 14.39 $ 11.63 $ 14.47 $ 10.81
======== ======== ======== ======== ======== ======== ======== ======= ========
$427,007 $294,477 $190,972 $337,605 $ 86,870 $120,779 $111,652 $88,515 $237,630
======== ======== ======== ======== ======== ======== ======== ======= ========
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------
PORTFOLIO
-------------------
ROBERTSON
STEPHENS
VALUE +
GROWTH
---------
<S> <C>
$48,356
--
--
23
449
1
--
--------
48,829
--------
--
--
--
--
--
23
4
12
--
--
--------
39
--------
$48,790
========
$ 4
46,028
--
(57)
2,815
--------
$48,790
========
4,439
$ 10.99
========
$45,541
========
-------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT AST FEDERATED
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY AST PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................... $ 725 $ 1,910 $ 2,355 $25,431 $ 357 $ 7,396 $11,919
Dividends................... 5,641 9,192 6,256 -- 4,330 2,082 53
------- ------- -------- ------- ------- ------- -------
Total Investment
Income................ 6,366 11,102 8,611 25,431 4,687 9,478 11,972
------- ------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees.... 3,079 2,881 5,727 2,325 765 1,828 992
Shareholder servicing
fees...................... 313 384 636 465 115 263 132
Administration and
accounting fees........... 268 306 403 340 115 238 132
Custodian fees.............. 210 85 140 97 54 85 41
Professional fees........... 28 34 56 41 10 23 12
Trustees' fees and
expenses.................. 11 13 22 16 4 8 5
Insurance fees.............. 3 7 8 2 1 4 2
Miscellaneous expenses...... 15 13 26 23 10 19 46
------- ------- -------- ------- ------- ------- -------
Total Expenses.......... 3,927 3,723 7,018 3,309 1,074 2,468 1,362
Less: Advisory fee
waivers and expense
reimbursements........ (307) -- -- (519) -- -- --
------- ------- -------- ------- ------- ------- -------
Net Expenses............ 3,620 3,723 7,018 2,790 1,074 2,468 1,362
------- ------- -------- ------- ------- ------- -------
Net Investment Income (Loss)... 2,746 7,379 1,593 22,641 3,613 7,010 10,610
------- ------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Securities and foreign
exchange
transactions.......... 20,748 13,085 42,941 80 7,915 29,898 1,294
Futures contracts....... -- -- -- -- -- -- --
Written option
contracts............. -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net realized gain (loss).... 20,748 13,085 42,941 80 7,915 29,898 1,294
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
exchange
transactions.......... 4,755 46,955 108,269 -- 978 (8,583) 6,820
Futures contracts....... -- -- -- -- -- -- --
Written option
contracts............. -- -- -- -- -- -- --
Interest rate swaps..... -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation
(depreciation)............ 4,755 46,955 108,269 -- 978 (8,583) 6,820
------- ------- -------- ------- ------- ------- -------
Net Increase in Net Assets
Resulting from
Operations................ $28,249 $67,419 $152,803 $22,721 $12,506 $28,325 $18,724
======= ======= ======== ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
PIMCO
T. ROWE TOTAL INVESCO FOUNDERS T. ROWE PRICE T. ROWE PRICE BERGER
PRICE ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT
----------- --------- ------- ------------ ------------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,578 $18,300 $ 5,465 $ 857 $ 1,010 $4,371 $ 756 $ 539
1,035 -- 4,109 215 5,459 -- 385 1,492
------- ------- ------- ------- ------- ------ ------- ------
3,613 18,300 9,574 1,072 6,469 4,371 1,141 2,031
------- ------- ------- ------- ------- ------ ------- ------
728 1,896 1,884 1,240 3,011 596 684 778
86 292 251 138 301 70 91 78
89 255 230 138 261 97 96 90
55 102 51 55 250 64 27 75
7 25 22 12 26 6 8 7
3 10 9 5 10 3 3 3
1 5 3 2 4 1 2 1
57 14 17 9 65 14 7 25
------- ------- ------- ------- ------- ------ ------- ------
1,026 2,599 2,467 1,599 3,928 851 918 1,057
-- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------- ------
1,026 2,599 2,467 1,599 3,928 851 918 1,057
------- ------- ------- ------- ------- ------ ------- ------
2,587 15,701 7,107 (527) 2,541 3,520 223 974
------- ------- ------- ------- ------- ------ ------- ------
2,313 (4,897) 9,984 (527) 2,395 904 1,487 (20)
-- 1,120 -- -- -- -- -- --
-- (77) -- -- -- 188 -- --
------- ------- ------- ------- ------- ------ ------- ------
2,313 (3,854) 9,984 (527) 2,395 1,092 1,487 (20)
------- ------- ------- ------- ------- ------ ------- ------
6,558 1,893 24,709 24,027 34,967 504 10,400 5,257
-- (1,275) -- -- -- -- -- --
-- 578 -- -- -- (46) -- --
-- 12 -- -- -- -- -- --
------- ------- ------- ------- ------- ------ ------- ------
6,558 1,208 24,709 24,027 34,967 458 10,400 5,257
------- ------- ------- ------- ------- ------ ------- ------
$11,458 $13,055 $41,800 $22,973 $39,903 $5,070 $12,110 $6,211
======= ======= ======= ======= ======= ====== ======= ======
<CAPTION>
---------------------------------------------
PORTFOLIO
---------------------------------------------
T. ROWE PIMCO ROBERTSON
PRICE LIMITED STEPHENS
NATURAL MATURITY VALUE +
RESOURCES BOND GROWTH(1)
---------- ----------- ---------
<S> <C> <C>
$ 285 $12,543 $ 46
647 -- 44
------ ------- ------
932 12,543 90
------ ------- ------
352 1,240 118
39 191 12
72 189 14
34 35 9
3 16 1
1 6 --
1 5 --
7 12 2
------ ------- ------
509 1,694 156
-- -- --
------ ------- ------
509 1,694 156
------ ------- ------
423 10,849 (66)
------ ------- ------
2,036 (1,168) (57)
-- (153) --
-- -- --
------ ------- ------
2,036 (1,321) (57)
------ ------- ------
7,352 (1,463) 2,814
-- (84) --
-- 35 --
-- -- --
------ ------- ------
7,352 (1,512) 2,814
------ ------- ------
$9,811 $ 8,016 $2,691
====== ======= ======
---------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT
INTERNATIONAL EQUITY GROWTH AND INCOME
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 2,746 $ 2,165 $ 7,379 $ 3,534
Net realized gain (loss) on investments and foreign
currency transactions................................ 20,748 8,916 13,085 7,136
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 4,755 13,385 46,955 23,471
-------- -------- -------- --------
Net Increase in Net Assets from Operations........... 28,249 24,466 67,419 34,141
-------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (5,032) -- (3,534) (1,700)
Distributions to shareholders from capital gains....... (5,923) (12,667) (7,139) (1,699)
-------- -------- -------- --------
Total Dividends and Distributions to Shareholders.... (10,955) (12,667) (10,673) (3,399)
-------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 101,730 105,273 217,780 170,735
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 10,955 12,667 10,673 3,399
Cost of shares redeemed................................ (51,824) (99,733) (43,451) (8,177)
-------- -------- -------- --------
Increase in Net Assets from Capital Share
Transactions...................................... 60,861 18,207 185,002 165,957
-------- -------- -------- --------
Total Increase in Net Assets...................... 78,155 30,006 241,748 196,699
NET ASSETS
Beginning of Period.................................... 268,056 238,050 288,749 92,050
-------- -------- -------- --------
End of Period.......................................... $346,211 $268,056 $530,497 $288,749
======== ======== ======== ========
SHARES ISSUED AND REDEEMED
Shares sold............................................ 5,530 6,250 13,666 11,930
Shares issued in reinvestment of dividends and
distributions........................................ 610 823 707 276
Shares redeemed........................................ (2,856) (5,865) (2,755) (600)
-------- -------- -------- --------
Net Increase in Shares Outstanding................... 3,284 1,208 11,618 11,606
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PORTFOLIO
- -------------------------------------------------------------------------------------------------------
FEDERATED UTILITY
JANCAP GROWTH AST MONEY MARKET INCOME AST PUTNAM BALANCED
- ---------------------- ------------------------ --------------------- ---------------------
1996 1995 1996 1995 1996 1995 1996 1995
- --------- -------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,593 $ 1,686 $ 22,641 $ 17,992 $ 3,613 $ 4,023 $ 7,010 $ 5,210
42,941 38,435 80 156 7,915 358 29,898 9,100
108,269 58,329 -- -- 978 16,069 (8,583) 18,547
- --------- -------- ----------- -------- -------- -------- -------- --------
152,803 98,450 22,721 18,148 12,506 20,450 28,325 32,857
- --------- -------- ----------- -------- -------- -------- -------- --------
(753) (1,363) (22,641) (17,992) (4,103) (3,376) (5,212) (3,867)
(24,162) -- (149) -- -- -- (8,816) --
- --------- -------- ----------- -------- -------- -------- -------- --------
(24,915) (1,363) (22,790) (17,992) (4,103) (3,376) (14,028) (3,867)
- --------- -------- ----------- -------- -------- -------- -------- --------
517,512 135,311 1,478,919 674,956 59,384 43,009 27,031 92,940
24,915 1,363 22,199 17,896 4,103 3,376 14,028 3,867
(209,312) (48,085) (1,295,804) (637,371) (56,151) (27,265) (24,083) (16,215)
- --------- -------- ----------- -------- -------- -------- -------- --------
333,115 88,589 205,314 55,481 7,336 19,120 16,976 80,592
- --------- -------- ----------- -------- -------- -------- -------- --------
461,003 185,676 205,245 55,637 15,739 36,194 31,273 109,582
431,321 245,645 344,225 288,588 107,399 71,205 255,206 145,624
- --------- -------- ----------- -------- -------- -------- -------- --------
$ 892,324 $431,321 $ 549,470 $344,225 $123,138 $107,399 $286,479 $255,206
========= ======== =========== ======== ======== ======== ======== ========
30,067 9,644 1,478,919 674,956 4,958 4,009 2,155 7,580
1,569 119 22,199 17,896 351 344 1,158 367
(12,155) (3,650) (1,295,804) (637,371) (4,710) (2,569) (1,954) (1,473)
- --------- -------- ----------- -------- -------- -------- -------- --------
19,481 6,113 205,314 55,481 599 1,784 1,359 6,474
========= ======== =========== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
FEDERATED HIGH YIELD ASSET ALLOCATION
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 10,610 $ 4,026 $ 2,587 $ 1,306
Net realized gain (loss) on investments and foreign
currency transactions................................ 1,294 124 2,313 483
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 6,820 3,479 6,558 5,440
-------- -------- -------- -------
Net Increase in Net Assets from Operations........... 18,724 7,629 11,458 7,229
-------- -------- -------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (4,032) (1,210) (1,316) (525)
Distributions to shareholders from capital gains....... -- -- (226) --
-------- -------- -------- -------
Total Dividends and Distributions to Shareholders.... (4,032) (1,210) (1,542) (525)
-------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 151,204 75,531 52,390 31,289
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 4,032 1,210 1,542 525
Cost of shares redeemed................................ (48,358) (20,776) (3,098) (2,582)
-------- -------- -------- -------
Increase in Net Assets from Capital Share
Transactions...................................... 106,878 55,965 50,834 29,232
-------- -------- -------- -------
Total Increase in Net Assets...................... 121,570 62,384 60,750 35,936
NET ASSETS
Beginning of Period.................................... 83,692 21,308 59,399 23,463
-------- -------- -------- -------
End of Period.......................................... $205,262 $ 83,692 $120,149 $59,399
======== ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................................ 13,287 7,197 4,228 2,775
Shares issued in reinvestment of dividends and
distributions........................................ 368 124 128 52
Shares redeemed........................................ (4,248) (2,008) (249) (244)
-------- -------- -------- -------
Net Increase in Shares Outstanding................ 9,407 5,313 4,107 2,583
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------
PIMCO TOTAL FOUNDERS CAPITAL T. ROWE PRICE
RETURN BOND INVESCO EQUITY INCOME APPRECIATION INTERNATIONAL EQUITY
- --------------------- --------------------- ---------------------- ---------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15,701 $ 5,966 $ 7,107 $ 3,658 $ (527) $ (151) $ 2,541 $ 1,454
(3,854) 6,557 9,984 5,268 (527) 2,836 2,395 (908)
1,208 4,574 24,709 19,246 24,027 10,589 34,967 15,141
- -------- -------- -------- -------- --------- -------- -------- --------
13,055 17,097 41,800 28,172 22,973 13,274 39,903 15,687
- -------- -------- -------- -------- --------- -------- -------- --------
(6,111) (1,271) (3,685) (1,056) -- (280) (1,759) (121)
(6,703) -- (4,986) -- (1,655) -- -- (249)
- -------- -------- -------- -------- --------- -------- -------- --------
(12,814) (1,271) (8,671) (1,056) (1,655) (280) (1,759) (370)
- -------- -------- -------- -------- --------- -------- -------- --------
196,298 199,583 184,426 93,257 237,559 62,848 222,719 101,284
12,814 1,271 8,671 1,056 1,655 280 1,759 370
(74,678) (37,838) (54,262) (9,914) (130,924) (14,221) (55,730) (30,055)
- -------- -------- -------- -------- --------- -------- -------- --------
134,434 163,016 138,835 84,399 108,290 48,907 168,748 71,599
- -------- -------- -------- -------- --------- -------- -------- --------
134,675 178,842 171,964 111,515 129,608 61,901 206,892 86,916
225,335 46,493 176,716 65,201 90,460 28,559 195,667 108,751
- -------- -------- -------- -------- --------- -------- -------- --------
$360,010 $225,335 $348,680 $176,716 $ 220,068 $ 90,460 $402,559 $195,667
======== ======== ======== ======== ========= ======== ======== ========
18,267 18,460 14,201 8,188 15,149 4,764 19,721 10,012
1,211 128 705 105 115 26 161 41
(6,938) (3,491) (4,116) (850) (8,512) (1,074) (4,907) (2,997)
- -------- -------- -------- -------- --------- -------- -------- --------
12,540 15,097 10,790 7,443 6,752 3,716 14,975 7,056
======== ======== ======== ======== ========= ======== ======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE
INTERNATIONAL BOND BERGER CAPITAL GROWTH
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 3,520 $ 1,705 $ 223 $ 150
Net realized gain (loss) on investments and foreign
currency transactions................................ 1,092 13 1,487 (195)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency transactions, and
forward currency contracts........................... 458 1,290 10,400 4,860
-------- -------- -------- -------
Net Increase in Net Assets from Operations........... 5,070 3,008 12,110 4,815
-------- -------- -------- -------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment income... (697) (263) (150) (3)
Distributions to shareholders from capital gains....... (884) -- -- --
-------- -------- -------- -------
Total Dividends and Distributions to Shareholders.... (1,581) (263) (150) (3)
-------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 60,046 30,340 147,599 42,283
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 1,581 263 150 3
Cost of shares redeemed................................ (12,483) (2,964) (69,441) (4,149)
-------- -------- -------- -------
Increase in Net Assets from Capital Share
Transactions...................................... 49,144 27,639 78,308 38,137
-------- -------- -------- -------
Total Increase in Net Assets...................... 52,633 30,384 90,268 42,949
NET ASSETS
Beginning of Period.................................... 45,602 15,218 45,979 3,030
-------- -------- -------- -------
End of Period.......................................... $ 98,235 $ 45,602 $136,247 $45,979
======== ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................................ 5,742 2,996 10,695 3,773
Shares issued in reinvestment of dividends and
distributions........................................ 156 27 12 --
Shares redeemed........................................ (1,183) (295) (4,945) (370)
-------- -------- -------- -------
Net Increase in Shares Outstanding................ 4,715 2,728 5,762 3,403
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on May 2, 1995.
(2) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PORTFOLIO
- -----------------------------------------------------------------------------------------
ROBERTSON
T. ROWE PRICE PIMCO LIMITED STEPHENS VALUE
FOUNDERS PASSPORT NATURAL RESOURCES MATURITY BOND + GROWTH
- -------------------- ------------------- --------------------- --------------
1996 1995(1) 1996 1995(1) 1996 1995(1) 1996(2)
- -------- ------- -------- ------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 974 $ 72 $ 423 $ 30 $ 10,849 $ 765 $ (66)
(20) 8 2,036 31 (1,321) 174 (57)
5,257 16 7,352 383 (1,512) 488 2,814
- -------- ------- -------- ------ -------- -------- -------
6,211 96 9,811 444 8,016 1,427 2,691
- -------- ------- -------- ------ -------- -------- -------
(129) -- (29) -- (761) -- --
-- -- (34) -- (303) -- --
- -------- ------- -------- ------ -------- -------- -------
(129) -- (63) -- (1,064) -- --
- -------- ------- -------- ------ -------- -------- -------
103,946 29,685 87,969 9,686 104,208 166,622 52,408
129 -- 63 -- 1,064 -- --
(20,969) (1,326) (18,508) (868) (65,151) (6,109) (6,309)
- -------- ------- -------- ------ -------- -------- -------
83,106 28,359 69,524 8,818 40,121 160,513 46,099
- -------- ------- -------- ------ -------- -------- -------
89,188 28,455 79,272 9,262 47,073 161,940 48,790
28,455 -- 9,262 -- 161,940 -- --
- -------- ------- -------- ------ -------- -------- -------
$117,643 $28,455 $ 88,534 $9,262 $209,013 $161,940 $48,790
======== ======= ======== ====== ======== ======== =======
9,188 2,884 6,706 918 9,943 16,062 5,032
12 -- 5 -- 102 -- --
(1,843) (128) (1,428) (84) (6,177) (597) (593)
- -------- ------- -------- ------ -------- -------- -------
7,357 2,756 5,283 834 3,868 15,465 4,439
======== ======= ======== ====== ======== ======== =======
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
\
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 12/31/96 $18.20 $ 0.16 $ 1.55 $ 1.71 $ (0.32) $ (0.37) $ (0.69) $19.22
International
Equity 12/31/95 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
12/31/94 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
12/31/93 12.74 0.14 4.46 4.60 -- -- -- 17.34
12/31/92 13.90 (0.17) (0.99) (1.16) -- -- -- 12.74
Lord Abbett 12/31/96 $14.98 $ 0.23 $ 2.48 $ 2.71 $ (0.17) $ (0.35) $ (0.52) $17.17
Growth and
Income 12/31/95 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
12/31/94 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
12/31/93 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
12/31/92(2) 10.00 0.07 0.63 0.70 -- -- -- 10.70
JanCap Growth 12/31/96 $15.40 $ 0.02 $ 4.19 $ 4.21 $ (0.02) $ (0.80) $ (0.82) $18.79
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
12/31/93 10.53 0.03 1.22 1.25 -- -- -- 11.78
12/31/92(3) 10.00 (0.01) 0.54 0.53 -- -- -- 10.53
AST Money
Market 12/31/96 $ 1.00 $0.0492 $0.0005 $0.0497 $(0.0492) $(0.0005) $(0.0497) $ 1.00
12/31/95 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
12/31/94 1.00 0.0369 -- 0.0369 (0.0367) (0.0002) (0.0369) 1.00
12/31/93 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
12/31/92(4) 1.00 0.0032 -- 0.0032 (0.0032) -- (0.0032) 1.00
Federated
Utility
Income 12/31/96 $11.94 $ 0.36 $ 0.97 $ 1.33 $ (0.44) $ -- $ (0.44) $12.83
12/31/95 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
12/31/94 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
12/31/93(5) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam
Balanced 12/31/96 $12.53 $ 0.32 $ 1.02 $ 1.34 $ (0.25) $ (0.43) $ (0.68) $13.19
12/31/95 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
12/31/94 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
12/31/93(5) 10.00 0.08 0.49 0.57 -- -- -- 10.57
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(2) Commenced operations on May 1, 1992.
(3) Commenced operations on November 6, 1992.
(4) Commenced operations on November 10, 1992.
(5) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9.65% $346,211 124% $0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
(8.35%) 24,998 55% -- 2.50% 2.50% (1.62%) (1.62%)
18.56% $530,497 43% $0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
7.00% 10,159 34% -- 0.99%(1) 1.75%(1) 2.49% (1) 1.73% (1)
28.36% $892,324 79% $0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
5.08% $549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
0.32% 4,294 N/A -- 0.65%(1) 1.15%(1) 2.43% (1) 1.93% (1)
11.53% $123,138 81% $0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09% (1) 5.09% (1)
11.23% $286,479 276% $0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53% (1) 2.53% (1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- --------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High
Yield 12/31/96 $11.14 $ 0.56 $ 0.90 $ 1.46 $(0.47) -- $(0.47) $12.13
12/31/95 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
12/31/94(6) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price 12/31/96 $12.01 $ 0.27 $ 1.28 $ 1.55 $(0.25) $(0.04) $(0.29) $13.27
Asset
Allocation 12/31/95 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
12/31/94(6) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total 12/31/96 $11.34 $ 0.46 $(0.10) $ 0.36 $(0.28) $(0.31) $(0.59) $11.11
Return Bond 12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
12/31/94(6) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity
Income 12/31/96 $12.50 $ 0.27 $ 1.79 $ 2.06 $(0.24) $(0.33) $(0.57) $13.99
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
12/31/94(6) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders
Capital 12/31/96 $14.25 $(0.03) $ 2.85 $ 2.82 $ -- $(0.27) $(0.27) $16.80
Appreciation 12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
12/31/94(6) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 12/31/96 $10.65 $ 0.06 $ 1.44 $ 1.50 $(0.08) $ -- $(0.08) $12.07
International
Equity 12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
12/31/94(6) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price 12/31/96 $10.60 $ 0.23 $ 0.38 $ 0.61 $(0.14) $(0.17) $(0.31) $10.90
International
Bond 12/31/95 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
12/31/94(7) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(6) Commenced operations on January 4, 1994.
(7) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT INCOME
RATIOS OF EXPENSES (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
--------------------------------- ---------------------------------
SUPPLEMENTAL DATA AFTER AFTER
---------------------------------------------------- ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
13.58% $205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06%(1) 8.87%(1)
13.14% $120,149 31% $0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64%(1) 3.42%(1)
3.42% $360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57%(1) 5.57%(1)
17.09% $348,680 58% $0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41%(1) 3.41%(1)
20.05% $220,068 69% $0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59%(1) 2.34%(1)
14.17% $402,559 11% $0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45%(1) 0.43%(1)
5.98% $ 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03%(1) 7.03%(1)
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
YEAR BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ---------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Berger
Capital
Growth 12/31/96 $12.40 $ 0.01 $ 2.01 $ 2.02 $(0.03) -- $(0.03) $14.39
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
12/31/94(8) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders
Passport 12/31/96 $10.33 $ 0.09 $ 1.24 $ 1.33 $(0.03) -- $(0.03) $11.63
12/31/95(9) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe
Price 12/31/96 $11.11 $ 0.05 $ 3.35 $ 3.40 $(0.02) $(0.02) $(0.04) $14.47
Natural
Resources 12/31/95(9) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO
Limited 12/31/96 $10.47 $ 0.56 $(0.15) $ 0.41 $(0.05) $(0.02) $(0.07) $10.81
Maturity
Bond 12/31/95(9) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson
Stephens
Value +
Growth 12/31/96(10) $10.00 $(0.01) $ 1.00 $ 0.99 -- -- -- $10.99
</TABLE>
- --------------------------------------------------------------------------------
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(8) Commenced operations on October 20, 1994.
(9) Commenced operations on May 2, 1995.
(10) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------
SUPPLEMENTAL DATA
------------------------------------------------------
NET ASSETS AT PORTFOLIO AVERAGE
TOTAL END OF PERIOD TURNOVER COMMISSION
RETURN (IN 000'S) RATE RATE PAID+
------- ------------- --------- ----------
<S> <C> <C> <C> <C>
16.34% $136,247 156% $0.0614
24.42% 45,979 84% --
(0.30%) 3,030 5% --
12.91% $117,643 133% $0.0190
3.30% 28,455 4% --
30.74% $ 88,534 31% $0.0238
11.10% 9,262 2% --
3.90% $209,013 247% N/A
4.70% 161,940 205% --
9.90% $ 48,790 77% $0.0529
-----------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------------- --------------------------------------
AFTER AFTER
ADVISORY BEFORE ADVISORY ADVISORY BEFORE ADVISORY
FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------------- --------------- ------------- --------------
<C> <C> <C> <C>
1.01% 1.01% 0.24% 0.24%
1.17% 1.17% 0.70% 0.70%
1.25%(1) 1.70%(1) 1.41% (1) 0.97% (1)
1.36% 1.36% 1.25% 1.25%
1.46%(1) 1.46%(1) 0.94% (1) 0.94% (1)
1.30% 1.30% 1.08% 1.08%
1.35%(1) 1.80%(1) 1.28% (1) 0.83% (1)
0.89% 0.89% 5.69% 5.69%
0.89%(1) 0.89%(1) 4.87% (1) 4.87% (1)
1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
American Skandia Trust (the "Trust"), was organized under the laws of the
Commonwealth of Massachusetts on October 31, 1988, as a "Massachusetts Business
Trust". The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Trust operates as a
series company, issuing eighteen classes of shares of beneficial interest during
1996: AST Putnam International Equity Portfolio ("Putnam International")
(formerly, Seligman Henderson International Equity Portfolio), Lord Abbett
Growth and Income Portfolio ("Lord Abbett"), JanCap Growth Portfolio ("JanCap"),
AST Money Market Portfolio ("Money Market"), Federated Utility Income Portfolio
("Federated"), AST Putnam Balanced Portfolio ("Putnam Balanced") (formerly, AST
Phoenix Balanced Asset Portfolio), Federated High Yield Portfolio ("High
Yield"), T. Rowe Price Asset Allocation Portfolio ("Asset Allocation"), PIMCO
Total Return Bond Portfolio ("PIMCO"), INVESCO Equity Income Portfolio
("INVESCO"), Founders Capital Appreciation Portfolio ("Founders"), T. Rowe Price
International Equity Portfolio ("T. Rowe"), T. Rowe Price International Bond
Portfolio ("International Bond") (formerly, AST Scudder International Bond
Portfolio), Berger Capital Growth Portfolio ("Berger"), Founders Passport
Portfolio ("Passport") (formerly, Seligman Henderson International Small Cap
Portfolio), T. Rowe Price Natural Resources Portfolio ("Natural Resources"),
PIMCO Limited Maturity Bond Portfolio ("Limited Maturity"), and Robertson
Stephens Value + Growth Portfolio ("Robertson Stephens") (collectively "the
Portfolios").
The following is a summary of the Trust's significant accounting policies:
Security Valuation
All Portfolios, other than Money Market: Securities are valued at the close of
regular trading on each business day the New York Stock Exchange ("NYSE") is
open. Securities are valued at the last sale price on the securities exchange or
securities market on which such securities primarily are traded. Securities not
listed on an exchange or securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by or at
the direction of the Board of Trustees.
Short-term obligations which mature in sixty days or less are valued at
amortized cost. Short-term obligations with more than sixty days remaining to
maturity are valued at current market value until the sixtieth day prior to
maturity, and thereafter are valued on an amortized cost basis based on the
value on such date.
Money Market: Securities are valued at amortized cost. The amortized cost method
values a security at its cost at the time of purchase and thereafter assumes a
constant amortization to maturity of any discount or premium.
Foreign Currency Translation and Foreign Currency Exchange Contracts
The Trust's investment valuations, other assets, and liabilities initially
expressed in foreign currencies are converted each business day into U.S.
dollars based upon current exchange rates determined prior to the close of the
NYSE. Purchases and sales of foreign investments and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Gains and losses attributable to changes
in foreign currency exchange rates are recorded for financial statement purposes
as net realized gains and losses on investments and foreign currency
transactions.
A foreign currency exchange contract (FCEC) is a commitment to purchase or sell
a specified amount of
<PAGE>
- --------------------------------------------------------------------------------
foreign currency at the settlement date at a specified rate. FCECs are used to
hedge against foreign exchange rate risk arising from a Portfolio's investment
or anticipated investment in securities denominated in foreign currencies. Risks
may arise upon entering into FCECs from the potential inability of
counterparties to meet the terms of their contracts. Also, when utilizing FCECs,
a Portfolio may give up the opportunity to profit from favorable exchange rate
movements during the term of the contract. FCECs are marked-to-market daily at
the applicable exchange rates and any gains or losses are recorded as unrealized
until the contract settlement date.
Futures Contracts and Options
Certain Portfolios may enter into futures contracts for the delayed delivery of
securities, currency, or contracts based upon financial indices, at an agreed
upon price and date. Such contracts require an initial deposit, either in cash
or securities, equal to a certain percentage of the contract amount. Subsequent
payments are made or received by the Portfolios, depending on the fluctuations
in the value of the underlying instrument, and are recorded as unrealized gains
and losses.
Certain Portfolios may write covered call or put options for which premiums are
received in cash and are recorded as liabilities, adjusted to reflect the value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. If a put option is
exercised, the premium reduces the cost basis of the security or currency
purchased.
For both futures and options, risks arise from possible illiquidity, the
potential inability of counterparties to meet the terms of their contracts, and
from movements in interest or exchange rates or securities values. Futures and
options are valued based on their quoted daily settlement prices.
Investment Transactions and Investment Income
Security transactions are accounted for on the trade date. Realized gains and
losses from security transactions are recognized on the specific identification
basis. Dividend income is recorded on the ex-dividend date. Corporate actions,
including dividends, on foreign securities are recorded on the ex-dividend date
or, if such information is not available, as soon as reliable information is
available from the Trust's sources. Interest income is recorded on the accrual
basis.
Dividends and Distributions to Shareholders
All Portfolios other than Money Market: Dividends and distributions arising from
net investment income and net realized capital gains, if any, are declared and
paid annually.
Money Market: Dividends from net investment income are declared daily and paid
monthly, and capital gains, if any, are declared and paid annually.
Distributions to shareholders are recorded on their ex-dividend date.
2. INVESTMENT MANAGEMENT AGREEMENTS,
INVESTMENT SUB-ADVISORY AGREEMENTS
AND TRANSACTIONS WITH AFFILIATES
The Portfolios have entered into Investment Management Agreements with American
Skandia Investment Services, Inc. ("Investment Manager") which provide that the
Investment Manager will furnish each Portfolio with investment advice and
investment management and administrative services. The Investment Manager has
engaged the following firms as Sub-advisors for their respective Portfolios:
Putnam Investment Management, Inc. for Putnam International and Putnam Balanced,
Lord, Abbett & Co. for Lord Abbett, Janus Capital
<PAGE>
- --------------------------------------------------------------------------------
Corporation for JanCap, J. P. Morgan Investment Management Inc. for Money
Market, Federated Investment Counseling for Federated and High Yield, T. Rowe
Price Associates, Inc. for Asset Allocation and Natural Resources, Pacific
Investment Management Co. for PIMCO and Limited Maturity, INVESCO Trust Co. for
INVESCO, Founders Asset Management, Inc. for Founders and Passport, Rowe
Price-Fleming International, Inc., a United Kingdom Corporation, for T. Rowe and
International Bond, Berger Associates, Inc. for Berger, and Robertson, Stephens
& Company Investment Management, L.P. for Robertson Stephens. The Investment
Manager receives a fee computed daily and paid monthly based on an annual rate
of 1.00%, .75%, .90%, .50%, .75%, .75%, .75%, .85%, .65%, .75%, .90%, 1.00%,
.80%, .75%, 1.00%, .90%, .65%, and 1.00% of the average daily net assets of the
Putnam International, Lord Abbett, JanCap, Money Market, Federated, Putnam
Balanced, High Yield, Asset Allocation, PIMCO, INVESCO, Founders, T. Rowe,
International Bond, Berger, Passport, Natural Resources, Limited Maturity, and
Robertson Stephens Portfolios, respectively. The fees for Putnam International
are at the rate of .85% for average daily net assets in excess of $75 million,
for Federated are at the rate of .60% for average daily net assets in excess of
$50 million and for Putnam Balanced are at the rate of .70% for average daily
net assets in excess of $300 million. The Investment Manager is currently
voluntarily waiving .05% of its fee for Money Market.
The Investment Manager pays each Sub-advisor a fee computed daily and payable
monthly based on an annual rate of .65%, .50%, .60%, .25%, .50%, .45%, .50%,
.50%, .30%, .50%, .65%, .75%, .40%, .55%, .60%, .60%, .30%, and .60% of the
average daily net assets of the Putnam International, Lord Abbett, JanCap, Money
Market, Federated, Putnam Balanced, High Yield, Asset Allocation, PIMCO,
INVESCO, Founders, T. Rowe, International Bond, Berger, Passport, Natural
Resources, Limited Maturity, and Robertson Stephens Portfolios, respectively.
The Sub-advisors for JanCap, Money Market, and T. Rowe are currently voluntarily
waiving a portion of the fee payable to them by the Investment Manager. The
annual rates of the fees payable by the Investment Manager to the Sub-advisors
of all Portfolios, other than International Bond, are reduced for Portfolio net
assets in excess of specified levels.
On April 12, 1996, the shareholders of the AST Scudder International Bond
Portfolio approved new Investment Management and Sub-Advisory Agreements,
effective May 1, 1996. Under the new Sub-Advisory Agreement, Rowe Price-Fleming
International, Inc., became Sub-advisor to the Portfolio. Effective May 1, 1996,
the name of the Portfolio was changed to the T. Rowe Price International Bond
Portfolio. Prior to May 1, 1996, the Investment Manager received a fee computed
daily and paid monthly based on an annual rate of 1.00% of the average daily net
assets of the Portfolio. Scudder, Stephens & Clark, Inc. served as Sub-advisor
for an annual rate of .60% of the average daily net assets of the Portfolio.
On October 11, 1996, the shareholders of the Seligman Henderson International
Equity Portfolio ("Henderson"), AST Phoenix Balanced Asset Portfolio
("Balanced") and Seligman Henderson International Small Cap Portfolio ("Small
Cap") approved new Investment Management and Sub-Advisory Agreements, effective
October 15, 1996. Under the new Sub-Advisory Agreements, Putnam Investment
Management, Inc. became Sub-advisor to the Henderson and Balanced Portfolios and
Founders Asset Management, Inc. became Sub-advisor to the Small Cap Portfolio.
Effective October 15, 1996, the names of the Portfolios were changed to AST
Putnam International Equity Portfolio, AST Putnam Balanced Portfolio, and
Founders Passport Portfolio for the Henderson, Balanced, and Small Cap
Portfolios, respectively. Prior to October 15, 1996, Seligman Henderson Co., a
joint venture between J. & W. Seligman & Co. Incorporated and Henderson
International, Inc. served as Sub-advisor for the Henderson and
<PAGE>
- --------------------------------------------------------------------------------
Small Cap Portfolios and Phoenix Investment Counsel, Inc. served as Sub-advisor
for the Balanced Portfolio. Prior to October 15, 1996, the Investment Manager
received a fee computed daily and paid monthly based on an annual rate of 1.00%,
.75% and 1.00% of the average daily net assets of the Henderson, Balanced, and
Small Cap Portfolios, respectively. The Investment Manager waived .15% of its
fee for Henderson on average daily net assets in excess of $75 million. The
Investment Manager paid each Sub-advisor a fee computed daily and payable
monthly based on an annual rate of 1.00%, .50% and .60% of the average daily net
assets of the Henderson, Balanced, and Small Cap Portfolios, respectively. The
annual rates of the fees paid by the Investment Manager to the Sub-advisors of
each Portfolio were reduced for Portfolio net assets in excess of specified
levels.
The Investment Manager has agreed to reimburse each Portfolio for the amount, if
any, by which the total operating and management expenses (after fee waivers and
expense reimbursements) of the Portfolio for any fiscal year exceed the most
restrictive state blue sky expense limitation in effect from time to time, to
the extent required by such limitation. The Investment Management Agreement with
each Portfolio also provides that the Investment Manager will reimburse the
Portfolio to prevent its expenses from exceeding a specific percentage limit.
During the year ended December 31, 1996, the Investment Manager reimbursed Money
Market for expenses pursuant to those provisions.
The Trust has entered into an agreement with American Skandia Life Assurance
Corporation ("ASLAC") pursuant to which it pays ASLAC a shareholder servicing
fee at an annual rate of .10% of each Portfolio's average daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or directors
of the Investment Manager. During the year ended December 31, 1996, the Trust
made no direct payments to its officers or interested Trustees.
3. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and proceeds from securities sold, excluding
short-term obligations, during the year ended December 31, 1996 were ($ in
thousands): $432,812 and $370,749 for Putnam International, $379,695 and
$155,746 for Lord Abbett, $742,468 and $467,531 for JanCap, $94,268 and $90,156
for Federated, $744,181 and $634,180 for Putnam Balanced, $163,459 and $54,732
for High Yield, $75,595 and $24,930 for Asset Allocation, $1,580,935 and
$1,282,195 for PIMCO, $271,082 and $135,460 for INVESCO, $180,472 and $85,656
for Founders, $206,324 and $32,392 for T. Rowe, $194,274 and $151,373 for
International Bond, $195,711 and $121,117 for Berger, $160,182 and $90,198 for
Passport, $78,088 and $11,188 for Natural Resources, $542,165 and $400,931 for
Limited Maturity, and $54,447 and $12,517 for Robertson Stephens.
4. TAX MATTERS
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code pertaining to regulated investment companies and to distribute all of its
taxable income, as well as any net realized gains, to its shareholders.
Therefore, no federal income or excise tax provision has been made. Foreign
taxes have been provided for on dividend and interest income earned on foreign
investments in accordance with the applicable country's tax rates and, to the
extent unrecoverable, are recorded as a reduction of investment income.
Tax Cost of Investments
At December 31, 1996, the net unrealized appreciation or depreciation based on
the cost of investments for
<PAGE>
- --------------------------------------------------------------------------------
federal income tax purposes was as follows ($ in thousands):
<TABLE>
<CAPTION>
TAX GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION (DEPRECIATION)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Putnam
International........ $ 322,005 $ 28,977 $ (5,101) $ 23,876
Lord Abbett........... 457,800 74,563 (3,805) 70,758
JanCap................ 692,487 184,437 (3,938) 180,499
Money Market.......... 548,206 -- -- --
Federated............. 110,631 13,279 (1,259) 12,020
Putnam Balanced....... 288,453 11,294 (3,696) 7,598
High Yield............ 192,729 10,790 (1,881) 8,909
Asset Allocation...... 107,951 13,406 (1,700) 11,706
PIMCO................. 427,007 5,138 (781) 4,357
INVESCO............... 294,477 45,218 (3,011) 42,207
Founders.............. 190,972 43,161 (5,779) 37,382
T. Rowe............... 338,578 62,816 (17,260) 45,556
International Bond.... 86,891 2,494 (629) 1,865
Berger................ 120,843 16,651 (1,419) 15,232
Passport.............. 111,679 9,522 (4,276) 5,246
Natural Resources..... 88,546 9,797 (2,092) 7,705
Limited Maturity...... 237,630 834 (2,085) (1,251)
Robertson Stephens.... 45,590 3,751 (985) 2,766
</TABLE>
Capital Loss Carryforwards
At December 31, 1996, for federal income tax purposes, capital loss
carryforwards ($ in thousands) which may be applied against future net taxable
realized gains of each succeeding year until the earlier of utilization or
expiration in 2004 were: $3,901 for PIMCO, $521 for Founders, $1,177 for Limited
Maturity, and $8 for Robertson Stephens.
Reporting of Distributions
The Trust distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Other financial statement reclassifications, due to permanent differences
between book and tax accounting, had no effect on the net assets or net asset
value per share.
5. WRITTEN OPTION TRANSACTIONS
Written option transactions entered into during the year ended December 31, 1996
are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
PIMCO LIMITED MATURITY
------------------------ ------------------------
NUMBER NUMBER
PUT OPTIONS OF CONTRACTS PREMIUM OF CONTRACTS PREMIUM
- ---------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at beginning
of year.............. 80 $ 32 -- $--
Written............... 1,262 1,014 143 44
Expired............... (80) (32) -- --
Exercised............. (100) (115) -- --
Closing buys.......... (200) (230) -- --
----- ------ ----- -----
Balance at end of
year................. 962 $ 669 143 $44
===== ====== ===== =====
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL BOND
---------------------------------------------
CALL OPTIONS PUT OPTIONS
-------------------- --------------------
PRINCIPAL PRINCIPAL
IN LOCAL IN LOCAL
CURRENCY CURRENCY
(000) PREMIUM (000) PREMIUM
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance at beginning of
year:
British Pound.............. 12 $ 13 -- $ --
German Deutschemark........ 23 24 -- --
Italian Lira............... 2 2 -- --
Japanese Yen............... -- -- 13 16
Swedish Kroner............. 13 16 -- --
------ -----
55 16
------ -----
Written:
Australian Dollar.......... -- -- 8 5
British Pound.............. 12 16 -- --
German Deutschemark........ 63 40 50 54
Italian Lira............... 14 10 -- --
Japanese Yen............... -- -- 38 43
Swedish Kroner............. 48 46 10 9
------ -----
112 111
------ -----
Expired:
British Pound.............. (12) (13) -- --
German Deutschemark........ (23) (24) (50) (54)
Italian Lira............... (16) (12) -- --
Japanese Yen............... -- -- (38) (43)
Swedish Kroner............. (27) (30) (10) (9)
------ -----
(79) (106)
------ -----
Closing Buys:
Australian Dollar.......... -- -- (8) (5)
British Pound.............. (12) (16) -- --
German Deutschemark........ (63) (40) -- --
Japanese Yen............... -- -- (13) (16)
Swedish Kroner............. (34) (32) -- --
------ -----
(88) (21)
------ -----
Balance at end of year..... $ -- $ --
====== =====
</TABLE>
At December 31, 1996, PIMCO and Limited Maturity had sufficient cash and/or
securities at least equal to the value of written options.
<PAGE>
AMERICAN
SKANDIA
TRUST
-----------------------------------------------
SEMIANNUAL REPORT
-----------------------------------------------
JUNE 30, 1997
(UNAUDITED)
<PAGE>
AMERICAN SKANDIA TRUST
SCHEDULES OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
LORD ABBETT GROWTH AND INCOME PORTFOLIO
JANCAP GROWTH PORTFOLIO
AST MONEY MARKET PORTFOLIO
FEDERATED UTILITY INCOME PORTFOLIO
AST PUTNAM BALANCED PORTFOLIO
FEDERATED HIGH YIELD PORTFOLIO
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PIMCO TOTAL RETURN BOND PORTFOLIO
INVESCO EQUITY INCOME PORTFOLIO
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
BERGER CAPITAL GROWTH PORTFOLIO
FOUNDERS PASSPORT PORTFOLIO
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
PIMCO LIMITED MATURITY BOND PORTFOLIO
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
AST JANUS OVERSEAS GROWTH PORTFOLIO
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
FOREIGN STOCK -- 96.5%
AUSTRALIA -- 1.5%
QBE Insurance Group Ltd. ........ 614,613 $ 3,717,605
Westpac Banking Corp. Ltd. ...... 375,100 2,260,356
------------
5,977,961
------------
AUSTRIA -- 1.0%
VA Technologie AG................ 23,000 4,207,511
------------
BRAZIL -- 0.7%
Unibanco Holdings SA Sponsored
[GDR]*......................... 73,500 2,728,687
------------
CANADA -- 6.1%
Bank of Nova Scotia.............. 150,700 6,602,469
CAE, Inc. ....................... 254,700 2,010,450
Magna International, Inc. Cl-A... 73,500 4,423,781
National Bank of Canada.......... 325,541 4,078,398
Newbridge Networks Corp.*........ 21,000 900,282
Northern Telecom Ltd. ........... 73,900 6,649,341
------------
24,664,721
------------
FINLAND -- 1.1%
Nokia AB Cl-A.................... 57,800 4,323,798
------------
FRANCE -- 12.5%
Compagnie Generale des Eaux...... 46,289 5,930,650
Compagnie Generale des Eaux
Warrants*...................... 18,820 11,272
Credit Local de France........... 30,300 2,948,955
Lafarge SA....................... 76,300 4,745,057
Michelin C.G.D.E. Cl-B........... 85,500 5,133,899
Scor SA.......................... 88,000 3,542,639
SGS-Thomson Microelectronics*.... 68,400 5,400,122
Societe Generale................. 49,334 5,506,551
Societe Nationale Elf Aquitaine
SA............................. 50,576 5,455,861
Societe Television Francaise..... 45,100 4,028,704
Total SA Cl-B.................... 77,200 7,802,491
------------
50,506,201
------------
GERMANY -- 8.2%
Altana AG........................ 5,930 6,358,064
Bayer AG......................... 148,738 5,730,860
Bayerische Motoren Werke AG...... 7,500 6,183,705
Deutsche Telekom AG.............. 251,000 6,166,705
Siemans AG....................... 82,500 4,940,729
Veba AG.......................... 68,000 3,840,376
------------
33,220,439
------------
HONG KONG -- 3.8%
Dao Heng Bank Group Ltd. ........ 352,500 1,929,313
First Pacific Co. Ltd. .......... 2,496,000 3,189,756
Guoco Group Ltd. ................ 347,000 1,827,542
HSBC Holdings PLC................ 148,703 4,472,530
Hutchison Whampoa Ltd. .......... 484,000 4,185,986
------------
15,605,127
------------
IRELAND -- 3.2%
Allied Irish Banks PLC........... 514,748 3,953,156
Bank of Ireland PLC.............. 369,100 4,051,438
CRH PLC.......................... 479,700 5,025,774
------------
13,030,368
------------
ITALY -- 1.7%
Ente Nazionale Idrocarburi SPA... 1,233,700 6,984,919
------------
JAPAN -- 16.6%
Canon, Inc. ..................... 279,000 7,595,812
Circle K Japan Co. Ltd. ......... 64,520 3,704,551
Fuji Photo Film Co. ............. 118,900 4,782,976
Hirose Electric Ltd. ............ 30,000 2,057,592
Kao Corp. ....................... 347,000 4,814,398
Keyence Corp. ................... 28,690 4,255,934
Matsushita Electric Works........ 339,000 3,845,550
NEC Corp. ....................... 458,000 6,394,415
Promise Co. Ltd. ................ 12,000 686,911
Rohm Co. ........................ 40,000 4,118,674
Sankyo Co. Ltd. ................. 130,000 4,367,365
Santen Pharmaceutical Ltd. ...... 9,700 195,524
Shin-Etsu Chemical Co. .......... 156,000 4,138,220
Sony Corp. ...................... 91,200 7,950,157
Taisho Pharmaceutical Co.
Ltd. .......................... 72,000 1,941,361
TDK Corp. ....................... 28,000 2,054,799
Tokyo Electron Ltd. ............. 94,000 4,494,939
------------
67,399,178
------------
MALAYSIA -- 0.5%
Malaysian Assurance Alliance
Berhad......................... 338,800 1,973,358
------------
MEXICO -- 1.9%
ALFA SA de CV.................... 52,500 358,150
Cemex SA de CV................... 774,300 3,313,556
Fomento Economico Mexicano SA de
CV Cl-B........................ 273,500 1,628,263
Panamerican Beverages, Inc.
Cl-A........................... 67,100 2,205,913
------------
7,505,882
------------
NETHERLANDS -- 8.8%
ABN AMRO Bank NV................. 186,684 3,480,178
Akzo Nobel NV.................... 32,226 4,415,420
Gucci Group NV................... 41,300 2,658,688
ING Groep NV..................... 142,524 6,569,766
KLM Royal Dutch Airlines NV...... 118,925 3,664,729
Philips Electronics NV........... 106,900 7,655,549
Unilever NV...................... 17,900 3,767,269
Vendex International NV.......... 62,100 3,400,270
------------
35,611,869
------------
POLAND -- 0.1%
Bank Handlowy W Warszawie
144A*.......................... 24,900 308,262
------------
PORTUGAL -- 1.2%
Banco Totta & Acores SA.......... 36,400 608,183
Electricidade de Portugal SA..... 29,200 535,825
Portugal Telecom SA.............. 90,600 3,654,471
------------
4,798,479
------------
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
SINGAPORE -- 0.4%
Cycle & Carriage Ltd. ........... 151,000 $ 1,563,125
------------
SWEDEN -- 4.1%
ABB AB Cl-A...................... 16,465 231,262
Astra AB Cl-A.................... 296,659 5,530,097
Ericsson, (L.M.) Telephone Co.
Cl-B........................... 131,500 5,183,532
Pharmacia & Upjohn, Inc. ........ 61,200 2,067,782
Sandvik AB Cl-B.................. 130,140 3,697,925
------------
16,710,598
------------
SWITZERLAND -- 10.4%
ABB AG........................... 2,500 3,783,210
Ciba Specialty Chemicals AG*..... 65,175 6,024,805
Georg Fischer AG................. 2,700 3,753,081
Julius Baer Holdings AG Cl-B..... 2,870 4,392,256
Nestle SA........................ 5,110 6,739,154
Novartis AG...................... 2,572 4,110,551
Publicitas Holdings SA........... 9,486 1,805,744
Swiss Reinsurance Co. ........... 3,866 5,466,509
Union Bank of Switzerland Cl-B... 5,326 6,090,400
------------
42,165,710
------------
UNITED KINGDOM -- 12.7%
Avis Europe PLC 144A*............ 1,913,531 4,349,731
BAT Industries PLC............... 560,700 5,018,839
British Petroleum Co. PLC........ 324,544 4,034,573
Burmah Castrol PLC............... 142,700 2,417,979
General Electric Co. PLC......... 507,358 3,033,215
Glaxo Wellcome PLC............... 221,400 4,571,866
Molins PLC....................... 84,700 719,363
Norwich Union PLC 144A*.......... 323,300 1,720,168
RTZ Corp. PLC.................... 232,400 4,050,136
Scottish Power PLC............... 649,400 4,228,470
Shell Transport & Trading Co.
PLC............................ 692,700 4,723,820
Smith Industries PLC............. 250,900 3,215,167
Tomkins PLC...................... 656,515 2,842,577
Vodafone Group PLC............... 1,363,700 6,642,612
------------
51,568,516
------------
TOTAL FOREIGN STOCK (COST
$333,257,269)...................... 390,854,709
------------
COMMON STOCK -- 1.1%
TELECOMMUNICATIONS
MCI Communications Corp.
(COST $4,651,451)................ 121,100 4,635,859
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ ------------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 2.0%
UBS Securities Funding,
Inc. 5.90% dated
06/30/97, repurchase
price $8,142,334
(Collateralized by
U.S. Treasury Note,
par value $5,532,000,
market value
$8,275,966 due
02/15/15) (COST
$8,141,000)........... 07/01/97 $8,141 $ 8,141,000
------------
TOTAL INVESTMENTS -- 99.6%
(COST $346,049,720).................. 403,631,568
OTHER ASSETS LESS
LIABILITIES -- 0.4%.................. 1,434,762
------------
NET ASSETS -- 100.0%................... $405,066,330
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy CAD $ 1,149,362 1.3807 07/97 $ 48
Buy CHF 10,566,967 1.3940 08/97 (434,062)
Buy DEM 1,572,980 1.6847 07/97 (49,992)
Buy ITL 2,683,219 1,696.8100 07/97 (5,833)
Buy JPY 8,329,629 117.0520 07/97 199,659
Buy PTE 609,090 176.0000 07/97 (83)
----------
$ (290,263)
==========
Sell CHF $10,209,074 1.4430 08/97 $ 74,794
Sell DEM 13,784,669 1.7090 07/97 245,589
Sell FRF 30,621,481 5.7381 08/97 636,448
Sell JPY 8,934,394 123.3442 07/97 (703,551)
Sell JPY 7,994,947 110.8200 11/97 97,019
Sell SEK 2,632,024 7.7342 07/97 (3,463)
----------
$ 346,836
==========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.6% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C>
COMMON STOCK -- 89.3%
AUTOMOBILE MANUFACTURERS -- 1.4%
General Motors Corp. .......... 185,000 $ 10,302,188
------------
CHEMICALS -- 4.1%
Dow Chemical Co. .............. 90,000 7,841,250
Hanna, (M.A.) Co. ............. 360,000 10,372,500
Rohm & Haas Co. ............... 130,000 11,708,125
------------
29,921,875
------------
CLOTHING & APPAREL -- 2.2%
Liz Claiborne, Inc. ........... 220,000 10,257,500
VF Corp. ...................... 70,000 5,932,500
------------
16,190,000
------------
COMPUTER HARDWARE -- 6.5%
EMC Corp.*..................... 140,000 5,460,000
Hewlett-Packard Co............. 310,000 17,360,000
International Business Machines
Corp......................... 170,000 15,331,875
Seagate Technology, Inc.*...... 250,000 8,796,875
------------
46,948,750
------------
CONGLOMERATES -- 1.6%
Minnesota Mining &
Manufacturing Co. ........... 115,000 11,730,000
------------
CONSUMER PRODUCTS &
SERVICES -- 3.1%
Fortune Brands, Inc. .......... 290,000 10,820,625
International Flavors &
Fragrances, Inc. ............ 75,000 3,787,500
Whirlpool Corp. ............... 140,000 7,638,750
------------
22,246,875
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.0%
Emerson Electric Co. .......... 240,000 13,215,000
National Service Industries,
Inc. ........................ 180,000 8,763,750
------------
21,978,750
------------
ENVIRONMENTAL SERVICES -- 0.8%
Waste Management, Inc. ........ 181,379 5,826,800
------------
FINANCIAL-BANK & TRUST -- 7.6%
BankAmerica Corp. ............. 110,000 7,101,875
BankBoston Corp. .............. 160,000 11,530,000
Chase Manhattan Corp. ......... 100,000 9,706,250
Comerica, Inc. ................ 100,000 6,800,000
First Chicago NBD Corp. ....... 90,000 5,445,000
Great Western Financial
Corp. ....................... 270,000 14,512,500
------------
55,095,625
------------
FINANCIAL SERVICES -- 2.3%
Morgan Stanley, Dean Witter,
Discover & Co.*.............. 220,000 9,473,750
Providian Financial Corp.*..... 220,000 7,067,500
------------
16,541,250
------------
FOOD -- 7.9%
Archer-Daniels-Midland Co. .... 200,000 4,700,000
Conagra, Inc. ................. 270,000 17,313,750
Heinz, (H.J.) Co. ............. 275,000 12,684,375
Hershey Foods Corp. ........... 110,000 6,084,375
Pioneer Hi-Bred International,
Inc.......................... 90,000 7,200,000
Sara Lee Corp. ................ 220,000 9,157,500
------------
57,140,000
------------
HEALTHCARE SERVICES -- 0.5%
United Healthcare Corp. ....... 65,000 3,380,000
------------
INDUSTRIAL PRODUCTS -- 2.4%
Corning, Inc. ................. 320,000 17,800,000
------------
INSURANCE -- 7.9%
Aegon NV [ADR]................. 109,999 7,706,805
American General Corp. ........ 180,000 8,595,000
Chubb Corp. ................... 290,000 19,393,750
Safeco Corp. .................. 220,000 10,271,250
Transamerica Corp. ............ 122,100 11,423,981
------------
57,390,786
------------
MACHINERY & EQUIPMENT -- 3.9%
Deere & Co. ................... 345,000 18,931,875
Snap-On, Inc. ................. 240,000 9,450,000
------------
28,381,875
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 2.6%
Baxter International, Inc. .... 160,000 8,360,000
Mallinckrodt Group, Inc. ...... 275,000 10,450,000
------------
18,810,000
------------
OIL & GAS -- 6.5%
Chevron Corp. ................. 80,000 5,915,000
Coastal Corp. ................. 200,000 10,637,500
Consolidated Natural Gas
Co. ......................... 200,000 10,762,500
Ente Nazionale Idrocarbure SPA
[ADR]........................ 104,000 5,915,000
Mobil Corp. ................... 200,000 13,975,000
------------
47,205,000
------------
PAPER & FOREST PRODUCTS -- 7.0%
Bowater, Inc. ................. 200,000 9,250,000
Georgia Pacific Corp. ......... 45,000 3,841,875
International Paper Co. ....... 250,000 12,140,625
James River Corp. of
Virginia..................... 300,000 11,100,000
Kimberly-Clark Corp. .......... 285,000 14,178,750
------------
50,511,250
------------
PHARMACEUTICALS -- 4.0%
American Home Products
Corp. ....................... 90,000 6,885,000
Pharmacia & Upjohn, Inc. ...... 200,000 6,950,000
Smithkline Beecham PLC [ADR]... 110,000 10,078,750
Warner-Lambert Co. ............ 40,000 4,970,000
------------
28,883,750
------------
</TABLE>
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PRINTING & PUBLISHING -- 1.0%
Deluxe Corp. .................. 220,000 $ 7,507,500
------------
RESTAURANTS -- 0.8%
Brinker International, Inc.*... 400,000 5,700,000
------------
RETAIL & MERCHANDISING -- 1.8%
Payless Shoesource, Inc.*...... 110,000 6,015,625
Toys 'R' Us, Inc.*............. 210,000 7,350,000
------------
13,365,625
------------
TELECOMMUNICATIONS -- 4.6%
Bell Atlantic Corp. ........... 130,000 9,863,750
Lucent Technologies, Inc. ..... 70,000 5,044,375
MCI Communications Corp. ...... 260,000 9,953,125
SBC Communications, Inc. ...... 140,000 8,662,500
------------
33,523,750
------------
UTILITIES -- 5.8%
Baltimore Gas & Electric
Co. ......................... 330,000 8,806,875
Carolina Power & Light Co. .... 260,000 9,327,500
Cinergy Corp. ................. 180,000 6,266,250
Duke Power Co. ................ 220,000 10,546,250
FPL Group, Inc. ............... 150,000 6,909,375
------------
41,856,250
------------
TOTAL COMMON STOCK (COST
$510,429,626).................... 648,237,899
------------
PREFERRED STOCK -- 3.5%
INSURANCE -- 1.2%
Aetna, Inc. Cl-C 6.25% [CVT]... 90,000 8,437,500
------------
OIL & GAS -- 2.3%
Atlantic Richfield Co. 9.01%
[CVT]........................ 270,000 5,805,000
Occidental Petroleum Corp.
$3.875 [CVT] 144A............ 185,000 10,845,625
------------
16,650,625
------------
TOTAL PREFERRED STOCK (COST
$24,259,533)..................... 25,088,125
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 2.5%
U.S. Treasury Bonds
6.875%
(COST $17,738,832)... 08/15/25 $18,000 18,076,320
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.3%
Temporary Investment Cash
Fund......................... 15,706,816 15,706,816
Temporary Investment Fund...... 15,706,816 15,706,816
------------
(COST $31,413,632)............. 31,413,632
------------
TOTAL INVESTMENTS -- 99.6%
(COST $583,841,623).............. 722,815,976
OTHER ASSETS LESS
LIABILITIES -- 0.4%.............. 2,972,637
------------
NET ASSETS -- 100.0%............... $725,788,613
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------
<S> <C> <C>
COMMON STOCK -- 91.6%
AEROSPACE -- 2.0%
Textron, Inc. ................. 388,850 $ 25,809,919
--------------
AIRLINES -- 3.9%
Alaska Air Group, Inc.*........ 202,775 5,196,109
UAL Corp.*..................... 637,975 45,655,086
--------------
50,851,195
--------------
BEVERAGES -- 4.6%
Coca-Cola Co. ................. 297,200 20,061,000
Coca-Cola Enterprises, Inc. ... 1,728,950 39,765,850
--------------
59,826,850
--------------
CHEMICALS -- 10.8%
Cytec Industries, Inc.*........ 743,950 27,805,131
Dupont, (E.I.) de Nemours &
Co. ......................... 553,300 34,788,737
Monsanto Co. .................. 1,538,675 66,259,192
Praxair, Inc. ................. 206,900 11,586,400
--------------
140,439,460
--------------
CLOTHING & APPAREL -- 0.9%
Gucci Group NV................. 187,875 12,094,453
--------------
COMPUTER HARDWARE -- 9.0%
Compaq Computer Corp.*......... 69,825 6,930,131
Dell Computer Corp.*........... 531,325 62,397,480
Intel Corp. ................... 235,650 33,418,116
Seagate Technology, Inc.*...... 398,075 14,007,264
--------------
116,752,991
--------------
COMPUTER SERVICES &
SOFTWARE -- 7.2%
Diebold, Inc. ................. 98,737 3,850,743
First Data Corp. .............. 1,103,853 48,500,541
Microsoft Corp.*............... 293,075 37,037,353
Sapient Corp.*................. 84,000 4,158,000
--------------
93,546,637
--------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.7%
Applied Materials, Inc.*....... 329,475 23,330,948
General Electric Co. .......... 781,550 51,093,831
--------------
74,424,779
--------------
FARMING & AGRICULTURE -- 1.1%
Delta & Pine Land Co. ......... 393,975 14,035,359
--------------
FINANCIAL-BANK & TRUST -- 10.1%
Bank of New York Co., Inc...... 75,425 3,280,988
Banc One Corp. ................ 500,000 24,218,750
Bank Plus Corp.*............... 670,609 7,292,873
Citicorp....................... 403,445 48,640,338
Mercantile Bancorporation,
Inc. ........................ 111,200 6,755,400
State Street Boston Corp. ..... 36,150 1,671,938
Wells Fargo & Co. ............. 149,233 40,218,294
--------------
132,078,581
--------------
FINANCIAL SERVICES -- 9.4%
Charles Schwab Corp. .......... 131,700 5,358,544
Federal Home Loan Mtge.
Corp. ....................... 692,300 23,797,813
Fannie Mae..................... 776,135 33,858,889
Merrill Lynch & Co., Inc. ..... 570,350 34,007,119
Student Loan Marketing
Assoc. ...................... 200,675 25,485,725
--------------
122,508,090
--------------
FOOD -- 0.5%
Safeway, Inc.*................. 134,484 6,203,075
--------------
OFFICE EQUIPMENT -- 0.7%
Danka Business Systems PLC
[ADR]........................ 225,550 9,219,356
--------------
OIL & GAS -- 5.4%
Diamond Offshore Drilling,
Inc.*........................ 419,175 32,748,047
Schlumberger Ltd. ............. 200,000 25,000,000
Transocean Offshore, Inc. ..... 165,575 12,024,884
--------------
69,772,931
--------------
PHARMACEUTICALS -- 13.4%
American Home Products
Corp. ....................... 482,700 36,926,550
Bristol-Meyers Squibb Co. ..... 39,950 3,235,950
Lilly, (Eli) & Co. ............ 480,875 52,565,648
Pfizer, Inc. .................. 374,975 44,809,513
Warner-Lambert Co. ............ 302,900 37,635,325
--------------
175,172,986
--------------
RETAIL & MERCHANDISING -- 0.5%
Fred Meyer, Inc.*.............. 139,250 7,197,484
--------------
TELECOMMUNICATIONS -- 6.4%
Cincinnati Bell, Inc. ......... 261,250 8,229,375
Lucent Technologies, Inc. ..... 916,725 66,061,495
Qwest Communications
International, Inc.*......... 339,050 9,239,113
--------------
83,529,983
--------------
TOTAL COMMON STOCK
(COST $909,573,346).............. 1,193,464,129
--------------
FOREIGN STOCK -- 7.7%
AUTOMOBILE MANUFACTURERS -- 6.2%
Bayerische Motoren Werke AG --
(DEM)........................ 1,173 967,131
Porsche AG Pfd. -- (DEM)....... 13,419 17,465,243
Volkswagen AG -- (DEM)......... 81,905 62,082,684
--------------
80,515,058
--------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.5%
Sony Corp. -- (JPY)............ 223,000 19,439,529
--------------
TOTAL FOREIGN STOCK
(COST $72,080,704)............... 99,954,587
--------------
TOTAL INVESTMENTS -- 99.3%
(COST $981,654,050).............. 1,293,418,716
OTHER ASSETS LESS
LIABILITIES -- 0.7%.............. 9,047,789
--------------
NET ASSETS -- 100.0%............... $1,302,466,505
==============
</TABLE>
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy DEM $19,173,831 1.7211 11/97 $ (61,124)
==========
Sell DEM $2,151,987 1.7385 07/97 $ 5,898
Sell DEM 59,795,456 1.6724 11/97 1,875,504
Sell DEM 25,951,047 1.6955 12/97 399,511
Sell JPY 17,725,430 115.6530 11/97 (531,630)
----------
$1,749,283
==========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C>
CORPORATE OBLIGATIONS -- 10.0%
FINANCIAL-BANK & TRUST -- 9.2%
CoreStates Bank NA [VR]
5.65%............... 07/19/97 $20,000 $ 20,000,000
First Union National Bank
NC [VR]
5.73125%............ 07/19/97 5,000 5,000,000
Korea Development Bank
[VR]
5.8425%............. 09/16/97 25,000 24,995,352
Society National Bank of
Cleveland [VR]
5.58%............... 07/01/97 10,000 9,999,869
------------
59,995,221
------------
FINANCIAL SERVICES -- 0.8%
Abbey National Treasury
Services PLC
5.75%............... 02/05/98 5,000 5,000,000
------------
TOTAL CORPORATE OBLIGATIONS
(COST $64,995,221)................ 64,995,221
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.5%
Federal Home Loan Bank [VR]
5.76%
(COST $9,986,200)... 07/08/98 10,000 9,986,200
------------
CERTIFICATES OF DEPOSIT -- 56.4%
Bank of Nova Scotia
5.65%............... 09/23/97 25,000 25,000,000
Bankers Trust NY [VR]
5.69%............... 07/01/97 20,000 19,992,150
5.50%............... 07/07/98 10,000 9,989,208
Bayerische Landesbank
NY
5.50%............... 11/21/97 7,500 7,497,444
5.71%............... 02/06/98 10,000 9,998,267
5.56% [VR].......... 06/26/98 10,000 9,992,328
Canadian Imperial Bank
of Commerce
5.70%............... 08/14/97 15,000 15,000,732
Commerz Bank NY
5.56%............... 07/07/97 24,195 24,195,040
Dai-Ichi Kangyo Bank
Ltd.
5.86%............... 07/28/97 20,000 20,000,550
Deutsche Bank
5.56%............... 07/17/97 10,000 10,000,000
5.55%............... 11/10/97 20,000 19,996,229
Harris Trust Bank
5.59%............... 07/31/97 32,000 32,000,000
Industrial Bank of
Japan NY
5.67%............... 07/11/97 15,000 15,000,041
5.84%............... 08/18/97 15,000 15,000,197
Landesbank Hess
6.08%............... 06/09/98 10,000 9,996,412
National Westminster
Bank NY
6.06%............... 05/26/98 5,000 4,999,140
NationsBank Corp.
5.54%............... 07/15/97 15,000 15,000,000
Radobank Nederland NV
NY
5.99%............... 03/24/98 10,000 9,996,519
San Paolo di Torino NY
5.82%............... 12/10/97 15,000 15,000,000
Sanwa Bank
5.65%............... 07/07/97 30,000 29,999,900
Sumitomo Bank Ltd.
5.78%............... 09/02/97 2,000 2,000,035
Sumitomo Bank Ltd. LA
5.68%............... 07/01/97 20,000 20,000,000
5.70%............... 07/03/97 10,000 10,000,022
Swiss Bank Corp.
5.98%............... 03/19/98 15,000 14,997,950
------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $365,652,164)............... 365,652,164
------------
COMMERCIAL PAPER -- 35.1%
FINANCIAL-BANK & TRUST -- 15.8%
Abbey National North
America Corp.
5.30%............... 08/12/97 15,000 14,907,250
ABN AMRO North America
Finance, Inc.
5.615%.............. 08/19/97 15,000 14,885,360
Barclays US Funding
Corp.
5.66%............... 08/22/97 15,000 14,877,367
BBL North America,
Inc.
5.62%............... 07/01/97 3,000 3,000,000
Commonwealth Bank of
Australia
5.52%............... 07/07/97 30,000 29,972,400
Lloyds Bank PLC
5.65%............... 08/22/97 15,000 14,877,583
Royal Bank of Scotland
PLC
5.64%............... 07/28/97 10,000 9,957,700
------------
102,477,660
------------
FINANCIAL SERVICES -- 18.5%
Associates Corp.
5.55%............... 07/24/97 25,000 24,911,354
Cregem North America,
Inc.
5.63%............... 07/07/97 20,000 19,981,233
General Electric
Capital Corp.
5.55%............... 07/22/97 15,000 14,951,437
5.72%............... 10/27/97 15,000 14,718,767
Halifax Building
Society
5.54%............... 07/24/97 28,000 27,900,896
</TABLE>
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C>
UBS Finance Del., Inc.
6.05%............... 07/01/97 $17,683 $ 17,683,000
------------
120,146,687
------------
MACHINERY & EQUIPMENT -- 0.8%
Deere & Co.
5.54%............... 07/25/97 5,000 4,981,533
------------
TOTAL COMMERCIAL PAPER
(COST $227,605,880)............... 227,605,880
------------
TOTAL INVESTMENTS -- 103.0%
(COST $668,239,465)............... 668,239,465
LIABILITES IN EXCESS OF OTHER
ASSETS -- (3.0%).................. (19,537,490)
------------
NET ASSETS -- 100.0%................ $648,701,975
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 68.8%
AUTOMOBILE MANUFACTURERS -- 0.5%
Ford Motor Co. .................... 16,700 $ 630,425
------------
CONGLOMERATES -- 2.0%
Philip Morris Companies, Inc. ..... 58,600 2,600,375
------------
OIL & GAS -- 2.4%
Exxon Corp. ....................... 13,400 824,100
New Jersey Resources Corp.......... 9,700 304,337
Williams Companies, Inc............ 44,750 1,957,812
------------
3,086,249
------------
REAL ESTATE -- 3.5%
Boston Properties, Inc.*........... 21,300 585,750
Meditrust Corp. [REIT]............. 100,100 3,991,487
------------
4,577,237
------------
TELECOMMUNICATIONS -- 19.5%
Ameritech Corp. ................... 55,500 3,770,531
BellSouth Corp. ................... 86,400 4,006,800
GTE Corp. ......................... 84,400 3,703,050
MCI Communications Corp. .......... 89,400 3,422,344
SBC Communications, Inc. .......... 58,000 3,588,750
Sprint Corp. ...................... 75,500 3,973,187
Telebras SA [ADR].................. 18,500 2,807,375
------------
25,272,037
------------
UTILITIES -- 0.2%
American Water Works Co., Inc. .... 13,900 297,112
------------
UTILITIES -- ELECTRIC -- 36.2%
Cinergy Corp. ..................... 49,600 1,726,700
CMS Energy Corp. .................. 114,400 4,032,600
DPL, Inc. ......................... 140,900 3,469,662
DQE, Inc. ......................... 109,250 3,086,312
Duke Power Co. .................... 106,143 5,088,230
Empresa Nacional Electridad SA
[ADR]............................ 91,670 2,068,304
FPL Group, Inc. ................... 85,400 3,933,737
GPU, Inc. ......................... 26,100 936,337
Korea Electric Power Corp. [ADR]... 42,900 801,694
National Power PLC [ADR]........... 72,200 2,540,538
NIPSCO Industries, Inc. ........... 79,100 3,267,819
Pacificorp......................... 94,200 2,072,400
PG&E Corp. ........................ 40,200 974,850
Pinnacle West Capital Co. ......... 115,500 3,472,219
Portland General Corp. ............ 36,900 1,464,469
Southern Co. ...................... 121,900 2,666,563
Teco Energy, Inc. ................. 118,600 3,031,713
Texas Utilities Co. ............... 70,200 2,417,513
------------
47,051,660
------------
UTILITIES -- GAS -- 4.5%
MCN Energy Group, Inc. ............ 98,700 3,022,688
Pacific Enterprises................ 83,000 2,790,875
------------
5,813,563
------------
TOTAL COMMON STOCK
(COST $77,666,867)................... 89,328,658
------------
PREFERRED STOCK -- 18.9%
COMPUTER SERVICES & SOFTWARE -- 1.9%
Microsoft Corp. 2.75% [CVT]........ 29,200 2,540,400
------------
CONTAINERS & PACKAGING -- 0.6%
Amcor Ltd. 7.25% [CVT]............. 13,700 726,100
------------
ENVIRONMENTAL SERVICES -- 1.1%
Browning-Ferris Industries, Inc.
7.25% [CVT]...................... 44,300 1,472,975
------------
FINANCIAL-BANK & TRUST -- 0.9%
National Australia Bank Ltd. 7.875%
[CVT]............................ 40,000 1,117,500
------------
FINANCIAL SERVICES -- 6.0%
Merrill Lynch & Co., Inc. [CVT]
6.25%............................ 33,000 1,237,500
6.50%............................ 27,700 2,285,250
7.25%............................ 12,700 869,950
Salomon, Inc. [CVT]
6.25%............................ 24,200 1,545,775
7.625%........................... 24,200 850,025
SunAmerica, Inc. $3.10 [CVT]....... 24,600 1,073,175
------------
7,861,675
------------
INSURANCE -- 1.0%
Aetna, Inc. Cl-C 6.25% [CVT]....... 13,800 1,293,750
------------
METALS & MINING -- 1.0%
Coeur D'arlene Mines Corp. 7.00%
[CVT]............................ 74,700 1,251,225
------------
OIL & GAS -- 3.0%
Tosco Financing Trust 5.75% [CVT]
144A............................. 26,300 1,499,100
Williams Companies, Inc. $3.50
[CVT]............................ 23,700 2,417,993
------------
3,917,093
------------
PRINTING & PUBLISHING -- 0.6%
Hollinger International Publishing
Co. 9.75% [CVT].................. 65,400 752,100
------------
TELECOMMUNICATIONS -- 2.1%
Airtouch Communications, Inc.
$2.125 Cl-C [CVT]................ 27,700 1,329,600
TCI Pacific Communications, Inc.
$5.00 [CVT]...................... 13,500 1,397,250
------------
2,726,850
------------
UTILITIES -- ELECTRIC -- 0.5%
Cal Energy Co., Inc. 6.25% [CVT]
144A............................. 11,000 616,000
------------
UTILITIES -- GAS -- 0.2%
MCN Energy Group, Inc. 8.00%
[CVT]............................ 5,800 314,287
------------
TOTAL PREFERRED STOCK
(COST $21,692,405)................... 24,589,955
------------
</TABLE>
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FOREIGN STOCK -- 5.7%
TELECOMMUNICATIONS -- 2.4%
Nippon Telegraph & Telephone
Corp. -- (JPY)................... 1,400 $ 1,343,805
Stet di Risp SPA -- (ITL).......... 530,500 1,841,147
------------
3,184,952
------------
UTILITIES -- ELECTRIC -- 3.3%
China Light & Power Co. Ltd. --
(HKD)............................ 284,000 1,609,387
Electricidade de Portugal
SA -- (PTE)...................... 145,580 2,671,420
------------
4,280,807
------------
TOTAL FOREIGN STOCK
(COST $6,288,087).................... 7,465,759
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 4.1%
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.2%
Solectron Corp. Notes [CVT]
144A
6.00%.................... 03/01/06 $1,245 1,551,581
------------
HEALTHCARE SERVICES -- 1.5%
Roche Holdings, Inc. Notes
[ZCB] 144A
6.375%................... 05/06/12 3,100 1,340,750
Tenet Healthcare Corp. Sub.
Notes [CVT]
6.00%.................... 12/01/05 500 631,250
------------
1,972,000
------------
PHARMACEUTICALS -- 1.0%
Alza Corp. Sub. Debs. [CVT]
5.00%.................... 05/01/06 1,350 1,361,813
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C>
UTILITIES -- ELECTRIC -- 0.4%
Korea Electric Power Debs.
[CVT]
5.00%.................... 08/01/01 $ 470 $ 470,588
------------
TOTAL CORPORATE OBLIGATIONS
(COST $4,879,328)..................... 5,355,982
------------
REPURCHASE AGREEMENTS -- 1.5%
Greenwich Capital Markets,
Inc. 5.95% dated
06/30/97, repurchase
price $1,894,313
(Collateralized by U.S.
Treasury Note, par value
$1,878,000, market value
$1,975,421 due 05/15/04)
(COST $1,894,000)........ 07/01/97 1,894 1,894,000
------------
TOTAL INVESTMENTS -- 99.0%
(COST $112,420,687)................... 128,634,354
OTHER ASSETS LESS LIABILITIES -- 1.0%... 1,269,406
------------
NET ASSETS -- 100.0%.................... $129,903,760
============
</TABLE>
- ----------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH DEPRECIATION
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy ITL $ 92,946 1,697.1999 7/97 $ (163)
Buy HKD 105,826 7.7445 7/97 (36)
------
$ (199)
======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 3.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 51.0%
ADVERTISING -- 0.2%
Omnicom Group, Inc................. 8,100 $ 499,162
----------
AEROSPACE -- 1.5%
General Motors Corp. Cl-H.......... 20,443 1,180,583
Northrop Grumman Corp.............. 15,268 1,340,721
Precision Castparts Corp........... 6,200 369,675
Rockwell International Corp........ 17,704 1,044,536
United Technologies Corp........... 10,944 908,352
----------
4,843,867
----------
AIRLINES -- 0.3%
Delta Air Lines, Inc............... 13,151 1,078,382
----------
AUTOMOBILE MANUFACTURERS -- 0.9%
Ford Motor Co...................... 33,674 1,271,193
General Motors Corp................ 28,118 1,565,821
----------
2,837,014
----------
AUTOMOTIVE PARTS -- 1.9%
Dana Corp.......................... 28,330 1,076,540
Eaton Corp......................... 11,755 1,026,358
Goodyear Tire & Rubber Co.......... 18,788 1,189,515
Lear Corp.*........................ 20,145 893,934
Magna International, Inc. Cl-A..... 3,300 198,619
TRW, Inc........................... 32,043 1,820,443
----------
6,205,409
----------
BEVERAGES -- 0.4%
Anheuser-Busch Companies, Inc...... 20,878 875,571
Coca-Cola Enterprises, Inc......... 17,300 397,900
----------
1,273,471
----------
BROADCASTING -- 0.2%
Clear Channel Communications,
Inc.*............................ 7,500 461,250
Evergreen Media Corp. Cl-A*........ 6,900 307,912
----------
769,162
----------
BUILDING MATERIALS -- 1.4%
Armstrong World Industries, Inc.... 17,223 1,263,738
Lowe's Companies, Inc.............. 36,700 1,362,488
Masco Corp......................... 35,750 1,492,562
Sherwin-Williams Co................ 8,100 250,088
Terex Corp. Appreciation Rights*... 600 9,300
----------
4,378,176
----------
BUSINESS SERVICES -- 0.5%
Accustaff, Inc.*................... 12,200 288,225
Equifax, Inc....................... 16,300 606,156
Norrell Corp....................... 13,500 445,500
Quintiles Transnational Corp.*..... 4,700 327,237
Telespectrum Worldwide, Inc.*...... 4,800 33,750
----------
1,700,868
----------
CHEMICALS -- 1.8%
Dupont, (E.I.) de Nemours & Co..... 23,230 1,460,586
Eastman Chemical Co................ 21,222 1,347,597
Hercules, Inc...................... 18,825 901,247
Praxair, Inc....................... 5,800 324,800
Witco Corp......................... 43,573 1,653,051
----------
5,687,281
----------
CLOTHING & APPAREL -- 0.3%
Hilfiger, (Tommy) Corp.*........... 5,100 204,956
Jones Apparel Group, Inc.*......... 6,300 300,825
Just For Feet, Inc.*............... 1,300 22,669
St. John Knits, Inc................ 3,900 210,600
WestPoint Stevens, Inc.*........... 7,600 297,350
----------
1,036,400
----------
COMPUTER HARDWARE -- 1.5%
Gateway 2000, Inc.*................ 7,600 246,525
Hewlett-Packard Co................. 28,230 1,580,880
International Business Machines
Corp............................. 31,536 2,844,153
----------
4,671,558
----------
COMPUTER SERVICES & SOFTWARE -- 1.7%
BMC Software, Inc.*................ 5,200 287,950
Cognos, Inc.*...................... 7,700 239,662
Computer Associates International,
Inc.............................. 25,145 1,400,262
Diebold, Inc....................... 8,600 335,400
Fiserv, Inc.*...................... 1,600 71,400
Gartner Group, Inc. Cl-A*.......... 7,500 269,531
McAfee Associates, Inc.*........... 6,100 385,062
NCR Corp.*......................... 34,590 1,029,052
Parametric Technology Corp.*....... 7,900 336,244
Paychex, Inc....................... 11,500 437,000
Peoplesoft, Inc.*.................. 6,300 332,325
Sterling Commerce, Inc.*........... 6,100 200,538
Viasoft, Inc.*..................... 3,300 167,475
----------
5,491,901
----------
CONGLOMERATES -- 1.7%
Minnesota Mining & Manufacturing
Co............................... 26,248 2,677,296
Philip Morris Companies, Inc....... 39,032 1,732,045
Tenneco, Inc....................... 23,270 1,051,513
----------
5,460,854
----------
CONSUMER PRODUCTS & SERVICES -- 3.1%
Apollo Group, Inc. Cl-A*........... 9,300 327,825
Blyth Industries, Inc.*............ 7,500 253,125
Colgate-Palmolive Co............... 20,294 1,324,183
Eastman Kodak Co................... 30,375 2,331,281
Estee Lauder Co. Cl-A.............. 4,900 246,225
Fortune Brands, Inc................ 29,366 1,095,719
Gallaher Group PLC [ADR]*.......... 29,366 541,436
Rexall Sundown, Inc.*.............. 3,600 140,400
Tupperware Corp.................... 39,685 1,448,502
Whirlpool Corp..................... 20,120 1,097,798
Whitman Corp....................... 42,371 1,016,904
----------
9,823,398
----------
CONTAINERS & PACKAGING -- 1.0%
Crown Cork & Seal Co., Inc......... 22,374 1,195,611
Owens-Illinois, Inc.*.............. 44,785 1,388,335
Temple-Inland, Inc................. 11,096 599,184
----------
3,183,130
----------
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.8%
Electronics For Imaging, Inc.*..... 5,600 $ 264,600
General Signal Corp................ 20,027 873,678
KLA Instruments Corp.*............. 6,000 292,500
LSI Logic Corp.*................... 9,400 300,800
Polaroid Corp...................... 43,838 2,433,009
Sawtek, Inc.*...................... 2,300 77,625
SCI Systems, Inc.*................. 4,000 255,000
Symbol Technologies, Inc........... 4,800 161,400
Teradyne, Inc.*.................... 6,200 243,350
Texas Instruments, Inc............. 11,645 978,908
----------
5,880,870
----------
ENERGY SERVICES -- 0.1%
AES Corp.*......................... 6,100 431,575
----------
ENTERTAINMENT & LEISURE -- 0.2%
Callaway Golf Co................... 6,600 234,300
Harley-Davidson, Inc............... 6,100 292,419
----------
526,719
----------
ENVIRONMENTAL SERVICES -- 0.5%
U.S. Filter Corp.*................. 13,100 356,975
United Waste Systems, Inc.*........ 6,600 270,600
USA Waste Services, Inc.*.......... 7,600 293,550
Waste Management, Inc.............. 20,419 655,960
----------
1,577,085
----------
FARMING & AGRICULTURE -- 0.1%
Dekalb Genetics Corp. Cl-B......... 3,000 239,250
----------
FINANCIAL-BANK & TRUST -- 5.4%
Banc One Corp...................... 32,050 1,552,422
Bankers Trust New York Corp........ 14,607 1,270,809
Charter One Financial, Inc......... 6,100 328,638
First of America Bank Corp......... 7,800 356,850
First Tennessee National Corp...... 6,990 335,520
Fleet Financial Group, Inc......... 28,767 1,819,513
Great Western Financial Corp....... 3,400 182,750
GreenPoint Financial Corp.......... 6,100 406,031
Huntington Bancshares, Inc......... 10,970 322,244
Keycorp............................ 21,178 1,183,321
Mellon Bank Corp................... 16,442 741,945
Mercantile Bancorporation, Inc..... 9,080 551,610
Morgan, (J.P.) & Co., Inc.......... 23,279 2,429,746
Northern Trust Corp................ 8,300 401,512
Old Kent Financial Corp............ 6,825 368,550
PNC Bank Corp...................... 57,788 2,405,425
Redwood Trust, Inc................. 3,700 172,975
Regions Financial Corp............. 15,200 480,700
State Street Boston Corp........... 9,000 416,250
Summit Bancorp..................... 13,150 659,144
TCF Financial Corp................. 3,000 148,125
Union Planters Corp................ 13,485 699,534
Westamerica Bancorporation......... 3,100 235,600
----------
17,469,214
----------
FINANCIAL SERVICES -- 1.3%
Ahmanson, (H.F.) & Co.............. 30,990 1,332,570
Beneficial Corp.................... 10,200 724,838
Esat Holdings Ltd. Warrants*....... 35 0
Finova Group, Inc.................. 5,900 451,350
Reliastar Financial Corp........... 3,000 219,375
Salomon, Inc....................... 17,150 953,969
SunAmerica, Inc.................... 7,000 341,250
----------
4,023,352
----------
FOOD -- 1.1%
General Mills, Inc................. 19,501 1,270,003
RJR Nabisco Holdings Corp.......... 29,650 978,450
Sara Lee Corp...................... 29,960 1,247,085
----------
3,495,538
----------
FURNITURE -- 0.1%
Leggett & Platt, Inc............... 7,700 331,100
----------
HEALTHCARE SERVICES -- 0.6%
Genesis Health Ventures, Inc.*..... 6,000 202,500
Health Care & Retirement Corp.*.... 7,400 246,975
Health Management Associates,
Inc.*............................ 10,500 299,250
Healthsouth Corp.*................. 16,100 401,494
Omnicare, Inc...................... 15,200 476,900
Oxford Health Plans, Inc.*......... 4,900 351,575
----------
1,978,694
----------
HOTELS & MOTELS -- 0.1%
Hillenbrand Industries, Inc........ 6,200 294,500
----------
INSURANCE -- 1.8%
American General Corp.............. 29,866 1,426,101
AON Corp........................... 31,266 1,618,015
Capmac Holdings, Inc............... 6,800 228,650
CIGNA Corp......................... 3,052 541,730
Hartford Life, Inc. Cl-A*.......... 8,000 300,000
USF&G Corp......................... 68,073 1,633,752
----------
5,748,248
----------
MACHINERY & EQUIPMENT -- 0.9%
Cooper Industries, Inc............. 25,920 1,289,520
New Holland NV..................... 54,074 1,480,276
----------
2,769,796
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.9%
Baxter International, Inc.......... 42,521 2,221,722
Stryker Corp....................... 10,900 380,138
U.S. Surgical Corp................. 6,300 234,675
----------
2,836,535
----------
METALS & MINING -- 0.4%
Freeport-McMoran
Copper & Gold, Inc. Cl-A......... 45,339 1,326,166
----------
OFFICE EQUIPMENT -- 0.9%
Xerox Corp......................... 36,626 2,888,876
----------
OIL & GAS -- 4.5%
Amoco Corp......................... 18,972 1,649,378
Atlantic Richfield Co.............. 9,325 657,412
British Petroleum Co. PLC [ADR].... 19,832 1,484,921
Camco International, Inc........... 6,000 328,500
Coastal Corp....................... 18,165 966,151
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C>
Ente Nazionale Idrocarbure SPA
[ADR]............................ 4,900 $ 278,688
Exxon Corp......................... 22,531 1,385,656
Global Marine, Inc.*............... 11,100 258,075
Halliburton Co..................... 4,900 388,325
Mobil Corp......................... 21,566 1,506,924
Occidental Petroleum Corp.......... 50,146 1,256,784
Societe Nationale Elf Aquitaine SA
[ADR]............................ 33,880 1,844,342
Tosco Corp......................... 9,300 278,419
Total SA [ADR]..................... 29,646 1,500,829
Western Atlas, Inc.*............... 3,400 249,050
YPF SA [ADR]....................... 13,100 402,825
----------
14,436,279
----------
PAPER & FOREST PRODUCTS -- 1.4%
Kimberly-Clark Corp................ 49,392 2,457,252
Weyerhaeuser Co.................... 36,435 1,894,620
----------
4,351,872
----------
PHARMACEUTICALS -- 2.0%
American Home Products Corp........ 20,308 1,553,562
BioChem Pharma, Inc.*.............. 6,800 151,300
Bristol-Meyers Squibb Co........... 18,082 1,464,642
Cardinal Health, Inc............... 7,450 426,512
Dura Pharmaceutical, Inc.*......... 7,700 307,038
Elan Corp. PLC [ADR]*.............. 7,200 325,800
Pharmacia & Upjohn, Inc............ 64,647 2,246,484
----------
6,475,338
----------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A............ 8,500 353,812
Central Newspapers, Inc. Cl-A...... 2,600 186,225
McGraw-Hill Co., Inc............... 24,505 1,441,200
----------
1,981,237
----------
RAILROADS -- 1.0%
Canadian National Railway Co....... 15,880 694,750
Norfolk Southern Corp.............. 13,029 1,312,672
Union Pacific Corp................. 17,526 1,235,584
----------
3,243,006
----------
RESTAURANTS -- 0.0%
AmeriKing, Inc.*................... 25 1,250
CKE Restaurants, Inc............... 3,600 113,850
----------
115,100
----------
RETAIL & MERCHANDISING -- 1.8%
Bed, Bath & Beyond, Inc.*.......... 6,900 209,588
Borders Group, Inc.*............... 15,800 381,175
Consolidated Stores Corp.*......... 11,406 396,368
Eagle Hardware & Garden, Inc.*..... 9,600 219,600
Harcourt General, Inc.............. 4,500 214,312
Kmart Corp.*....................... 120,970 1,481,882
Linens 'N Things, Inc.*............ 6,200 183,675
Payless Shoesource, Inc.*.......... 3,300 180,469
Pier 1 Imports, Inc................ 10,300 272,950
Rite Aid Corp...................... 9,200 458,850
Sears Roebuck & Co................. 23,834 1,281,078
TJX Companies, Inc................. 24,200 638,275
----------
5,918,222
----------
SEMI-CONDUCTORS -- 0.7%
Intel Corp......................... 6,175 875,692
Motorola, Inc...................... 19,191 1,458,516
----------
2,334,208
----------
TELECOMMUNICATIONS -- 3.5%
ADC Telecommunications, Inc.*...... 5,700 190,238
Ameritech Corp..................... 19,854 1,348,831
AT&T Corp.......................... 23,015 806,963
BellSouth Corp..................... 35,173 1,631,148
Cascade Communications Corp.*...... 6,100 168,512
Cincinnati Bell, Inc............... 14,000 441,000
Intercel, Inc. Warrants 144A*...... 640 4,608
Jacor Communications, Inc.*........ 8,400 321,300
Nextlink Communications, Inc.
Warrants 144A*................... 385 0
SBC Communications, Inc............ 30,454 1,884,341
Sprint Corp........................ 52,636 2,769,970
Teleport Communications Group, Inc.
Cl-A............................. 9,800 334,425
Tellabs, Inc.*..................... 5,200 290,550
U.S. West Communications Group..... 24,200 912,038
----------
11,103,924
----------
TRANSPORTATION -- 0.4%
Ryder Systems, Inc................. 36,100 1,191,300
Sabre Group Holdings, Inc.*........ 8,700 235,988
Wisconsin Central Transportation
Corp.*........................... 500 18,625
----------
1,445,913
----------
UTILITIES -- 0.5%
Calenergy, Inc..................... 9,400 357,200
Duke Power Co...................... 23,191 1,111,714
----------
1,468,914
----------
TOTAL COMMON STOCK
(COST $141,849,820).................. 163,631,564
----------
PREFERRED STOCK -- 0.5%
BROADCASTING -- 0.0%
American Radio Systems 11.375%..... 2 219
Chancellor Broadcasting Co. 12.00%
144A............................. 400 46,000
Citadel Broadcasting Co. 13.25%
[PIK] 144A....................... 20 20,000
----------
66,219
----------
ENTERTAINMENT & LEISURE -- 0.1%
Time Warner, Inc. Cl-M 10.25%...... 215 239,610
----------
MACHINERY & EQUIPMENT -- 0.4%
Case Corp. Cl-A $4.50 [CVT]........ 7,545 1,225,240
----------
RESTAURANTS -- 0.0%
AmeriKing, Inc. 13.00%............. 1,000 28,000
----------
</TABLE>
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AST PUTNAM BALANCED PORTFOLIO
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<TABLE>
<CAPTION>
SHARES VALUE
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<S> <C> <C>
TELECOMMUNICATIONS -- 0.0%
Cablevision Systems Corp. Cl-M
11.125% [PIK].................... 73 $ 73,611
----------
UTILITIES -- 0.0%
El Paso Electric Co. 11.40%
[PIK]............................ 392 44,296
Public Service New Hampshire Cl-A
10.60%........................... 1,410 35,250
----------
79,546
----------
TOTAL PREFERRED STOCK
(COST $1,329,561).................... 1,712,226
----------
FOREIGN STOCK -- 10.0%
AIRLINES -- 0.1%
KLM Royal Dutch Airlines NV --
(NLG)............................ 4,600 141,751
Swire Pacific Ltd. Cl-A -- (HKD)... 15,000 135,056
----------
276,807
----------
AUTOMOBILE MANUFACTURERS -- 0.2%
Bayerische Motoren Werke AG --
(DEM)............................ 600 494,696
Edaran Otomobil Nasional BHD --
(MYR)............................ 5,000 42,594
----------
537,290
----------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY)......... 7,000 162,478
Denso Corp. -- (JPY)............... 7,000 167,365
Michelin C.G.D.E. Cl-B -- (FRF).... 7,000 420,319
----------
750,162
----------
BEVERAGES -- 0.0%
Fomento Economico Mexicano SA
Cl-B -- (MXP).................... 21,900 130,380
----------
BUILDING MATERIALS -- 0.3%
Cemex SA de CV -- (MXP)............ 45,500 194,714
CRH PLC -- (IEP)................... 39,900 418,029
Daikin Industries Ltd. -- (JPY).... 10,000 90,750
Lafarge SA -- (FRF)................ 5,400 335,823
----------
1,039,316
----------
CHEMICALS -- 0.6%
Akzo Nobel NV -- (NLG)............. 3,600 493,251
Bayer AG -- (DEM).................. 10,899 419,938
Ciba Specialty Chemicals AG --
(CHF)............................ 3,611 333,802
Sekisui Chemical Co.
Ltd. -- (JPY).................... 13,000 131,588
Shin-Etsu Chemical Co. -- (JPY).... 19,000 504,014
----------
1,882,593
----------
CLOTHING & APPAREL -- 0.1%
Onward Kashiyama Co.
Ltd. -- (JPY).................... 9,000 149,215
----------
COMPUTER SERVICES & SOFTWARE -- 0.1%
NEC Corp. -- (JPY)................. 31,000 432,810
----------
CONGLOMERATES -- 0.9%
Alfa SA de CV -- (MXP)............. 39,500 269,465
BAT Industries PLC -- (GBP)........ 53,600 479,775
Compagnie Generale des Eaux --
(FRF)............................ 2,200 281,869
Compagnie Generale des Eaux
Warrants -- (FRF)*............... 480 288
Cycle & Carriage Ltd. -- (SGD)..... 12,000 124,222
Hutchison Whampoa Ltd. -- (HKD).... 37,000 320,003
Mitsui & Co. Ltd. -- (JPY)......... 31,000 297,558
Securicor PLC -- (GBP)............. 29,700 140,960
Smith Industries PLC -- (GBP)...... 24,095 308,766
Sungei Way Holdings BHD --
(MYR)............................ 37,400 70,538
Tomkins PLC -- (GBP)............... 70,271 304,259
Unilever NV -- (NLG)............... 1,300 273,601
----------
2,871,304
----------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Electrolux AB Cl-B -- (SEK)........ 3,000 216,705
Fuji Photo Film Co. -- (JPY)....... 9,000 362,042
Kao Corp. -- (JPY)................. 28,000 388,482
----------
967,229
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1 .1%
Electricidade de
Portugal -- (PTE)................ 2,400 44,040
General Electric Co.
PLC -- (GBP)..................... 46,600 278,596
Hirose Electric Ltd. -- (JPY)...... 2,400 164,608
Matsushita Electric Works Ltd. --
(JPY)............................ 31,000 351,658
Murata Manufacturing Co. Ltd. --
(JPY)............................ 4,000 159,162
Omron Corp. -- (JPY)............... 17,000 360,471
Philips Electronics NV -- (NLG).... 8,100 580,074
Rohm Co. -- (JPY).................. 4,000 411,868
SGS-Thomson Microelectronics NV --
(FRF)*........................... 5,700 450,010
Sony Corp. -- (JPY)................ 5,000 435,864
Tokyo Electron Ltd. -- (JPY)....... 5,000 239,092
----------
3,475,443
----------
ENERGY SERVICES -- 0 .1%
VA Technologie AG -- (ATS)......... 2,000 365,871
----------
FINANCIAL-BANK & TRUST -- 1.3%
ABN AMRO Bank NV -- (NLG).......... 17,432 324,969
Allied Irish Banks PLC -- (IEP).... 47,886 367,754
Bank of Nova Scotia -- (CAD)....... 4,000 175,248
Commonwealth Bank of Australia --
(AUD)............................ 13,800 166,944
Dao Heng Bank Group Ltd. --
(HKD)............................ 28,000 153,250
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD)............... 8,000 100,720
Dresdner Bank AG -- (DEM).......... 9,500 332,808
HSBC Holdings PLC -- (HKD)......... 17,165 516,271
ING Groep NV -- (NLG).............. 12,181 561,494
Julius Baer Holdings AG Cl-B --
(CHF)............................ 200 306,081
Malayan Banking BHD -- (MYR)....... 10,000 105,000
Union Bank of Switzerland Cl-B --
(CHF)............................ 480 548,891
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
United Overseas Bank
Ltd. -- (SGD).................... 20,000 $ 205,638
Westpac Banking Corp. Ltd. --
(AUD)............................ 57,100 344,085
----------
4,209,153
----------
FINANCIAL SERVICES -- 0.3%
Bank of Ireland -- (IEP)........... 34,500 378,690
Cetelem Group SA -- (FRF).......... 1,400 176,036
Credit Local de France -- (FRF).... 2,500 243,313
Gucco Group Ltd. -- (HKD).......... 24,000 126,401
Promise Co. Ltd. -- (JPY).......... 1,000 57,243
----------
981,683
----------
FOOD -- 0.4%
Goodman Fielder Ltd. -- (AUD)...... 110,900 163,507
Greencore Group PLC -- (IEP)....... 37,895 186,463
Ito-Yokado Co. Ltd. -- (JPY)....... 6,000 348,168
Nestle SA -- (CHF)................. 385 507,744
----------
1,205,882
----------
INSURANCE -- 0.2%
Mapfre Vida SA -- (ESP)............ 2,000 129,632
Norwich Union PLC 144A --
(GBP)*........................... 27,000 143,658
Swiss Reinsurance Co. -- (CHF)..... 330 466,619
----------
739,909
----------
MACHINERY & EQUIPMENT -- 0.3%
ABB AG -- (CHF).................... 208 314,763
Kurita Water Industries Ltd. --
(JPY)............................ 8,000 212,914
Rieter Holdings AG -- (CHF)........ 250 97,747
Sandvik AB Cl-A -- (SEK)........... 1,440 40,918
Sandvik AB Cl-B -- (SEK)........... 12,100 343,821
----------
1,010,163
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.1%
Sankyo Co. Ltd. -- (JPY)........... 11,000 369,546
----------
METALS & MINING -- 0.2%
Kawasaki Steel Corp. -- (JPY)...... 28,000 91,134
Nippon Steel Co. -- (JPY).......... 55,000 175,654
RTZ Corp. PLC -- (GBP)............. 18,400 320,665
----------
587,453
----------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)............... 21,000 571,728
----------
OIL & GAS -- 0.9%
British Petroleum Co.
PLC -- (GBP)..................... 24,500 304,572
Burmah Castrol PLC -- (GBP)........ 19,700 333,807
Ente Nazionale Idrocarburi SPA --
(ITL)............................ 107,800 610,338
Hong Kong & China Gas Co. Ltd. --
(HKD)............................ 53,200 106,444
Shell Transport & Trading Co.
PLC -- (GBP)..................... 50,400 343,699
Societe Nationale Elf Aquitaine
SA -- (FRF)...................... 4,350 469,254
Total SA Cl-B -- (FRF)............. 5,500 555,877
----------
2,723,991
----------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK).................... 11,500 244,893
----------
PHARMACEUTICALS -- 0.4%
Astra AB Cl-A -- (SEK)............. 19,200 357,911
Novartis AG -- (CHF)............... 204 326,031
Pharmacia & Upjohn,
Inc. -- (SEK).................... 5,100 172,315
Santen Pharmaceutical
Ltd. -- (JPY).................... 7,700 155,209
Yamanouchi Pharmaceutical Co.
Ltd. -- (JPY).................... 7,000 188,133
----------
1,199,599
----------
PRINTING & PUBLISHING -- 0.1%
Dai Nippon Printing Co. Ltd. --
(JPY)............................ 17,000 384,206
----------
RAILROADS -- 0.1%
East Japan Railway Co. Ltd. --
(JPY)............................ 61 312,984
----------
REAL ESTATE -- 0.1%
Amoy Properties Ltd. -- (HKD)...... 140,000 154,515
Cheung Kong Holdings Ltd. --
(HKD)............................ 27,000 266,626
Hong Kong Land Holdings Ltd. --
(HKD)............................ 1,900 5,054
----------
426,195
----------
RETAIL & MERCHANDISING -- 0.2%
Marui Co. Ltd. -- (JPY)............ 14,000 260,209
Vendex International NV -- (NLG)... 6,000 328,528
----------
588,737
----------
TELECOMMUNICATIONS -- 0.8%
Deutsche Telekom AG -- (DEM)....... 27,600 678,092
Ericsson, (L.M.) Telephone Co.
Cl-B --
(SEK)............................ 6,660 262,527
Newbridge Networks Corp. --
(CAD)*........................... 1,800 78,601
Nokia AB Cl-A -- (FIM)............. 4,950 370,291
Northern Telecom Ltd. -- (CAD)..... 2,300 207,281
Portugal Telecom SA -- (PTE)....... 11,900 480,002
Vodafone Group PLC -- (GBP)........ 102,100 497,331
----------
2,574,125
----------
TRANSPORTATION -- 0.1%
IHC Caland NV -- (NLG)............. 4,100 224,077
Yamato Transport Co.
Ltd. -- (JPY).................... 14,000 174,695
----------
398,772
----------
UTILITIES -- 0.2%
ABB AB Cl-A -- (SEK)............... 1,367 19,200
Hong Kong Electric Holdings Ltd. --
(HKD)............................ 16,000 64,440
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Scottish Power PLC -- (GBP)........ 51,200 $ 333,381
Veba AG -- (DEM)................... 6,700 378,390
----------
795,411
----------
TOTAL FOREIGN STOCK
(COST $27,706,990)................... 32,202,850
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 11.5%
ADVERTISING -- 0.0%
Larmar Advertising Co. Sr.
Sub. Notes
9.625%.................. 12/01/06 $ 35 35,962
Outdoor Systems, Inc. Sr.
Sub. Notes 144A
8.875%.................. 06/15/07 25 24,375
Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%................... 10/15/06 43 44,612
-------------
104,949
-------------
AEROSPACE -- 0.2%
BE Aerospace, Inc.
Sr. Sub. Notes
9.875%.................. 02/01/06 60 62,175
Howmet Corp. Sr. Sub.
Notes
10.00%.................. 12/01/03 45 48,600
Lockheed Martin Corp.
Notes
7.25%................... 05/15/06 400 405,000
-------------
515,775
-------------
AIRLINES -- 0.1%
Continental Airlines
Notes 144A
7.42%................... 04/01/07 175 177,603
-------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Consorcio Grupo Dina SA
[ZCB]
3.18%................... 11/15/02 45 38,869
-------------
AUTOMOTIVE PARTS -- 0.0%
Harvard Industries, Inc.
Sr. Notes
11.125%................. 08/01/05 10 4,050
Lear Corp. Sub. Notes
9.50%................... 07/15/06 75 80,062
Titan Wheel International,
Inc. Sr. Sub. Notes
8.75%................... 04/01/07 5 5,100
-------------
89,212
-------------
BEVERAGES -- 0.0%
Canandaigua Wine
Sr. Sub. Notes
8.75%................... 12/15/03 5 5,031
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
BROADCASTING -- 0.5%
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................... 11/01/05 $ 80 $ 83,400
Capstar Broadcasting Sr.
Disc. Notes
[STEP] 144A
12.75%.................. 02/01/09 60 38,700
Capstar Broadcasting
[PIK] 144A
12.00%.................. 07/01/09 20 20,200
Chancellor Radio
Broadcasting
Sr. Sub. Notes
9.375%.................. 10/01/04 10 10,400
Citadel Broadcasting Co.
Sr. Sub. Notes 144A
10.25%.................. 07/01/07 10 10,000
Granite Broadcasting Corp.
Sr. Sub. Debs.
10.375%................. 05/15/05 75 77,625
News America Holdings
Debs.
7.70%................... 10/30/25 835 790,119
7.75%................... 12/01/45 365 343,100
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%.................. 05/15/06 100 109,500
Sinclair Broadcasting
Group
Sr. Sub. Notes
10.00%.................. 09/30/05 80 83,000
Spanish Broadcasting
System Sr. Notes 144A
11.00%.................. 03/15/04 25 26,375
Sullivan Broadcasting
Holdings Co.
Sr. Sub. Notes
10.25%.................. 12/15/05 75 77,625
Sun Media Corp.
Sr. Sub. Notes 144A
9.50%................... 02/15/07 10 10,125
Young Broadcasting, Inc.
Notes Cl-B
9.00%................... 01/15/06 5 5,000
-------------
1,685,169
-------------
BUILDING MATERIALS -- 0.1%
Atrium Companies, Inc. Sr.
Sub. Notes
10.50%.................. 11/15/06 10 10,300
Building Materials Corp.
Sr. Notes
8.625%.................. 12/15/06 10 10,250
Cemex SA 144A
12.75%.................. 07/15/06 10 11,587
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
Inter-City Products Corp.
USA
Sr. Notes
9.75%................... 03/01/00 $ 45 $ 46,237
Polytama International
Notes
11.25%.................. 06/15/07 25 25,875
Southdown, Inc.
Sr. Sub. Notes
10.00%.................. 03/01/06 75 81,937
Terex Corp.
Sr. Notes
13.25%.................. 05/15/02 35 39,287
-------------
225,473
-------------
BUSINESS SERVICES -- 0.1%
Affinity Group Holdings
Sr. Notes 144A
11.00%.................. 04/01/07 40 42,200
Outsourcing Solutions
Corp. Sr. Sub. Notes
11.00%.................. 11/01/06 20 21,650
Primark Corp. Sr. Notes
8.75%................... 10/15/00 75 75,750
-------------
139,600
-------------
CHEMICALS -- 0.1%
Harris Chemical North
American Sr. Sub. Notes
10.75%.................. 10/15/03 40 41,100
Millennium America, Inc.
7.00%................... 11/15/06 350 343,000
Pioneer Americas
Acquisition Co. Sr.
Notes
9.25%................... 06/15/07 10 9,913
Sterling Chemicals
Holdings Sr. Disc. Notes
[STEP]
11.21%.................. 08/15/08 35 23,187
-------------
417,200
-------------
CLOTHING & APPAREL -- 0.0%
GFSI, Inc.
Sr. Sub. Notes 144A
9.625%.................. 03/01/07 10 10,150
Glenoit Corp.
Sr. Sub. Notes 144A
11.00%.................. 04/15/07 10 10,537
-------------
20,687
-------------
COMPUTER SERVICES & SOFTWARE -- 0.0%
Printpack, Inc. Sr. Notes
9.875%.................. 08/15/04 25 26,406
Viasystems, Inc.
Sr. Sub. Notes 144A
9.75%................... 06/01/07 10 10,250
-------------
36,656
-------------
CONGLOMERATES -- 0.3%
Perez Companc SA
144A
9.00%................... 01/30/04 15 15,562
Philip Morris Co., Inc.
Debs.
7.50%................... 01/15/02 425 432,969
7.75%................... 01/15/27 480 470,400
-------------
918,931
-------------
CONSTRUCTION -- 0.0%
Newport News Shipbuilding,
Inc. Sr. Notes
8.625%.................. 12/01/06 20 20,600
9.25%................... 12/01/06 15 15,637
Webb, (Del E.) Corp. Sr.
Sub. Notes
9.75%................... 01/15/08 15 15,300
-------------
51,537
-------------
CONSUMER PRODUCTS & SERVICES -- 0.1%
Affinity Group
Sr. Sub. Notes
11.50%.................. 10/15/03 55 59,125
Consumers International
Corp.
Sr. Notes 144A
10.25%.................. 04/01/05 10 10,600
Foamex LP
Sr. Sub. Notes 144A
9.875%.................. 06/15/07 10 10,300
French Fragrances, Inc.
Sr. Notes 144A
10.375%................. 05/15/07 10 10,325
Hedstrom Corp.
Sr. Sub. Notes 144A
10.00%.................. 06/01/07 15 15,300
Hedstrom Holdings, Inc.
[STEP] 144A
12.00%.................. 06/01/09 5 2,975
Herff Jones, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/05 45 48,825
Imed Corp.
Sr. Sub. Notes 144A
9.75%................... 12/01/06 40 40,700
MacAndrews & Forbes Debs.
13.00%.................. 03/01/99 100 100,500
Pierce Leahy Corp.
Sr. Sub. Notes
11.125%................. 07/15/06 5 5,500
-------------
304,150
-------------
CONTAINERS & PACKAGING -- 0.1%
Gaylord Container Corp.
Sr. Notes
11.50%.................. 05/15/01 50 52,438
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
Ivex Packaging Corp.
Sr. Sub. Notes
12.50%.................. 12/15/02 $ 45 $ 48,319
Owens-Illinois, Inc.
Sr. Notes
8.10%................... 05/15/07 20 20,400
Riverwood International
Co.
Notes
10.875%................. 04/01/08 10 9,000
Stone Container Corp.
First Mtge.
10.75%.................. 10/01/02 5 5,238
-------------
135,395
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.0%
Celestica International
Sr. Sub. Notes
10.50%.................. 12/31/06 20 21,600
HCC Industries
Sr. Sub. Notes 144A
10.75%.................. 05/15/07 15 15,788
International Wire Group
Sr. Sub. Notes 144A
11.75%.................. 06/01/05 30 32,814
Tracor, Inc.
Sr. Sub. Notes
8.50%................... 03/01/07 5 5,000
Wavetek Corp.
Sr. Sub. Notes 144A
10.125%................. 06/15/07 10 10,150
-------------
85,352
-------------
ENTERTAINMENT & LEISURE -- 0.7%
ACT III Theaters
Sr. Sub. Notes
11.875%................. 02/01/03 60 65,025
AMC Entertainment, Inc.
Sr. Sub. Notes 144A
9.50%................... 03/15/09 40 41,500
Argosy Gaming Co.
First Mtge.
13.25%.................. 06/01/24 25 24,125
Cinemark USA, Inc.
Sr. Sub. Notes
9.625%.................. 08/01/08 65 66,463
Coast Hotels & Casino
Notes Cl-B
13.00%.................. 12/15/02 55 61,394
Colorado Gaming &
Entertainment Corp.
[PIK]
12.00%.................. 06/01/03 150 157,510
Greate Bay Property
Funding
First Mtge.
10.875%................. 01/15/04 25 22,375
Lady Luck Gaming
First Mtge.
11.875%................. 03/01/01 45 45,731
Louisiana Casino Cruises
First Mtge.
11.50%.................. 12/01/98 100 102,250
Mohegan Tribal Gaming
Cl-B Sr. Notes
13.50%.................. 11/15/02 30 39,413
Players International
Sr. Notes
10.875%................. 04/15/05 25 25,813
Premier Parks Corp.
Sr. Notes
9.75%................... 01/15/07 50 52,125
Premier Parks Corp.
Sr. Notes Cl-A
12.00%.................. 08/15/03 40 44,450
Showboat Marina Casinos
First Mtge.
13.50%.................. 03/15/03 75 86,250
Six Flags Theme Parks
Sr. Sub. Notes Cl-A
[STEP]
5.79%................... 06/15/05 40 40,800
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 850 836,188
8.875%.................. 10/01/12 425 469,094
-------------
2,180,506
-------------
ENVIRONMENTAL SERVICES -- 0.3%
Allied Waste Industries
Sr. Notes [STEP] 144A
11.30%.................. 06/01/07 50 31,000
Allied Waste North America
Sr. Sub. Notes 144A
10.25%.................. 12/01/06 35 37,800
WMX Technologies, Inc.
Notes
7.10%................... 08/01/26 925 937,719
-------------
1,006,519
-------------
EQUIPMENT SERVICES -- 0.0%
Coinmach Corp.
Sr. Notes
11.75%.................. 11/15/05 10 11,088
-------------
FINANCIAL-BANK & TRUST -- 1.5%
Allstate Financing II
7.825%.................. 12/01/45 125 121,719
Banponce Corp.
Medium-Term Note
7.125%.................. 05/02/02 410 412,563
Chevy Chase Savings Bank
Sub. Debs.
9.25%................... 12/01/05 45 45,225
Dime Capital Trust I Cl-A
9.325%.................. 05/06/27 10 10,363
First Nationwide Holdings
Sr. Notes
12.50%.................. 04/15/03 55 61,875
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
First Nationwide Holdings
Sr. Sub. Notes
10.625%................. 10/01/03 $ 35 $ 38,675
Greenpoint Capital Trust I
144A
9.10%................... 06/01/27 10 10,200
Imperial Credit Capital
Trust I
144A
10.25%.................. 06/14/02 20 20,025
Korea Development Bank
Notes
7.90%................... 02/01/02 350 362,250
Merita Bank Ltd.
Sub. Notes
6.50%................... 01/15/06 500 475,625
North Fork Bancorp
8.70%................... 12/15/26 5 5,017
Peoples Bank-Bridgeport
Sub. Notes
7.20%................... 12/01/06 305 297,756
Provident Capital Trust
8.60%................... 12/01/26 20 19,650
Riggs Capital Trust
144A
8.625%.................. 12/31/26 15 14,831
Salomon, Inc.
Sr. Notes
7.00%................... 05/15/99 360 363,600
Societe Generale
144A
7.85%................... 04/30/07 360 369,345
Sovereign Capital Trust
Co.
Guaranteed 144A
9.00%................... 04/01/27 15 14,981
St. Paul Bancorp.
Sr. Notes
7.125%.................. 02/15/04 350 346,063
Standard Credit Card
Master Trust 1991-3 Cl-A
8.875%.................. 07/07/98 1,310 1,348,513
State Development Bank of
China
Notes
7.375%.................. 02/01/07 180 180,000
Swedbank
Sub. Notes 144A
7.50%................... 11/29/49 360 360,896
-------------
4,879,172
-------------
FINANCIAL SERVICES -- 2.1%
Aames Financial Corp.
Sr. Notes
9.125%.................. 11/01/03 40 40,800
AFC Capital Trust I
144A
8.207%.................. 02/03/27 270 273,375
CIA Latino Americana
144A
11.625%................. 06/01/04 10 10,513
Colonial Capital I
Notes Guaranteed
8.92%................... 01/15/27 15 15,300
Consorcio Equatoriano
Notes 144A
14.00%.................. 05/01/02 10 10,613
Contifinancial Corp.
Sr. Notes
8.375%.................. 08/15/03 45 46,125
Continental Global Group
Sr. Notes 144A
11.00%.................. 04/01/07 25 26,281
Dollar Financial Group
Sr. Notes
10.875%................. 11/15/06 15 16,088
Esat Holdings Ltd.
[STEP] 144A
12.50%.................. 02/01/07 35 21,175
First Financial Caribbean
Corp.
Sr. Notes
7.84%................... 10/10/06 200 199,250
Ford Motor Credit Co.
Sr. Notes
7.00%................... 09/25/01 870 878,700
FRD Acquisition Cl-B
12.50%.................. 07/15/04 10 10,675
General Motors Acceptance
Corp.
Medium-Term Notes
6.40%................... 05/19/99 835 837,088
Imperial Credit
Industries, Inc.
Sr. Notes 144A
9.875%.................. 01/15/07 20 19,950
Intertek Finance PLC
Sr. Sub. Notes 144A
10.25%.................. 11/01/06 25 25,938
Lehman Brothers Holdings
Notes
6.40%................... 12/27/99 465 463,838
Loomis Fargo & Co.
Sr. Sub. Notes 144A
10.00%.................. 01/15/04 10 10,200
Quebec Province
Debs.
7.125%.................. 02/09/24 1,320 1,242,450
Railcar Leasing LLC
6.75%................... 07/15/06 681 681,060
Rodamco NV Corp.
Notes
7.75%................... 05/15/15 565 583,363
Salomon Inc.
Notes
7.30%................... 05/15/02 465 469,190
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Southern Investments U.K.
Sr. Notes
6.80%................... 12/01/06 $ 245 $ 239,181
The Money Store, Inc.
Notes
8.05%................... 04/15/02 405 411,581
Travelers Capital II Corp.
7.75%................... 12/01/36 160 155,600
Vicap SA
144A
10.25%.................. 05/15/02 20 20,425
Webster Capital Trust I
144A
9.36%................... 01/29/27 10 10,338
Williams Scotsman, Inc.
Sr. Notes 144A
9.875%.................. 06/01/07 15 15,038
-------------
6,734,135
-------------
FOOD -- 0.1%
AmeriKing, Inc.
Sr. Notes
10.75%.................. 12/01/06 5 5,256
Chiquita Brands
Sr. Notes
9.625%.................. 01/15/04 43 44,881
Del Monte Corp.
Sr. Sub. Notes 144A
12.25%.................. 04/15/07 10 10,850
MBW Foods, Inc.
Sr. Sub. Notes 144A
9.875%.................. 02/15/07 10 10,325
RJR Nabisco, Inc.
Notes
8.75%................... 08/15/05 185 187,081
Stater Brothers, Inc.
Sr. Notes
11.00%.................. 03/01/01 10 10,825
Windy Hill Pet Food Co.
Sr. Sub. Notes 144A
9.75%................... 05/15/07 5 5,088
-------------
274,306
-------------
HEALTHCARE SERVICES -- 0.4%
Columbia/HCA Healthcare
Notes
6.91%................... 06/15/05 410 405,900
Genesis Health Ventures,
Inc.
Sr. Sub. Notes
9.25%................... 10/01/06 45 45,450
Integrated Health Services
Sr. Sub. Notes 144A
9.50%................... 09/15/07 25 25,813
Manor Care, Inc.
Sr. Notes
7.50%................... 06/15/06 305 309,956
Merit Behavioral Care
Sr. Sub. Notes
11.50%.................. 11/15/05 40 43,250
National Health Investors,
Inc.
7.30%................... 07/16/07 295 293,970
Paracelsus Healthcare
Corp.
Sr. Sub. Notes
10.00%.................. 08/15/06 50 51,250
Tenet Healthcare Corp. Sr.
Sub. Notes
8.00%................... 01/15/05 75 75,563
8.625%.................. 01/15/07 60 61,650
-------------
1,312,802
-------------
HOTELS & MOTELS -- 0.1%
Hammons, (J.Q.) Hotel
Group First Mtge.
8.875%.................. 02/15/04 40 40,650
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 40 41,900
Prime Hospitality Corp.
First Mtge.
9.25%................... 01/15/06 50 51,875
Prime Hospitality Corp.
Sr. Sub. Notes
9.75%................... 04/01/07 35 36,400
-------------
170,825
-------------
INSURANCE -- 0.5%
Aegon NV Sub. Notes
8.00%................... 08/15/06 850 896,750
Conseco, Inc. Sr. Notes
10.50%.................. 12/15/04 430 503,100
Reliance Group Holdings
Sr. Notes
9.00%................... 11/15/00 40 41,350
-------------
1,441,200
-------------
MACHINERY & EQUIPMENT -- 0.1%
Agco Corp. Sr. Sub. Notes
8.50%................... 03/15/06 40 41,150
Hawk Corp. Sr. Notes
10.25%.................. 12/01/03 5 5,175
Millipore Corp.
7.20%................... 04/01/02 340 342,976
Motors and Gears, Inc. Sr.
Notes
10.75%.................. 11/15/06 35 36,269
Polymer Group
9.00%................... 07/01/07 15 14,759
W.R. Carpenter North
America Sr. Sub. Notes
144A
10.625%................. 06/15/07 5 5,025
-------------
445,354
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Fresenius Medical Care AG
9.00%................... 12/01/06 $ 20 $ 20,500
Graphic Controls Corp. Sr.
Sub. Notes Cl-A
12.00%.................. 09/15/05 35 38,589
-------------
59,089
-------------
METALS & MINING -- 0.4%
Acindar Industria
Argentina de Aceros SA
11.25%.................. 02/15/04 10 10,575
AK Steel Corp. Sr. Notes
9.125%.................. 12/15/06 30 30,900
Altos Hornos de Mexico
Notes 144A
11.875%................. 04/30/04 15 16,050
Echo Bay Mines Ltd. Jr.
Sub. Debs.
11.00%.................. 04/01/27 15 15,413
Freeport-McMoran Copper &
Gold, Inc.
Sr. Notes
7.50%................... 11/15/06 125 124,688
Noranda, Inc. Debs.
7.00%................... 07/15/05 680 666,400
Potash Corp. Notes
7.125%.................. 06/15/07 300 299,625
WCI Steel, Inc. Sr. Notes
Cl-B
10.00%.................. 12/01/04 35 36,313
Wells Aluminum Sr. Notes
144A
10.125%................. 06/01/05 5 5,195
-------------
1,205,159
-------------
OFFICE EQUIPMENT -- 0.0%
United Stationery Supply
Sr. Sub. Notes
12.75%.................. 05/01/05 5 5,600
-------------
OIL & GAS -- 0.6%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%.................. 11/01/04 25 27,438
CITGO Petroleum Corp. Sr.
Notes
7.875%.................. 05/15/06 170 174,039
El Paso Natural Gas Co.
Debs.
7.50%................... 11/15/26 180 176,625
Flores & Rucks Sr. Sub.
Notes
9.75%................... 10/01/06 40 42,300
Forcenergy, Inc. Sr. Sub.
Notes
8.50%................... 02/15/07 20 19,600
Kelley Oil & Gas Corp. Sr.
Sub. Notes
10.375%................. 10/15/06 10 10,300
Maxus Energy Corp. Notes
10.83%.................. 09/01/04 35 40,075
Pacalta Resources Sr.
Notes 144A
10.75%.................. 06/15/04 10 10,175
Panda Global Energy Co.
Sr. Notes 144A
12.50%.................. 04/15/04 10 9,714
Parker Drilling Corp.
Notes
9.75%................... 11/15/06 30 31,350
Petroleum Geo-Services
7.50%................... 03/31/07 175 176,531
Petroliam Nasional BHD
Notes 144A
7.625%.................. 10/15/26 750 750,938
Petsec Energy, Inc.
Sr. Sub. Notes 144A
9.50%................... 06/15/07 35 35,087
Pogo Producing
Sub. Notes 144A
8.75%................... 05/15/07 5 5,032
Pride Petroleum Services,
Inc.
Sr. Notes
9.375%.................. 05/01/07 15 15,600
Snyder Oil Corp.
Sr. Sub. Notes
8.75%................... 06/15/07 15 15,000
Transamerican Energy
Sr. Disc. Notes [STEP]
144A
13.00%.................. 06/15/02 160 116,000
13.24%.................. 12/31/03 124 83,598
Transamerican Energy
Sr. Notes [STEP] 144A
11.50%.................. 06/15/02 70 68,250
Wiser Oil Co.
Sr. Sub. Notes 144A
9.50%................... 05/15/07 10 10,050
-------------
1,817,702
-------------
PAPER & FOREST PRODUCTS -- 0.1%
Boise Cascade Corp. Debs.
7.35%................... 02/01/16 115 108,817
Florida Coast Paper LLC
First Mtge.
12.75%.................. 06/01/03 35 36,314
Indah Kiat Finance
Mauritius
144A
10.00%.................. 07/01/07 115 114,856
Maxxam Group Holdings,
Inc. Sr. Notes
12.00%.................. 08/01/03 5 5,162
Radnor Holdings
Sr. Notes
10.00%.................. 12/01/03 5 5,064
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Repap New Brunswick
Sr. Notes
10.625%................. 04/15/05 $ 30 $ 28,275
-------------
298,488
-------------
PRINTING & PUBLISHING -- 0.0%
America Media Operation
Sr. Sub. Notes
11.625%................. 11/15/04 40 43,600
Hollinger International
Publishing Co. Notes
8.625%.................. 03/15/05 15 15,300
9.25%................... 03/15/07 15 15,336
Von Hoffman Press, Inc.
Sr. Sub. Notes 144A
10.375%................. 05/15/07 10 10,400
-------------
84,636
-------------
RAILROADS -- 0.7%
Norfolk Southern Corp.
6.95%................... 05/01/02 425 428,188
7.80%................... 05/15/27 815 835,375
7.05%................... 05/01/37 755 766,325
TFM SA de CV
144A
10.25%.................. 06/15/07 10 10,187
TFM SA de CV
[STEP] 144A
11.78%.................. 06/15/09 50 28,813
-------------
2,068,888
-------------
REAL ESTATE -- 0.0%
Continental Homes Holding
Sub. Notes
10.00%.................. 04/15/06 15 15,713
-------------
RETAIL & MERCHANDISING -- 0.4%
Brylane L.P.
Sr. Sub. Notes Cl-B
10.00%.................. 09/01/03 30 31,724
Corporate Express
Sr. Sub. Notes
9.125%.................. 03/15/04 35 34,954
Federated Department
Stores
Sr. Notes
8.50%................... 06/15/03 720 767,700
Loehmann's Holdings, Inc.
Sr. Notes
11.875%................. 05/15/03 20 20,600
Mothers Work, Inc.
Sr. Notes
12.625%................. 08/01/05 25 25,654
Ralph's Grocery Co.
Sr. Sub. Notes 144A
11.00%.................. 06/15/05 5 5,475
Rite Aid Corp. Notes
6.70%................... 12/15/01 170 169,362
Sassco Fashions Ltd.
144A
12.75%.................. 12/31/03 25 26,250
Southland Corp.
Sr. Sub. Debs.
5.00%................... 12/15/03 100 84,875
Specialty Retail Group,
Inc.
Notes 144A
8.50%................... 07/15/05 10 10,075
William Carter Holdings
144A
12.00%.................. 10/01/08 20 20,300
-------------
1,196,969
-------------
SEMI-CONDUCTORS -- 0.0%
Fairchild Semiconductor
Sr. Sub. Notes 144A
10.125%................. 03/15/07 30 31,800
Fairchild Semiconductor
Sr. Sub. Notes [PIK]
144A
11.74%.................. 03/15/07 25 26,125
International Semi-Tech
Microelectronics Sr.
Disc. Notes [STEP]
13.30%.................. 08/15/03 50 30,500
-------------
88,425
-------------
TELECOMMUNICATIONS -- 1.5%
Adelphia Communications
Corp. Sr. Notes Cl-B
10.25%.................. 07/15/00 10 10,200
Airtouch Communications,
Inc. Notes
7.125%.................. 07/15/01 295 297,950
Arch Communications Group
Sr. Disc. Notes [STEP]
14.26%.................. 03/15/08 30 15,825
Benedek Communications Sr.
Disc. Notes [STEP]
14.47%.................. 05/15/06 75 45,937
Brooks Fiber Properties,
Inc. Sr. Notes 144A
10.00%.................. 06/01/07 20 20,350
Centennial Cellular Sr.
Notes
8.875%.................. 11/01/01 75 75,187
Century Communications
Corp. Sr. Notes
9.50%................... 03/01/05 60 61,800
Cia Telecom Chile Notes
7.625%.................. 07/15/06 995 1,022,362
Colt Telecom Group PLC
Units [STEP]
12.00%.................. 12/15/06 35 22,836
Comcast Cellular Sr. Notes
144A
9.50%................... 05/01/07 45 45,673
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Comcast U.K. Cable Corp.
Debs. [STEP]
10.24%.................. 11/15/07 $ 60 $ 45,150
Comcast U.K. Cable Corp.
Sr. Sub. Debs.
9.50%................... 01/15/08 150 159,000
Commodore Media, Inc. Sr.
Sub. Notes [STEP] 144A
7.50%................... 05/01/03 80 87,200
Diamond Cable
Communications PLC Sr.
Disc. Notes [STEP]
10.61%.................. 12/15/05 60 41,400
Dobson Communications
Corp. Sr. Notes
11.75%.................. 04/15/07 40 39,200
Globalstar LP 144A
11.375%................. 02/15/04 45 45,338
Globo Communicacoes
Partners Notes 144A
10.50%.................. 12/20/06 60 64,050
Heartland Wireless Sr.
Notes Cl-B
14.00%.................. 10/15/04 45 18,450
Innova S. De. R.L. Sr.
Notes. 144A
12.875%................. 04/01/07 30 31,538
Intercel, Inc. Sr. Disc.
Notes [STEP]
12.17%.................. 02/01/06 70 42,963
Intermedia Communications
of Florida, Inc. Sr.
Notes
13.50%.................. 06/01/05 40 45,750
International Cabletel,
Inc. Sr. Notes [STEP]
11.88%.................. 02/01/06 65 45,013
ITC Deltacom, Inc. Sr.
Notes 144A
11.00%.................. 06/01/07 30 30,825
Jacor Communications Co.
Notes
9.75%................... 12/15/06 10 10,574
JCAC Communications, Inc.
Sr. Sub. Notes
10.125%................. 06/15/06 45 48,150
Jones Intercable Sr. Sub.
Debs.
10.50%.................. 03/01/08 30 32,550
L-3 Communications Corp.
Sr. Sub. Notes 144A
10.375%................. 05/01/07 20 21,300
Marcus Cable Co. Debs.
11.875%................. 10/01/05 60 64,950
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
2.25%................... 08/01/04 50 43,500
McCaw International Ltd.
Units [STEP] 144A
13.00%.................. 04/15/07 10 5,000
McLeod, Inc. [STEP] 144A
10.50%.................. 03/01/07 55 35,062
MFS Communications, Inc.
Sr. Disc. Notes [STEP]
8.11%................... 01/15/04 75 69,563
MFS Communications, Inc.
Sr. Notes [STEP]
8.05%................... 01/15/06 80 63,000
Millicom International
Cellular Sr. Disc. Notes
[STEP]
12.59%.................. 06/01/06 80 59,000
Mobile Telecommunications
Corp. Sr. Notes
13.50%.................. 12/15/02 20 21,300
Nextlink Communications
[PIK]
14.00%.................. 02/01/09 40 20,895
Nextel Communications,
Inc.
Sr. Disc. Notes [STEP]
13.01%.................. 09/01/03 5 4,363
13.30%.................. 08/15/04 205 158,363
Omnipoint Corp.
Sr. Notes
11.625%................. 08/15/06 75 71,250
Orbcomm Global LP
Sr. Notes Cl-B
14.00%.................. 08/15/04 40 40,700
Pegasus Media &
Communications, Inc.
Notes
12.50%.................. 07/01/05 45 49,613
Pricellular Wireless
Sr. Notes
10.75%.................. 11/01/04 40 42,150
Radio One, Inc.
144A
7.00%................... 05/15/04 10 8,914
RBS Participacoes SA Co.
Notes 144A
11.00%.................. 04/01/07 15 15,843
Rogers Cablesystems Ltd.
Notes
11.00%.................. 12/01/15 60 65,550
TCI Satellite
Entertainment
Sr. Sub. Notes 144A
10.875%................. 02/15/07 30 30,150
Teleport Communications
Sr. Disc. Notes [STEP]
9.61%................... 07/01/07 30 21,714
TV Azteca Yankee
Sr. Notes 144A
10.50%.................. 02/15/07 15 15,450
TV Filme, Inc.
Sr. Notes 144A
12.875%................. 12/15/04 15 15,637
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
U.S. West Capital Funding
Notes
6.95%................... 01/15/37 $ 710 $ 710,887
Viacom, Inc.
Sub. Debs.
8.00%................... 07/07/06 40 39,100
Worldcom, Inc.
7.75%................... 01/01/07 805 828,144
-------------
4,926,669
-------------
TRANSPORTATION -- 0.0%
Atlantic Express
Sr. Notes 144A
10.75%.................. 02/01/04 10 10,438
Chemical Leaman Corp.
Sr. Notes 144A
10.375%................. 06/15/05 10 10,224
-------------
20,662
-------------
UTILITIES -- 0.5%
AES China Generating Co.
Ltd. Sr. Notes
10.125%................. 12/15/06 10 10,674
Arizona Public Service
Sr. Notes
6.75%................... 11/15/06 205 199,619
Cleveland Electric
Illumination Co.
First Mtge. Cl-B
9.50%................... 05/15/05 25 27,063
CMS Energy Corp.
Sr. Notes
8.125%.................. 05/15/02 25 25,155
Connecticut Light & Power
First Mtge.
7.875%.................. 06/01/01 290 295,075
El Paso Electric Co.
First Mtge. Cl-E
9.40%................... 05/01/11 10 10,736
Enersis SA Notes
7.40%................... 12/01/16 520 500,500
6.60%................... 12/01/26 220 215,050
Illinova Corp. Notes
7.125%.................. 02/01/04 115 113,994
Long Island Lighting Debs.
9.00%................... 11/01/22 40 43,900
Niagara Mohawk Power Corp.
Notes
9.95%................... 06/01/00 50 50,056
Northeast Utilities System
Notes
8.38%................... 03/01/05 31 30,130
8.58%................... 12/01/06 10 9,256
-------------
1,531,208
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $36,605,781).................... 36,726,704
-------------
TAXABLE MUNICIPAL BONDS -- 0.3%
N.J. Economic Development Authority
7.425%
(COST $850,000)......... 02/15/29 850 850,000
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 13.5%
FEDERAL HOME LOAN MORTGAGE CORP. -- 1.4%
9.50%................... 05/01/05 450 473,967
7.50%................... 02/01/27 857 860,945
7.50%................... 04/01/27 38 37,725
7.50%................... 05/01/27 324 325,336
7.50%................... 05/01/27 97 96,974
7.50%................... 05/27/27 37 36,990
7.50%................... 06/01/27 423 424,485
7.50%................... 06/01/27 641 643,393
7.50%................... 06/01/27 337 337,862
7.50%................... 06/01/27 615 617,185
7.50%................... 06/01/27 618 620,420
-------------
4,475,282
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 7.2%
7.00%................... 03/18/02 278 279,711
6.50%................... 03/01/04 37 36,452
6.50%................... 05/01/04 677 669,614
6.50%................... 06/01/04 711 702,356
6.50%................... 06/01/04 317 313,137
6.50%................... 06/01/04 97 95,589
6.50%................... 06/01/04 216 213,577
6.50% [TBA]............. 07/15/04 330 325,977
8.50%................... 10/15/08 1,061 1,107,755
5.50%................... 02/01/11 690 653,572
5.50%................... 05/01/11 692 653,663
5.50%................... 05/01/11 693 656,763
5.50%................... 05/01/11 379 358,788
5.50%................... 05/01/11 691 652,629
9.50%................... 08/01/22 997 1,071,576
7.00%................... 12/18/22 628 603,824
7.50%................... 10/15/23 44 44,366
6.50%................... 01/01/26 888 850,053
6.50%................... 02/01/26 664 635,609
6.50%................... 04/01/26 896 857,920
6.50%................... 04/01/26 728 696,637
6.50%................... 07/01/26 51 48,465
7.00%................... 08/01/26 381 373,953
9.00%................... 10/01/26 193 203,668
7.00%................... 12/01/26 919 900,793
7.00%................... 12/01/26 990 970,820
8.00%................... 12/01/26 57 58,484
7.50%................... 01/01/27 418 419,086
7.50%................... 01/01/27 103 102,837
6.50%................... 02/01/27 1,038 993,220
7.00%................... 03/01/27 71 70,026
7.00%................... 03/01/27 302 296,243
8.00%................... 03/01/27 900 920,674
8.00%................... 03/01/27 25 25,507
8.00%................... 04/01/27 50 50,843
8.00%................... 04/01/27 827 845,535
8.00%................... 04/01/27 424 433,771
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C>
7.00%................... 05/01/27 $ 272 $ 266,976
7.50%................... 05/01/27 624 625,454
7.50%................... 06/01/27 154 154,875
7.50%................... 06/01/27 480 481,500
7.00% [TBA]............. 07/16/27 1,040 1,018,878
9.00% [TBA]............. 07/16/27 2,160 2,274,761
-------------
23,015,937
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 4.9%
10.00%.................. 06/15/13 561 616,482
7.00%................... 08/15/23 1,792 1,761,449
7.00%................... 01/15/26 73 71,673
7.00%................... 02/15/26 323 317,038
7.00%................... 05/15/26 861 846,277
7.50%................... 09/15/26 359 360,491
8.50%................... 10/15/26 854 888,564
8.00%................... 11/15/26 980 1,002,314
8.00%................... 11/15/26 239 244,759
7.50%................... 12/15/26 1,494 1,499,782
8.00%................... 01/15/27 258 264,017
7.00%................... 02/15/27 50 49,490
7.00%................... 02/15/27 845 830,295
7.00%................... 02/15/27 72 70,498
8.00%................... 02/15/27 553 565,290
8.50%................... 03/15/27 906 942,494
7.50%................... 04/15/27 1,017 1,021,300
7.50%................... 04/15/27 232 232,969
8.50%................... 04/15/27 454 471,914
7.50%................... 05/15/27 813 815,952
5.50% [TBA]............. 07/16/27 3,100 3,064,628
-------------
15,937,676
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $43,103,582).................... 43,428,895
-------------
U.S. TREASURY OBLIGATIONS -- 1.7%
U.S. Treasury Bills
5.02%................... 08/14/97 410 407,441
U.S. Treasury Bonds
8.125%.................. 08/15/19 3,680 4,200,867
U.S. Treasury Notes
6.875%.................. 05/15/06 750 765,607
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $5,340,916)..................... 5,373,915
-------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 3.0%
Advanta Mtge. Loan Trust
Series 1997-2 Cl-A2
7.05%................... 05/25/21 805 809,277
Associates Manufactured
Housing Series 1996-1
Cl-A3
7.00%................... 03/15/27 685 692,988
Capital Equipment
Receivables Trust Series
1996-1 Cl-A4
6.28%................... 06/15/00 600 599,952
Federal National Mtge.
Assoc. REMIC Series
1993-240 Cl-B
6.25%................... 12/25/13 548 525,316
Ford Credit Auto Owner
Trust Series 1996-A Clay
6.50%................... 11/15/99 890 896,236
Green Tree Financial Corp.
Series 1997-2 Cl-A6
7.24%................... 03/15/25 635 644,011
Green Tree Financial Corp.
Series 1997-3 Cl-A4
6.93%................... 07/15/28 1,095 1,095,035
Green Tree Financial Corp.
Series 1997-4 Cl-A3
6.45%................... 09/15/28 505 503,737
Green Tree Recreational,
Equipment & Consumer
Trust Series 1997-B
Cl-A1
6.55%................... 07/15/28 1,220 1,220,000
Premier Auto Trust
Series 1996-4 Cl-A4
6.40%................... 10/06/01 500 499,187
Salomon Brothers Mortgage
Securities VII
Series 1993-C1 Cl-A
6.90%................... 01/18/23 446 448,999
Securitized Asset Sales,
Inc.
6.8076%................. 11/28/23 976 930,415
Standard Credit Card
Master Trust Series
1995-6 Cl-A
6.75%................... 06/07/00 860 866,721
-------------
TOTAL COLLATERALIZED MORTGAGE & ASSET-
BACKED OBLIGATIONS
(COST $9,695,183)..................... 9,731,874
-------------
SOVEREIGN ISSUES -- 0.0%
NETHERLANDS
Asia Pulp & Paper
International Finance
Co.
Notes
11.75%
(COST $47,725).......... 10/01/05 45 49,613
-------------
REPURCHASE AGREEMENTS -- 10.4%
UBS Securities Funding,
Inc. 5.90% dated
06/30/97, repurchase
price $33,365,467
(Collateralized by U.S.
Treasury Bond, par value
$33,391,000, market
value $33,979,275, due
05/15/98)
(COST $33,360,000)...... 07/01/97 33,360 33,360,000
-------------
TOTAL INVESTMENTS -- 101.9%
(COST $299,889,558)................... 327,067,641
-------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C>
SALE COMMITMENTS -- (1.3%)
Federal National Mtge. Assoc. [TBA]
6.50%.................. 07/15/04 $ 2,384 $ (2,354,938)
5.50%.................. 07/15/12 225 (212,414)
7.50%.................. 07/16/27 1,620 (1,625,063)
-------------
TOTAL SALE COMMITMENTS
(COST $(4,192,390))................... (4,192,415)
LIABILITIES IN EXCESS OF OTHER ASSETS --
(0.6%)................................ (1,854,720)
-------------
NET ASSETS -- 100.0%.................... $ 321,020,506
=============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy CAD $ 4,302 1.3812 07/97 $ 2
Buy CAD 38,727 1.3800 07/97 (17)
Buy CAD 13,221 1.3803 07/97 (2)
Buy CHF 424,117 1.3911 08/97 (18,251)
Buy GBP 29,197 0.6006 07/97 6
Buy ITL 197,503 1,696.8100 07/97 (429)
Buy JPY 81,166 113.1350 07/97 (1,038)
--------
$(19,729)
========
Sell CHF $1,038,093 1.4430 08/97 $ 7,605
Sell DEM 936,220 1.7090 07/97 16,680
Sell FRF 1,844,005 5.7646 08/97 29,978
Sell FRF 457,344 5.6850 08/97 13,650
Sell JPY 770,249 124.6350 07/97 (69,558)
Sell JPY 74,108 114.5450 07/97 1
Sell JPY 1,443,783 111.5929 11/97 17,520
Sell SEK 84,262 7.7347 07/97 (115)
Sell SEK 41,073 7.7332 07/97 (50)
--------
$ 15,711
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.4% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 87.7%
ADVERTISING -- 0.5%
Larmar Advertising Co.
Sr. Sub. Notes
9.625%............... 12/01/06 $ 1,400 $ 1,445,500
------------
AUTOMOTIVE PARTS -- 3.1%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%............... 08/01/04 1,938 2,170,560
Collins & Aikman
Products Sr. Sub.
Notes
11.50%............... 04/15/06 2,600 2,957,500
Exide Corp. Sr. Notes
10.00%............... 04/15/05 1,225 1,277,062
Lear Corp. Sub. Notes
9.50%................ 07/15/06 1,500 1,601,250
Lear Seating Corp. Sr.
Sub. Notes
11.25%............... 07/15/00 150 151,500
8.25%................ 02/01/02 550 554,125
Oxford Automotive, Inc.
Sr. Sub. Notes 144A
10.125%.............. 06/15/07 900 910,125
------------
9,622,122
------------
BEVERAGES -- 0.2%
Dr. Pepper Bottling
Holding Co. Sr. Notes
[STEP]
9.15%................ 02/15/03 500 495,000
------------
BROADCASTING -- 6.7%
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................ 11/01/05 500 520,000
Australis Media Ltd.
Units [STEP]
8.95%................ 05/15/03 625 462,500
Capstar Radio
Broadcasting Sr. Sub.
Notes 144A
9.25%................ 07/01/07 700 682,500
Chancellor Broadcasting
Co. Sr. Sub. Notes
9.375%............... 10/01/04 750 781,875
Chancellor Broadcasting
Co. Sr. Sub. Notes
144A
8.75%................ 06/15/07 600 600,000
Heritage Media Corp.
Sr. Sub. Notes
8.75%................ 02/15/06 3,200 3,320,000
Lenfest Communications
Sr. Sub. Notes
8.375%............... 11/01/05 1,250 1,234,375
NWCG Holding Corp. Sr.
Disc. Notes [ZCB]
13.20%............... 06/15/99 300 264,792
Outdoor Systems, Inc.
Sr. Sub. Notes 144A
8.875%............... 06/15/07 2,100 2,058,000
SCI Television, Inc.
Sr. Notes
11.00%............... 06/30/05 1,150 1,219,241
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%............... 05/15/06 1,175 1,286,625
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%............... 12/15/03 650 672,750
10.00%............... 09/30/05 2,000 2,070,000
Sinclair Broadcasting
Group Sr. Sub. Notes
144A
9.00%................ 07/15/07 1,250 1,218,750
Sullivan Broadcasting
Holdings Co. Sr. Sub.
Notes
10.25%............... 12/15/05 1,800 1,845,000
13.25%............... 12/15/06 150 147,750
TCI Communications,
Inc. Sr. Notes
6.875%............... 02/15/06 550 521,328
Young Broadcasting
Corp. Sr. Sub. Notes
11.75%............... 11/15/04 250 277,500
10.125%.............. 02/15/05 1,175 1,239,625
Young Broadcasting
Corp. Sr. Sub. Notes
Cl-B
9.00%................ 01/15/06 500 493,750
------------
20,916,361
------------
BUILDING MATERIALS -- 0.7%
American Builders Sr.
Sub. Notes 144A
10.625%.............. 05/15/07 575 595,125
Collins & Aikman Floor
Covering Corp. Sr.
Sub. Notes 144A
10.00%............... 01/15/07 525 534,187
Falcon Building
Products Sr. Sub.
Notes 144A
9.50%................ 06/15/07 350 351,750
Falcon Building
Products [STEP] 144A
10.50%............... 06/15/07 1,000 605,000
------------
2,086,062
------------
BUSINESS SERVICES -- 0.4%
Outsourcing Solutions
Corp. Sr. Sub. Notes
11.00%............... 11/01/06 1,000 1,095,000
------------
CAPITAL GOODS -- 0.2%
Australis Holdings Ltd.
[STEP]
9.88%................ 11/01/02 1,000 740,000
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
CHEMICALS -- 3.7%
Astor Corp. Sr. Sub.
Notes Cl-B
10.50%............... 10/15/06 $ 1,025 $ 1,091,625
Buckeye Cellulose Corp.
Sr. Sub. Notes
8.50%................ 12/15/05 250 253,750
Crain Industries, Inc.
Sr. Sub. Notes
13.50%............... 08/15/05 500 572,500
Harris Chemical North
America Sr. Notes
10.25%............... 07/15/01 2,000 2,060,000
ISP Holdings, Inc. Sr.
Notes Cl-B
9.75%................ 02/15/02 500 532,500
9.00%................ 10/15/03 1,275 1,327,594
Polymer Group, Inc. Sr.
Notes
12.25%............... 07/15/02 1,000 1,118,030
Polymer Group, Inc. Sr.
Sub. Notes
9.00%................ 07/01/07 1,250 1,229,888
RBX Corp. Notes Cl-B
11.25%............... 10/15/05 1,000 890,000
Sterling Chemicals
Holdings Sr. Disc.
Notes [STEP]
11.61%............... 08/15/08 2,925 1,952,437
Uniroyal Technology
Corp. Sr. Notes
11.75%............... 06/01/03 425 425,000
------------
11,453,324
------------
CLOTHING & APPAREL -- 1.4%
Brylane L.P. Sr. Sub.
Notes Cl-B
10.00%............... 09/01/03 1,325 1,424,375
GFSI, Inc. Sr. Sub.
Notes 144A
9.625%............... 03/01/07 100 101,250
Glenoit Corp. Sr. Sub.
Notes 144A
11.00%............... 04/15/07 1,400 1,473,500
Hosiery Corp. of
America, Inc. Sr.
Sub. Notes
13.75%............... 08/01/02 500 547,500
Pillowtex Corp. Sr.
Sub. Notes
10.00%............... 11/15/06 750 787,500
------------
4,334,125
------------
COMPUTER SERVICES & SOFTWARE -- 0.6%
Alvey Systems, Inc. Sr.
Sub. Notes
11.375%.............. 01/31/03 1,750 1,811,250
------------
CONSUMER PRODUCTS & SERVICES -- 5.1%
American Safety Razor
Co. Sr. Notes
9.875%............... 08/01/05 1,250 1,312,500
Cabot Safety Corp. Sr.
Sub. Notes
12.50%............... 07/15/05 1,500 1,657,500
Herff Jones, Inc. Sr.
Sub. Notes
11.00%............... 08/15/05 550 596,750
Playtex Family Products
Corp. Sr. Sub. Notes
9.00%................ 12/15/03 2,100 2,136,750
Renaissance Cosmetics,
Inc. Sr. Notes
11.75%............... 02/15/04 650 676,000
Revlon Consumer
Products Corp. Sr.
Notes Cl-B
9.375%............... 04/01/01 500 516,875
10.50%............... 02/15/03 1,375 1,474,687
Simmons Co. Sr. Sub.
Notes
10.75%............... 04/15/06 1,250 1,325,000
Syratech Corp. Sr.
Notes
11.00%............... 04/15/07 1,500 1,601,250
Westpoint Stevens, Inc.
Sr. Sub. Debs.
9.375%............... 12/15/05 4,425 4,624,125
------------
15,921,437
------------
CONTAINERS & PACKAGING -- 3.3%
Container Corp. of
America Sr. Notes
9.75%................ 04/01/03 250 263,750
11.25%............... 05/01/04 250 273,750
Four M Corp. Sr. Notes
12.00%............... 06/01/06 1,300 1,348,750
Owens Illinois, Inc.
Sr. Sub. Notes
10.00%............... 08/01/02 500 527,500
9.75%................ 08/15/04 200 210,750
9.95%................ 10/15/04 2,750 2,921,875
Packaging Resources,
Inc. Sr. Notes
11.625%.............. 05/01/03 450 470,250
Plastic Containers Sr.
Notes Cl-B
10.00%............... 12/15/06 450 469,125
Riverwood International
Co. Notes
10.875%.............. 04/01/08 625 565,625
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C>
Stone Container Corp.
Sr. Notes
12.58%............... 08/01/97 $ 1,550 $ 1,643,000
11.50%............... 10/01/04 1,200 1,254,000
U.S. Can Corp. Sr. Sub.
Notes Cl-B
10.125%.............. 10/15/06 400 428,000
------------
10,376,375
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.6%
Advanced Micro Devices,
Inc. Sr. Notes
11.00%............... 08/01/03 1,400 1,564,500
Amphenol Corp. Sr. Sub.
Notes
9.875%............... 05/15/07 450 466,875
Electronic Retailing
Systems, Inc. [STEP]
144A
13.25%............... 02/01/04 875 608,125
Fairchild Semiconductor
Sr. Sub. Notes 144A
10.125%.............. 03/15/07 1,250 1,325,000
Therma-Wave, Inc. Sr.
Notes 144A
10.625%.............. 05/15/04 250 267,500
Viasystems, Inc. Sr.
Sub. Notes 144A
9.75%................ 06/01/07 675 688,500
------------
4,920,500
------------
ENTERTAINMENT & LEISURE -- 2.8%
AMF Group, Inc. Notes
10.875%.............. 03/15/06 400 434,000
AMF Group, Inc. Sr.
Disc. Notes [STEP]
11.12%............... 03/15/06 3,375 2,413,125
Cobblestone Golf Group
Sr. Notes
11.50%............... 06/01/03 750 791,250
KSL Recreation Group,
Inc. Sr. Sub. Notes
144A
10.25%............... 04/24/07 400 418,000
Leslie's Poolmart Sr.
Notes 144A
10.375%.............. 07/15/04 325 334,750
Premier Parks Corp. Sr.
Notes
9.75%................ 01/15/07 450 470,250
Premier Parks Corp. Sr.
Notes Cl-A
12.00%............... 08/15/03 600 667,500
Six Flags Theme Parks
Sr. Sub. Notes Cl-A
[STEP]
9.08%................ 06/15/05 3,225 3,321,750
------------
8,850,625
------------
ENVIRONMENTAL SERVICES -- 2.3%
Allied Waste Industries
Sr. Disc. Notes
[STEP] 144A
10.23%............... 06/01/07 3,700 2,340,250
Allied Waste North
America Sr. Sub.
Notes 144A
10.25%............... 12/01/06 2,200 2,362,250
Envirosource, Inc. Sr.
Notes
9.75%................ 06/15/03 1,400 1,375,500
ICF Kaiser
International, Inc.
Sr. Sub. Notes
13.00%............... 12/31/03 600 621,000
Mid-American Waste
Systems, Inc. Sr.
Sub. Notes*
12.25%............... 02/15/03 900 463,500
------------
7,162,500
------------
EQUIPMENT SERVICES -- 0.5%
Coinmach Corp. Sr.
Notes
11.75%............... 11/15/05 781 864,957
Primeco, Inc. Sr. Sub.
Notes
12.75%............... 03/01/05 667 793,730
------------
1,658,687
------------
FARMING & AGRICULTURE -- 0.6%
Dimon, Inc. Sr. Notes
8.875%............... 06/01/06 1,750 1,826,562
------------
FINANCIAL-BANK & TRUST -- 1.2%
First Nationwide
Holdings Sr. Sub.
Notes
10.625%.............. 10/01/03 3,275 3,610,687
------------
FINANCIAL SERVICES -- 1.4%
Contifinancial Corp.
Sr. Notes
8.375%............... 08/15/03 1,500 1,539,150
Intertek Finance PLC
Sr. Sub. Notes
10.25%............... 11/01/06 1,150 1,204,625
Mesa Operating Co.
Disc. Notes [STEP]
10.11%............... 07/01/06 500 388,750
Mesa Operating Co. Sr.
Sub. Notes
10.625%.............. 07/01/06 250 285,312
Olympic Financial Ltd.
Units
11.50%............... 03/15/07 925 943,500
------------
4,361,337
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
FOOD -- 3.0%
Carr-Gottstein Foods
Co. Sr. Sub. Notes
12.00%............... 11/15/05 $ 900 $ 1,001,250
Curtice-Burns Foods,
Inc. Sr. Sub. Notes
12.25%............... 02/01/05 1,100 1,212,750
Di Giorgio Corp. Sr.
Notes 144A
10.00%............... 06/15/07 300 298,500
International Home
Foods Sr. Sub. Notes
10.375%.............. 11/01/06 2,750 2,839,375
MBW Foods, Inc. Sr.
Sub. Notes 144A
9.875%............... 02/15/07 525 534,187
PMI Acquisition Corp.
Sr. Sub. Notes
10.25%............... 09/01/03 750 798,750
Smith's Food & Drug
Centers Sr. Sub.
Notes
11.25%............... 05/15/07 500 590,000
Specialty Foods Corp.
Sr. Notes Cl-B
11.25%............... 08/15/03 600 522,000
Van de Kamps, Inc. Sr.
Sub. Notes
12.00%............... 09/15/05 1,450 1,624,000
------------
9,420,812
------------
HEALTHCARE SERVICES -- 2.9%
Genesis Health
Ventures, Inc. Sr.
Sub. Notes
9.75%................ 06/15/05 1,250 1,300,000
Icon Fitness Corp.
Notes Cl-B [STEP]
14.00%............... 11/15/06 1,100 605,000
Icon Health & Fitness
Sr. Sub. Notes Cl-B
13.00%............... 07/15/02 530 598,900
Tenet Healthcare Corp.
Sr. Sub. Notes
8.00%................ 01/15/05 2,250 2,272,500
10.125%.............. 03/01/05 1,700 1,870,000
8.625%............... 01/15/07 2,250 2,295,000
------------
8,941,400
------------
HOTELS & MOTELS -- 0.5%
Courtyard By Marriott
Sr. Notes
10.75%............... 02/01/08 1,500 1,623,750
------------
INDUSTRIAL PRODUCTS -- 1.3%
Continental Global
Group Sr. Notes 144A
11.00%............... 04/01/07 950 999,875
MMI Products, Inc. Sr.
Sub. Notes 144A
11.25%............... 04/15/07 1,100 1,171,500
Unifrax Investment
Corp. Sr. Notes
10.50%............... 11/01/03 1,650 1,724,250
------------
3,895,625
------------
MACHINERY & EQUIPMENT -- 2.3%
Clark Materials
Handling Sr. Notes
10.75%............... 11/15/06 1,675 1,762,938
Fairfield Manufacturing
Co. Sr. Sub. Notes
11.375%.............. 07/01/01 900 963,000
Hawk Corp. Sr. Notes
10.25%............... 12/01/03 250 258,125
International Knife &
Saw, Inc. Sr. Sub.
Notes
11.375%.............. 11/15/06 1,050 1,131,375
Mettler-Toledo, Inc.
Notes
9.75%................ 10/01/06 1,000 1,065,000
Roller Bearing Co. Sr.
Sub. Notes 144A
9.625%............... 06/15/07 375 383,437
Ryder TRS, Inc. Sr.
Sub. Notes
10.00%............... 12/01/06 300 310,500
Tokheim Corp. Sr. Sub.
Notes Cl-B
11.50%............... 08/01/06 1,100 1,215,500
------------
7,089,875
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.8%
Dade International,
Inc. Sr. Sub. Notes
11.125%.............. 05/01/06 2,225 2,492,000
------------
METALS & MINING -- 3.4%
Acme Metals, Inc. Sr.
Disc. Notes [STEP]
10.71%............... 08/01/04 925 1,031,375
Bayou Steel Corp. First
Mtge. Notes
10.25%............... 03/01/01 750 761,250
Echo Bay Mines Ltd. Jr.
Sub. Debs.
11.00%............... 04/01/27 1,250 1,260,938
Euramax International
Ltd. Sr. Sub. Notes
11.25%............... 10/01/06 1,250 1,350,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
GS Technologies
Operating Corp. Sr.
Notes
12.00%............... 09/01/04 $ 975 $ 1,053,000
12.25%............... 10/01/05 1,200 1,317,000
Neenah Corp. Sr. Sub.
Notes 144A
11.125%.............. 05/01/07 625 665,625
Republic Engineered
Steel First Mtge.
9.875%............... 12/15/01 750 700,313
Royal Oak Mines, Inc.
Sr. Sub. Notes
11.00%............... 08/15/06 1,400 1,358,000
Ryerson Tull, Inc.
Notes
9.125%............... 07/15/06 900 949,500
------------
10,447,001
------------
OFFICE EQUIPMENT -- 0.9%
Knoll, Inc. Sr. Sub.
Notes
10.875%.............. 03/15/06 910 1,011,238
United Stationery
Supply Sr. Sub. Notes
12.75%............... 05/01/05 1,653 1,886,486
------------
2,897,724
------------
OIL & GAS -- 4.7%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%............... 11/01/04 2,400 2,622,000
DI Industries, Inc. Sr.
Notes
8.875%............... 07/01/07 1,000 990,000
Falcon Drilling Co.,
Inc. Sr. Notes
9.75%................ 01/15/01 350 364,000
12.50%............... 03/15/05 300 334,500
Forcenergy, Inc. Sr.
Sub. Notes
9.50%................ 11/01/06 2,650 2,749,375
8.50%................ 02/15/07 300 294,000
Giant Industries, Inc.
Sr. Sub. Notes
9.75%................ 11/15/03 550 566,500
Pacalta Resources Ltd.
Sr. Notes 144A
10.75%............... 06/15/04 300 304,500
Petsec Energy, Inc. Sr.
Sub. Notes 144A
9.50%................ 06/15/07 400 400,000
Pride Petroleum
Services, Inc. Sr.
Notes
9.375%............... 05/01/07 2,500 2,593,750
United Meridian Corp.
Sr. Sub. Notes
10.375%.............. 10/15/05 1,775 1,930,313
United Refining Co. Sr.
Notes 144A
10.75%............... 06/15/07 900 895,500
XCL Ltd. Units 144A
13.50%............... 05/01/04 750 768,750
------------
14,813,188
------------
PAPER & FOREST PRODUCTS -- 1.3%
Buckeye Cellulose Corp.
Sr. Sub. Notes
9.25%................ 09/15/08 1,000 1,050,000
Repap New Brunswick Sr.
Notes
10.625%.............. 04/15/05 500 475,000
S.D. Warren Co. Sr.
Sub. Notes
12.00%............... 12/15/04 1,300 1,462,500
Uniforet, Inc. Sr.
Notes
11.125%.............. 10/15/06 1,200 1,128,000
------------
4,115,500
------------
PRINTING & PUBLISHING -- 1.7%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
12.73%............... 07/01/06 2,200 1,996,500
Garden State Newspapers
Sr. Sub. Notes
12.00%............... 07/01/04 200 223,000
Hollinger International
Publishing Co. Notes
9.25%................ 02/01/06 800 820,000
9.25%................ 03/15/07 1,000 1,030,000
K-III Communications
Corp. Sr. Notes
8.50%................ 02/01/06 500 505,650
Petersen Publishing Sr.
Sub. Notes Cl-B
11.125%.............. 11/15/06 800 896,000
------------
5,471,150
------------
REAL ESTATE -- 0.5%
Trizec Finance Ltd. Sr.
Notes
10.875%.............. 10/15/05 1,457 1,646,410
------------
RETAIL & MERCHANDISING -- 1.0%
Ralph's Grocery Co. Sr.
Notes
10.45%............... 06/15/04 3,025 3,259,438
------------
TELECOMMUNICATIONS -- 22.1%
Arch Communications
Group Sr. Disc. Notes
[STEP]
14.42%............... 03/15/08 1,200 639,000
Bell Cablemedia PLC Sr.
Disc. Notes [STEP]
11.81%............... 07/15/04 850 769,250
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
Brooks Fiber Properties
Sr. Disc. Notes [STEP]
9.52%................ 01/01/06 $ 900 $ 589,500
12.52%............... 03/01/06 3,650 2,500,250
Cablevision Systems
Corp. Sr. Sub. Debs.
9.875%............... 02/15/13 500 525,000
Cablevision Systems
Corp. Sr. Sub. Notes
9.25%................ 01/01/05 2,950 3,068,000
9.875%............... 05/15/06 300 319,500
Cellular
Communications, Inc.
Sr. Sub. Notes 144A
10.00%............... 02/01/07 500 495,000
Cellular Communications
International, Inc.
Notes [ZCB]
11.44%............... 08/15/00 1,550 1,193,500
CF Cable TV, Inc. Sr.
Notes
11.625%.............. 02/15/05 500 570,000
Charter Communications
Cl-B [STEP]
10.54%............... 03/15/07 650 445,250
Charter Communications
Southeast L.P. Sr.
Notes
11.25%............... 03/15/06 1,150 1,236,250
Comcast Cellular Sr.
Notes 144A
9.50%................ 05/01/07 1,000 1,012,500
Comcast Corp. Sr. Sub.
Debs.
9.375%............... 05/15/05 2,500 2,637,500
Comcast U.K. Cable
Corp. Debs. [STEP]
11.00%............... 01/15/07 2,900 2,218,732
Diamond Cable
Communications PLC
Sr. Disc. Notes
[STEP]
12.07%............... 09/30/04 250 204,375
11.00%............... 12/15/05 4,000 2,720,000
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
12.67%............... 03/15/04 3,075 2,198,625
Intermedia
Communications of
Florida, Inc. Sr.
Disc. Notes [STEP]
10.75%............... 05/15/06 4,650 3,255,000
International Cabletel,
Inc. Sr. Notes [STEP]
13.57%............... 10/15/03 500 437,500
10.15%............... 04/15/05 1,050 813,750
12.12%............... 02/01/06 2,550 1,765,875
Jacor Communications
Co. Notes
9.75%................ 12/15/06 500 521,250
McLeod, Inc. [STEP]
144A
10.62%............... 03/01/07 2,150 1,376,000
Millicom International
Cellular Sr. Disc.
Notes [STEP]
12.93%............... 06/01/06 2,600 1,881,750
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
12.94%............... 09/01/03 300 262,500
12.76%............... 08/15/04 2,225 1,724,375
Nextlink
Communications, Inc.
Sr. Notes
12.50%............... 04/15/06 500 537,500
Paging Network, Inc.
Sr. Sub. Notes
10.125%.............. 08/01/07 2,000 1,950,000
10.00%............... 10/15/08 1,000 965,000
Panamsat L.P. Sr. Sub.
Notes [STEP]
9.97%................ 08/01/03 1,400 1,365,000
Pegasus Media &
Communications, Inc.
Notes
12.50%............... 07/01/05 975 1,057,875
Phonetel Technologies
Sr. Notes
12.00%............... 12/15/06 1,025 1,042,938
Qwest Communications
International Sr.
Notes 144A
10.875%.............. 04/01/07 1,625 1,771,250
Rogers Cablesystems Sr.
Notes
10.00%............... 03/15/05 1,300 1,417,000
10.00%............... 12/01/07 1,350 1,458,000
11.00%............... 12/01/15 750 823,125
Sygnet Wireless, Inc.
Sr. Notes
11.50%............... 10/01/06 1,425 1,432,125
TCI Satellite
Entertainment [STEP]
144A
12.24%............... 02/15/07 400 238,000
TCI Satellite
Entertainment Sr.
Sub. Notes 144A
10.875%.............. 02/15/07 250 250,625
Teleport Communications
Group, Inc. Sr. Notes
9.875%............... 07/01/06 225 239,625
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C>
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
10.08%............... 07/01/07 $ 3,975 $ 2,852,063
Telesystem
International
Wireless [STEP] 144A
13.16%............... 06/30/07 2,200 1,174,250
Telewest PLC Debs.
[STEP]
10.97%............... 10/01/07 4,975 3,631,750
UIH Australia Pacific
Sr. Disc. Notes
[STEP]
14.10%............... 05/15/06 1,600 976,000
USA Mobile
Communications Sr.
Notes
9.50%................ 02/01/04 1,050 987,000
Vanguard Cellular
System Debs.
9.375%............... 04/15/06 2,000 2,030,000
Viacom, Inc. Sub. Debs.
8.00%................ 07/07/06 6,000 5,865,000
Videotron Holdings PLC
Sr. Notes
10.625%.............. 02/15/05 1,000 1,120,000
Wireless One, Inc. Sr.
Notes
13.00%............... 10/15/03 500 320,000
Wireless One, Inc.
[STEP]
13.50%............... 08/01/06 300 82,500
------------
68,966,858
------------
TRANSPORTATION -- 2.9%
Ameritruck Distribution
Sr. Sub. Notes
12.25%............... 11/15/05 1,200 1,227,000
Chemical Leaman Corp.
Sr. Notes 144A
10.375%.............. 06/15/05 750 766,875
Gearbulk Holding Ltd.
Sr. Notes
11.25%............... 12/01/04 1,400 1,554,000
Johnstown America, Inc.
Sr. Sub. Notes
11.75%............... 08/15/05 600 631,500
Statia Terminals, First
Mtge. Notes Cl-A
11.75%............... 11/15/03 1,000 1,060,000
Stena AB Sr. Notes
10.50%............... 12/15/05 2,875 3,155,313
Trism, Inc. Sr. Sub.
Notes
10.75%............... 12/15/00 725 699,625
------------
9,094,313
------------
UTILITIES -- 2.1%
California Energy Co.,
Inc. Disc. Notes
10.25%............... 01/15/04 4,550 4,925,375
California Energy Co.,
Inc. Sr. Notes
9.50%................ 09/15/06 500 537,500
El Paso Electric Co.
First Mtge. Notes
Cl-E
9.40%................ 05/01/11 1,075 1,190,014
------------
6,652,889
------------
TOTAL CORPORATE OBLIGATIONS
(COST $263,576,240)................ 273,515,387
------------
U.S. TREASURY OBLIGATIONS -- 1.3%
U.S. Treasury Notes
5.75%
(COST $3,777,244).... 08/15/03 4,000 3,863,120
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
--------
<S> <C> <C>
COMMON STOCK -- 0.1%
BROADCASTING -- 0.0%
Sullivan Broadcasting Holdings
Co.*.......................... 2,400 25,200
------------
CAPITAL GOODS -- 0.0%
Australis Holdings Warrants*.... 1,000 0
------------
CHEMICALS -- 0.0%
Sterling Chemicals Holdings
Warrants*..................... 1,075 37,625
Uniroyal Technology Corp.
Warrants*..................... 2,500 5,938
------------
43,563
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America,
Inc.*......................... 400 3,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.0%
Electronic Retailing, Inc.
Warrants 144A*................ 875 3,500
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants*..................... 1,200 300
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Warrants
144A*......................... 250 12,625
------------
INDUSTRIAL PRODUCTS -- 0.0%
Bar Technologies, Inc. Warrants
144A*......................... 300 13,500
------------
PRINTING & PUBLISHING -- 0.1%
Affiliated Newspaper
Investments, Inc.*............ 1,000 100,500
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
TELECOMMUNICATIONS -- 0.0%
Cellular Communications
International, Inc.
Warrants*..................... 1,100 $ 11,000
Pegasus Communications Corp.
Cl-A*......................... 1,128 11,985
Wireless One, Inc. Warrants*.... 1,500 0
------------
22,985
------------
TOTAL COMMON STOCK
(COST $25,738).................... 225,173
------------
PREFERRED STOCK -- 4.3%
BROADCASTING -- 2.3%
American Radio Systems
11.375%....................... 18,357 1,964,193
Capstar Broadcasting Partners
$12.00 144A................... 6,500 656,500
Chancellor Broadcasting Co.
12.25% [PIK].................. 7,500 978,750
Chancellor Broadcasting Co. 144A
12.00%........................ 18,300 2,104,500
SFX Broadcasting, Inc. Cl-E
12.625%....................... 400 434,000
Sinclair Broadcast Group Cl-A
144A
11.625%....................... 10,000 1,060,000
------------
7,197,943
------------
FINANCIAL-BANK & TRUST -- 0.2%
California Federal Capital Corp.
Cl-A
9.125% [PIK].................. 30,000 785,640
------------
INDUSTRIAL PRODUCTS -- 0.2%
Fairfield Manufacturing Co.,
Inc. $11.25 Cl-A 144A......... 650 656,500
------------
PRINTING & PUBLISHING -- 0.7%
K-III Communications Corp. Cl-B
11.625% [PIK]................. 8,962 981,386
K-III Communications Corp. Cl-C
10.00% [CVT].................. 10,750 1,093,802
------------
2,075,188
------------
TELECOMMUNICATIONS -- 0.5%
Panamsat Corp.
12.75%........................ 232 284,200
Pegasus Communications Corp.
Cl-A
12.75% [PIK].................. 1,250 1,231,250
------------
1,515,450
------------
UTILITIES -- 0.4%
El Paso Electric Co.
11.40% [PIK].................. 10,894 1,231,022
------------
TOTAL PREFERRED STOCK
(COST $12,057,911)................ 13,461,743
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 6.0%
Greenwich Capital
Markets, Inc. 5.95%,
dated 06/30/97,
repurchase price
$18,794,106
(Collateralized by
U.S. Treasury Note,
par value
$18,262,000, market
value $19,212,939,
due 05/15/04)
(COST $18,791,000)... 07/01/97 $18,791 18,791,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.2%
Temporary Investment Cash Fund... 367,603 367,603
Temporary Investment Fund........ 367,603 367,603
(COST $735,206).................. 735,206
TOTAL INVESTMENTS -- 99.6%
(COST $298,963,339)................ 310,591,629
OTHER ASSETS LESS
LIABILITIES -- 0.4%................ 1,289,097
NET ASSETS -- 100.0%................. $311,880,726
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 11.4% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
COMMON STOCK -- 45.0%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ................ 1,500 $ 92,437
------------
AEROSPACE -- 0.7%
Boeing Co. ......................... 6,368 337,902
Lockheed Martin Corp. .............. 1,500 155,344
McDonnell Douglas Corp. ............ 2,000 137,000
Northrop Grumman Corp. ............. 800 70,250
Primex Technologies, Inc. .......... 120 2,565
Raytheon Co. ....................... 1,800 91,800
Rockwell International Corp. ....... 2,800 165,200
United Technologies Corp. .......... 2,800 232,400
------------
1,192,461
------------
AIRLINES -- 0.2%
Alaska Air Group, Inc.*............. 2,700 69,187
AMR Corp.*.......................... 1,900 175,750
------------
244,937
------------
AUTOMOBILE MANUFACTURERS -- 0.7%
Ford Motor Co. ..................... 11,800 445,450
General Motors Corp. ............... 6,900 384,244
Honda Motor Co. Ltd. [ADR].......... 4,800 288,900
------------
1,118,594
------------
AUTOMOTIVE PARTS -- 0.3%
Arvin Industries, Inc. ............. 1,300 35,425
Echlin, Inc. ....................... 3,100 111,600
Genuine Parts Co. .................. 4,650 157,519
Goodyear Tire & Rubber Co. ......... 1,200 75,975
TRW, Inc. .......................... 2,800 159,075
------------
539,594
------------
BEVERAGES -- 1.4%
Anheuser-Busch Companies, Inc. ..... 5,400 226,462
Cadbury Schweppes PLC [ADR]......... 3,473 127,199
Coca-Cola Co. ...................... 20,200 1,363,500
Coca-Cola Enterprises, Inc. ........ 6,900 158,700
Pepsico, Inc. ...................... 12,900 484,556
------------
2,360,417
------------
BROADCASTING -- 0.2%
Chris-Craft Industries, Inc.*....... 1,339 64,607
TCA Cable TV, Inc. ................. 1,600 60,200
U.S. West, Inc.*.................... 6,500 131,625
Viacom, Inc. Cl-B*.................. 4,000 120,000
------------
376,432
------------
BUILDING MATERIALS -- 0.1%
Calmat Co. ......................... 1,700 36,550
Masco Corp. ........................ 3,600 150,300
------------
186,850
------------
BUSINESS SERVICES -- 0.1%
Cognizant Corp. .................... 1,500 60,750
Equifax, Inc. ...................... 3,900 145,031
Olsten Corp. ....................... 2,000 38,875
------------
244,656
------------
CHEMICALS -- 1.5%
Akzo-Nobel NV [ADR]................. 1,000 69,125
Cabot Corp. ........................ 2,300 65,262
Crompton & Knowles Corp. ........... 3,800 84,550
Dow Chemical Co. ................... 3,000 261,375
Dupont, (E.I.) de Nemours & Co. .... 10,400 653,900
FMC Corp.*.......................... 1,200 95,325
Great Lakes Chemical Corp. ......... 2,500 130,937
Hanna, (M.A.) Co. .................. 2,100 60,506
IMC Global, Inc. ................... 2,000 70,000
Lubrizol Corp. ..................... 2,200 92,262
Millennium Chemicals, Inc. ......... 192 4,368
Monsanto Co. ....................... 5,800 249,762
Morton International, Inc. ......... 3,400 102,637
Olin Corp. ......................... 1,200 46,875
PPG Industries, Inc. ............... 2,800 162,750
Rohm & Haas Co. .................... 1,600 144,100
Witco Corp. ........................ 3,100 117,606
------------
2,411,340
------------
CLOTHING & APPAREL -- 0.3%
Cintas Corp. ....................... 1,800 123,750
Jones Apparel Group, Inc.*.......... 2,600 124,150
Nike, Inc. Cl-B..................... 2,800 163,450
Springs Industries, Inc. Cl-A....... 2,000 105,500
------------
516,850
------------
COMPUTER HARDWARE -- 1.3%
Bay Networks, Inc.*................. 1,900 50,469
Compaq Computer Corp.*.............. 2,400 238,200
Dell Computer Corp.*................ 2,600 305,337
Digital Equipment Corp.*............ 1,400 49,612
Hewlett-Packard Co. ................ 7,200 403,200
International Business Machines
Corp. ............................ 8,200 739,537
Seagate Technology, Inc.*........... 3,600 126,675
Stratus Computer, Inc.*............. 1,100 55,000
Sun Microsystems, Inc.*............. 3,200 119,100
3Com Corp.*......................... 2,948 132,660
------------
2,219,790
------------
COMPUTER SERVICES & SOFTWARE -- 2.0%
Adobe Systems, Inc.*................ 600 21,037
America Online, Inc.*............... 1,900 105,687
Automatic Data Processing, Inc. .... 3,300 155,100
BMC Software, Inc.*................. 3,300 182,737
Cadence Design Systems, Inc.*....... 1,550 51,925
Ceridian Corp.*..................... 1,500 63,375
Cisco Systems, Inc.*................ 5,100 342,337
Computer Associates International,
Inc. ............................. 3,675 204,652
First Data Corp. ................... 5,400 237,262
Informix Corp.*..................... 2,900 26,100
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Microsoft Corp.*........................ 10,000 $ 1,263,750
Novell, Inc.*....................... 9,500 65,906
Oracle Corp.*....................... 6,500 327,437
Parametric Technology Corp.*........ 2,400 102,150
Paychex, Inc. ...................... 3,600 136,800
Storage Technology Corp.*........... 1,200 53,400
Structural Dynamics Research
Corp.*............................ 1,300 34,125
------------
3,373,780
------------
CONGLOMERATES -- 0.9%
Hanson PLC [ADR].................... 337 8,425
Minnesota Mining & Manufacturing
Co. .............................. 4,400 448,800
Philip Morris Companies, Inc. ...... 21,900 971,812
------------
1,429,037
------------
CONSTRUCTION -- 0.0%
Granite Construction, Inc........... 1,100 21,725
Jacobs Engineering Group, Inc.* .... 1,000 26,875
------------
48,600
------------
CONSUMER PRODUCTS & SERVICES -- 1.4%
Colgate-Palmolive Co. .............. 4,000 261,000
Cross, (A.T.) Co. Cl-A.............. 1,400 17,850
CUC International, Inc.*............ 3,700 95,506
Eastman Kodak Co. .................. 3,300 253,275
Fortune Brands, Inc. ............... 2,400 89,550
Gallaher Group PLC [ADR]*........... 2,400 44,250
Gillette Co......................... 4,500 426,375
Imperial Tobacco Group PLC [ADR].... 675 8,684
National Presto Industries, Inc. ... 800 32,250
Pittston Brink Group................ 1,300 39,000
Procter & Gamble Co. ............... 6,500 918,125
Tambrands, Inc. .................... 1,500 74,812
------------
2,260,677
------------
CONTAINERS & PACKAGING -- 0.1%
Bemis Co., Inc. .................... 2,700 116,775
Sealed Air Corp.*................... 2,400 114,000
------------
230,775
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.3%
Altera Corp.*....................... 2,800 141,400
Applied Materials, Inc.*............ 1,600 113,300
Arrow Electronics, Inc.*............ 900 47,812
Diebold, Inc. ...................... 2,700 105,300
Emerson Electric Co. ............... 4,600 253,287
General Electric Co. ............... 28,400 1,856,650
Hitachi Ltd. [ADR].................. 2,400 271,200
Honeywell, Inc. .................... 1,500 113,812
Hubbell, Inc. Cl-B.................. 2,000 88,000
Molex, Inc. ........................ 3,500 127,750
Philips Electronics NV [ADR]........ 3,600 258,750
Solectron Corp.*.................... 1,500 105,094
Sundstrand Corp. ................... 2,200 118,800
Symbol Technologies, Inc. .......... 1,050 35,306
Tandy Corp. ........................ 600 33,600
Teleflex, Inc. ..................... 1,800 56,250
Varian Associates, Inc. ............ 700 37,975
------------
3,764,286
------------
ENTERTAINMENT & LEISURE -- 0.7%
Brunswick Corp. .................... 2,000 62,500
Callaway Golf Co. .................. 1,900 67,450
Circus Circus Enterprises*.......... 2,700 66,487
Harley-Davidson, Inc. .............. 1,900 91,081
Mattel, Inc. ....................... 1,900 64,362
Mirage Resorts, Inc.*............... 3,800 95,950
President Casinos, Inc. Warrants*... 883 221
Time Warner, Inc. .................. 5,500 265,375
Walt Disney Co. .................... 6,264 502,686
------------
1,216,112
------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries, Inc..... 3,100 103,075
USA Waste Services, Inc.* .......... 2,600 100,425
Waste Management, Inc. ............. 4,023 129,239
------------
332,739
------------
FINANCIAL-BANK & TRUST -- 3.6%
Australia and New Zealand Banking
Group Ltd. [ADR] ................. 3,600 132,750
Banc One Corp. ..................... 4,900 237,344
Banco Bilbao Vizcaya [ADR].......... 3,000 242,625
Banco Frances del Rio de la Plata SA
[ADR]............................. 5,060 164,450
Chase Manhattan Corp. .............. 4,256 413,098
Citicorp............................ 4,600 554,587
City National Corp. ................ 1,800 43,312
CoreStates Financial Corp. ......... 3,400 182,750
Crestar Financial Corp. ............ 2,600 101,075
Fifth Third Bancorp................. 2,100 172,266
First Bank System, Inc. ............ 2,400 204,900
First Chicago NBD Corp.............. 3,400 205,700
First Security Corp................. 4,725 129,052
First Tennessee National Corp. ..... 2,700 129,600
First Union Corp.................... 2,800 259,000
Fleet Financial Group, Inc.......... 2,900 183,425
Keycorp............................. 3,500 195,562
Mellon Bank Corp. .................. 4,400 198,550
Mercantile Bancorporation, Inc. .... 1,400 85,050
Mercantile Bankshares Corp. ........ 1,800 72,000
Morgan, (J.P.) & Co., Inc. ......... 2,300 240,062
NationsBank Corp. .................. 8,000 516,000
Northern Trust Corp. ............... 3,600 174,150
Norwest Corp. ...................... 4,000 225,000
Pacific Century Hawaii, Inc. ....... 1,500 69,375
PNC Bank Corp. ..................... 4,820 200,632
Southtrust Corp. ................... 3,000 124,125
State Street Boston Corp. .......... 3,600 166,500
U.S. Bancorp........................ 2,852 182,884
Wells Fargo & Co. .................. 900 242,550
------------
6,048,374
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
FINANCIAL SERVICES -- 1.5%
American Express Co. ............... 3,900 $ 290,550
Bear Stearns Companies, Inc. ....... 2,415 82,563
Charles Schwab Corp. ............... 3,200 130,200
Comdisco, Inc. ..................... 2,850 74,100
Echelon International Corp.*........ 146 3,331
Edwards (A.G.), Inc. ............... 1,500 64,125
Fannie Mae.......................... 6,000 261,750
Federal Home Loan Mtge. Corp. ...... 9,500 326,562
Franklin Resources, Inc. ........... 2,850 206,803
Green Tree Financial Corp. ......... 2,500 89,062
Grupo Financiero Bancomer [ADR]
144A*............................. 1,400 13,650
H & R Block, Inc. .................. 2,500 80,625
Household International, Inc. ...... 1,600 187,900
Merrill Lynch & Co., Inc. .......... 2,600 155,025
Morgan Stanley, Dean Witter,
Discover & Co.*................... 5,485 236,198
Paine Webber Group, Inc. ........... 2,400 84,000
Salomon, Inc. ...................... 1,400 77,875
SunAmerica, Inc. ................... 2,400 117,000
------------
2,481,319
------------
FOOD -- 1.6%
Archer-Daniels-Midland Co. ......... 7,412 174,182
Conagra, Inc. ...................... 3,400 218,025
CPC International, Inc. ............ 1,800 166,162
Dole Food Co. ...................... 1,700 72,675
Earthgrains Co. .................... 148 9,703
General Mills, Inc. ................ 2,500 162,812
Grand Metropolitan PLC [ADR]........ 4,800 188,100
Heinz, (H.J.) Co. .................. 4,450 205,256
IBP, Inc. .......................... 2,400 55,800
Kellogg Co. ........................ 2,400 205,500
McCormick & Co., Inc. .............. 2,600 65,650
Ralston Purina Group................ 2,100 172,594
Safeway, Inc.*...................... 2,280 105,165
Sara Lee Corp. ..................... 6,200 258,075
Smucker, (J.M.) Co. ................ 1,600 34,800
Unilever PLC [ADR].................. 2,100 457,800
Universal Corp. .................... 1,000 31,750
Universal Foods Corp. .............. 1,300 49,562
------------
2,633,611
------------
FURNITURE -- 0.1%
Leggett & Platt, Inc. .............. 2,000 86,000
------------
HEALTHCARE SERVICES -- 0.4%
Apria Healthcare Group, Inc.*....... 2,000 35,500
Columbia-HCA Healthcare Corp. ...... 6,096 239,649
Healthsouth Corp.*.................. 3,600 89,775
PaCificare Health Systems, Inc.
Cl-A.............................. 400 24,225
PaCificare Health Systems, Inc.
Cl-B*............................. 1,000 63,875
United Healthcare Corp. ............ 2,100 109,200
Vencor, Inc.*....................... 2,200 92,950
------------
655,174
------------
HOTELS & MOTELS -- 0.2%
HFS, Inc.*.......................... 2,400 139,200
ITT Corp.*.......................... 1,900 116,019
------------
255,219
------------
INDUSTRIAL PRODUCTS -- 0.3%
Corning, Inc. ...................... 2,600 144,625
Dexter Corp. ....................... 1,500 48,000
Harsco Corp. ....................... 2,000 81,000
Pall Corp. ......................... 4,000 93,000
Tomkins PLC [ADR]................... 6,000 107,250
------------
473,875
------------
INSURANCE -- 1.8%
Aetna, Inc. ........................ 2,102 215,192
AFLAC, Inc. ........................ 2,550 120,487
American Financial Group, Inc. ..... 1,700 72,144
American General Corp. ............. 3,600 171,900
American International Group,
Inc. ............................. 4,500 672,187
Chubb Corp. ........................ 2,600 173,875
CIGNA Corp. ........................ 1,300 230,750
General Re Corp. ................... 1,100 200,200
HSB Group, Inc. .................... 1,100 58,712
Loews Corp. ........................ 1,700 170,212
Progressive Corp. .................. 1,300 113,100
Selective Insurance Group........... 1,000 48,437
Torchmark Corp. .................... 2,300 163,875
Transatlantic Holdings, Inc. ....... 700 69,475
Travelers Group, Inc. .............. 5,800 365,762
UNUM Corp. ......................... 3,400 142,800
------------
2,989,108
------------
LUMBER & WOOD PRODUCTS -- 0.0%
Deltic Timber Corp. ................ 342 10,025
------------
MACHINERY & EQUIPMENT -- 0.9%
AlliedSignal, Inc. ................. 3,700 310,800
Black & Decker Corp. ............... 1,800 66,937
Caterpillar, Inc. .................. 2,800 300,650
Danaher Corp. ...................... 1,100 55,894
Deere & Co. ........................ 4,000 219,500
Durco International, Inc. .......... 2,900 84,825
Federal Signal Corp. ............... 1,700 42,712
Gencorp, Inc. ...................... 2,800 64,750
Illinois Tool Works, Inc. .......... 4,200 209,737
Sequa Corp. Cl-A* .................. 700 39,462
Tecumseh Products Co. Cl-A.......... 1,400 83,825
Thermo Electron Corp.*.............. 1,600 55,000
------------
1,534,092
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.4%
Baxter International, Inc. ......... 2,400 125,400
Becton Dickinson & Co. ............. 2,700 136,687
Boston Scientific Corp.*............ 2,100 129,019
Guidant Corp. ...................... 500 42,500
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Medtronic, Inc. ........................ 2,000 $ 162,000
Stryker Corp. ...................... 3,400 118,575
------------
714,181
------------
METALS & MINING -- 0.4%
Aluminum Co. of America............. 2,700 203,512
Barrick Gold Corp. ................. 6,500 143,000
Brush Wellman, Inc. ................ 1,300 27,219
Carpenter Technology Corp. ......... 2,200 100,650
Nucor Corp. ........................ 1,600 90,400
Placer Dome, Inc. .................. 4,700 76,962
------------
641,743
------------
MISCELLANEOUS -- 0.1%
International Flavors & Fragrances,
Inc. ............................. 2,600 131,300
------------
OFFICE EQUIPMENT -- 0.4%
Ikon Office Solutions, Inc. ........ 2,300 57,356
Pitney Bowes, Inc. ................. 1,900 132,050
Standard Register Co. .............. 1,100 33,687
Staples, Inc.*...................... 2,900 67,425
Viking Office Products, Inc.*....... 2,100 39,900
Wallace Computer Service, Inc. ..... 2,900 87,181
Xerox Corp. ........................ 3,100 244,512
------------
662,111
------------
OIL & GAS -- 4.7%
Amerada Hess Corp. ................. 4,700 261,144
Atlantic Richfield Co. ............. 4,000 282,000
BJ Services Co.*.................... 3,300 176,962
British Petroleum Co. PLC [ADR]..... 3,000 224,625
Chevron Corp. ...................... 6,000 443,625
El Paso Natural Gas Co. ............ 1,400 77,000
Enron Corp. ........................ 4,400 179,575
Ensco International, Inc.*.......... 2,100 110,775
Ente Nazionale Idrocarbure SPA
[ADR]............................. 3,500 199,062
Exxon Corp. ........................ 21,400 1,316,100
Global Marine, Inc.*................ 4,200 97,650
Halliburton Co. .................... 1,200 95,100
Helmerich & Payne, Inc. ............ 900 51,862
MCN Energy Group, Inc. ............. 2,400 73,500
Mobil Corp. ........................ 8,000 559,000
Murphy Oil Corp. ................... 1,200 58,500
National Fuel Gas Co. .............. 1,600 67,100
Noble Affiliates, Inc. ............. 2,600 100,587
Occidental Petroleum Corp. ......... 6,600 165,412
Philips Petroleum Co. .............. 4,000 175,000
Ranger Oil Ltd. .................... 5,400 50,287
Repsol SA [ADR]..................... 3,000 127,312
Royal Dutch Petroleum Co. .......... 18,400 1,000,500
Schlumberger Ltd. .................. 1,700 212,500
Shell Transport & Trading Co.
[ADR]............................. 2,000 251,500
Societe Nationale Elf Aquitaine SA
[ADR]............................. 2,000 108,875
Sonat, Inc. ........................ 2,600 133,250
Texaco, Inc. ....................... 3,100 337,125
Tidewater, Inc. .................... 2,700 118,800
Tosco Corp. ........................ 3,000 89,813
Total SA [ADR]...................... 3,000 151,875
Union Pacific Resources Group,
Inc. ............................. 5,509 137,036
Unocal Corp. ....................... 3,600 139,725
USX Marathon Group.................. 5,400 155,925
Valero Energy Corp. ................ 2,900 105,125
Washington Gas Light Co. ........... 2,200 55,275
------------
7,889,502
------------
PAPER & FOREST PRODUCTS -- 0.5%
Georgia Pacific Corp. .............. 1,500 128,063
Glatfelter, (P.H.) Co. ............. 2,600 52,000
International Paper Co. ............ 4,400 213,675
Kimberly-Clark Corp. ............... 5,400 268,650
Wausau Paper Mills Co. ............. 1,900 35,863
Weyerhaeuser Co. ................... 3,200 166,400
------------
864,651
------------
PERSONAL SERVICES -- 0.1%
Service Corp. International......... 3,800 124,925
------------
PHARMACEUTICALS -- 3.6%
Abbott Laboratories................. 5,900 393,825
American Home Products Corp. ....... 5,300 405,450
Amgen, Inc.*........................ 2,300 133,688
Bristol-Meyers Squibb Co. .......... 8,200 664,200
Cardinal Health, Inc. .............. 2,400 137,400
Carter-Wallace, Inc. ............... 3,900 69,713
Centocor, Inc.*..................... 1,200 37,275
Genzyme Corp.*...................... 2,100 58,275
Glaxo Wellcome PLC [ADR]............ 4,800 200,700
Ivax Corp. ......................... 2,200 24,613
Johnson & Johnson Co. .............. 10,200 656,625
Lilly, (Eli) & Co. ................. 4,900 535,631
McKesson Corp. ..................... 1,300 100,750
Merck & Co., Inc. .................. 9,900 1,024,650
Perrigo Co.*........................ 3,600 45,000
Pfizer, Inc. ....................... 5,500 657,250
Pharmacia & Upjohn, Inc. ........... 4,300 149,425
Scherer, (R.P.) Corp.*.............. 1,000 51,625
Schering-Plough Corp. .............. 5,600 268,100
Warner-Lambert Co. ................. 3,000 372,750
Watson Pharmaceuticals, Inc.*....... 1,500 63,375
------------
6,050,320
------------
PRINTING & PUBLISHING -- 0.3%
Banta Corp. ........................ 2,900 78,663
Belo, (A.H.) Corp. Cl-A............. 1,300 54,113
Dun & Bradstreet Corp. ............. 1,500 39,375
Gannett Co., Inc. .................. 2,200 217,250
McGraw-Hill Co., Inc. .............. 2,400 141,150
------------
530,551
------------
RAILROADS -- 0.4%
Burlington Northern Santa Fe
Corp. ............................ 1,300 116,838
CSX Corp. .......................... 2,300 127,650
Kansas City Southern Industries,
Inc. ............................. 1,800 116,100
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Norfolk Southern Corp. ................. 1,500 $ 151,125
Union Pacific Corp. ................ 1,900 133,950
------------
645,663
------------
RESTAURANTS -- 0.3%
Brinker International, Inc.*........ 7,300 104,025
Cracker Barrel Old Country Store,
Inc. ............................. 2,700 71,550
Darden Restaurants, Inc. ........... 6,500 58,906
McDonald's Corp. ................... 4,800 231,900
Outback Steakhouse, Inc.* .......... 1,900 45,956
------------
512,337
------------
RETAIL & MERCHANDISING -- 2.0%
Albertson's, Inc. .................. 4,200 153,300
Ann Taylor Stores Corp.*............ 1,600 31,200
Bed, Bath & Beyond, Inc.*........... 2,200 66,825
Circuit City Stores, Inc. .......... 900 32,006
Costco Companies, Inc.*............. 3,900 128,213
Dayton-Hudson Corp. ................ 2,400 127,650
Fastenal Co. ....................... 1,400 68,600
Federated Department Stores,
Inc.*............................. 2,700 93,825
Gap, Inc. .......................... 2,900 112,738
Home Depot, Inc. ................... 6,000 413,625
J.C. Penney Co., Inc. .............. 2,800 146,125
Kohls Corp.*........................ 2,800 148,225
Kroger Co.*......................... 5,400 156,600
Lands' End, Inc.*................... 1,800 53,325
May Department Stores Co. .......... 3,900 184,275
Melville Corp. ..................... 2,475 126,844
Meyer, (Fred), Inc.*................ 1,500 77,531
Micro Warehouse, Inc.*.............. 1,500 25,688
Payless Shoesource, Inc.*........... 672 36,750
Tiffany & Co. ...................... 1,200 55,425
TJX Companies, Inc. ................ 2,800 73,850
Toys 'R' Us, Inc.*.................. 4,620 161,700
Wal-Mart Stores, Inc. .............. 20,400 689,775
Walgreen Co. ....................... 3,300 176,963
------------
3,341,058
------------
SEMI-CONDUCTORS -- 1.2%
Analog Devices, Inc.*............... 7,533 200,095
Atmel Corp.*........................ 2,000 56,000
Intel Corp. ........................ 7,000 992,688
Linear Technology Corp. ............ 1,900 98,325
Maxim Integrated Products, Inc.*.... 2,000 113,750
Motorola, Inc. ..................... 4,700 357,200
Xilinx, Inc.*....................... 3,100 152,094
------------
1,970,152
------------
TELECOMMUNICATIONS -- 4.0%
ADC Telecommunications, Inc.*....... 3,400 113,475
Airtouch Communications, Inc.*...... 6,000 164,250
Ameritech Corp. .................... 4,800 326,100
AT&T Corp. ......................... 13,900 487,369
Bell Atlantic Corp. ................ 4,400 333,850
BellSouth Corp. .................... 8,100 375,638
British Telecommunications PLC
[ADR]............................. 3,200 237,600
Century Telephone Enterprises,
Inc. .............................. 2,800 94,325
Cia de Telecomunicaciones de Chile
SA [ADR].......................... 1,700 56,100
Comcast Corp. Cl-A.................. 5,700 121,838
Ericsson, (L.M.) Telephone Co.
[ADR]............................. 4,800 189,000
GTE Corp. .......................... 7,200 315,900
Hong Kong Telecommunications Ltd.
[ADR]............................. 9,245 216,102
Lucent Technologies, Inc. .......... 5,176 372,996
MCI Communications Corp. ........... 6,700 256,484
Nextel Communications, Inc. Cl-A*... 3,600 68,175
Nokia Corp. Cl-A [ADR].............. 1,800 132,750
Northern Telecom Ltd. .............. 3,400 309,400
NYNEX Corp. ........................ 3,200 184,400
SBC Communications, Inc. ........... 8,657 535,652
Southern New England
Telecommunications Corp. ......... 2,400 93,300
Sprint Corp. ....................... 3,900 205,238
Telebras SA [ADR]................... 3,300 500,775
Telefonica de Espana [ADR].......... 1,600 138,000
Telefonos de Mexico SA Cl-L [ADR]... 1,800 85,950
Telephone & Data Systems, Inc. ..... 2,000 75,875
Tellabs, Inc.*...................... 2,000 111,750
U.S. West Communications Group...... 3,100 116,831
Vodafone Group PLC [ADR]............ 3,200 155,000
Worldcom, Inc.*..................... 8,800 281,600
360 Communications Co.*............. 2,300 39,388
------------
6,695,111
------------
TRANSPORTATION -- 0.0%
Alexander & Baldwin, Inc. .......... 1,800 47,025
------------
UTILITIES -- 1.7%
Allegheny Power System, Inc. ....... 2,700 72,056
American Water Works Co., Inc. ..... 1,200 25,650
Calenergy, Inc.*.................... 2,400 91,200
CMS Energy Corp. ................... 2,800 98,700
Duke Power Co. ..................... 3,700 177,369
Edison International, Inc. ......... 7,800 194,025
Empresa Nacional de Electridad SA
[ADR]............................. 1,900 161,619
Empresa Nacional Electridad SA
[ADR]............................. 2,000 45,125
Energy Group PLC [ADR].............. 337 14,280
Entergy Corp. ...................... 4,800 131,400
Florida Progress Corp. ............. 2,200 68,888
FPL Group, Inc. .................... 3,700 170,431
Idaho Power Co. .................... 2,600 81,575
Illinova Corp. ..................... 2,700 59,400
IPALCO Enterprises, Inc. ........... 2,400 75,000
MidAmerican Energy Co. ............. 3,800 65,788
New York State Electric & Gas
Corp. ............................ 3,400 70,975
Niagara Mohawk Power Corp. ......... 9,200 78,775
NIPSCO Industries, Inc. ............ 2,300 95,019
Pacific Gas & Electric Co. ......... 6,800 164,900
Portland General Corp. ............. 2,700 107,156
Potomac Electric Power Co. ......... 3,200 74,000
Public Service Co. of New Mexico.... 1,000 17,875
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Scana Corp. ............................ 2,700 $ 66,994
Southern Co. ....................... 8,700 190,313
Southwestern Public Service Co. .... 2,100 82,556
Teco Energy, Inc. .................. 3,100 79,244
Texas Utilities Co.................. 3,700 127,419
Unicom Corp. ....................... 4,200 93,450
------------
2,781,182
------------
TOTAL COMMON STOCK
(COST $54,447,093).................... 74,928,793
------------
FOREIGN STOCK -- 10.1%
AEROSPACE -- 0.1%
Mitsubishi Heavy Industries
Ltd. -- (JPY)..................... 22,000 168,743
------------
AIRLINES -- 0.1%
KLM Royal Dutch Airlines
NV -- (NLG)....................... 3,000 92,446
Singapore Airlines Ltd. -- (SGD).... 15,000 134,294
------------
226,740
------------
AUTOMOBILE MANUFACTURERS -- 0.2%
Man AG -- (DEM)..................... 1,000 311,335
------------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY).......... 15,000 348,168
------------
BEVERAGES -- 0.2%
Lion Nathan Ltd. -- (NZD)........... 50,000 126,681
Louis Vuitton Moet
Hennessy -- (FRF)................. 660 177,431
------------
304,112
------------
BUILDING MATERIALS -- 0.3%
Blue Circle Industries
PLC -- (GBP)...................... 26,200 186,741
Holderbank Financiere Glarus
AG -- (CHF)....................... 200 188,852
Malayan Cement BHD -- (MYR)......... 51,250 85,694
------------
461,287
------------
CHEMICALS -- 0.5%
Akzo Nobel NV -- (NLG).............. 400 54,806
BASF AG -- (DEM).................... 5,600 206,617
Bayer AG -- (DEM)................... 5,000 192,650
L'Air Liquide -- (FRF).............. 1,260 200,024
Sumitomo Chemical Co. -- (JPY)...... 26,000 117,749
------------
771,846
------------
CLOTHING & APPAREL -- 0.3%
Benetton Group SPA -- (ITL)......... 4,160 66,438
Christian Dior SA -- (FRF).......... 1,200 198,053
Kuraray Co. Ltd. -- (JPY)........... 21,000 208,901
------------
473,392
------------
CONGLOMERATES -- 0.6%
Cycle & Carriage Ltd. -- (SGD)...... 15,000 155,277
GKN PLC -- (GBP).................... 6,000 103,366
Hutchison Whampoa Ltd. -- (HKD)..... 56,000 484,329
Sime Darby BHD -- (MYR)............. 50,000 166,416
United Engineers Ltd. -- (MYR)...... 15,000 108,170
Valmet Corp. -- (FIM)............... 4,000 69,271
------------
1,086,829
------------
CONSTRUCTION -- 0.3%
Matsushita Electric
Works -- (JPY).................... 15,000 170,157
Societe Technip -- (FRF)............ 2,300 266,896
------------
437,053
------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
Kao Corp. -- (JPY).................. 26,000 360,733
Orkla AS Cl-A -- (NOK).............. 1,000 73,696
------------
434,429
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.4%
Mitsubishi Electric
Corp. -- (JPY).................... 27,000 151,021
Sharp Corp. -- (JPY)................ 9,000 124,084
Siemans AG -- (DEM)................. 2,000 119,775
Sony Corp.-- (JPY).................. 3,000 261,518
------------
656,398
------------
FINANCIAL-BANK & TRUST -- 2.2%
Abbey National PLC -- (GBP)......... 18,000 245,799
ABN AMRO Bank NV -- (NLG)........... 8,000 149,137
Banca Commerciale Italia
NA -- (ITL)....................... 30,000 62,118
Bank of Scotland -- (GBP)........... 20,208 129,226
Bankgesellschaft Berlin
AG -- (DEM)....................... 5,450 114,931
Barclays PLC -- (GBP)............... 15,191 301,548
DCB Holdings BHD -- (MYR)........... 33,000 104,604
DCB Holdings BHD Rights -- (MYR)*... 1,650 2,550
Deutsche Bank AG -- (DEM)........... 2,800 164,394
Developmental Bank of Singapore Ltd.
Cl-F -- (SGD)..................... 7,000 88,130
Dresdner Bank AG -- (DEM)........... 2,400 84,078
HSBC Holdings PLC -- (GBP).......... 18,000 554,097
ING Groep NV -- (NLG)............... 10,153 468,011
Kredietbank NV -- (BEF)............. 300 120,867
Oversea-Chinese Banking Corp.
Ltd. -- (SGD)..................... 12,000 124,222
Societe Generale
Belgique -- (BEF)................. 1,000 93,359
Svenska Handlesbanken
Cl-A -- (SEK)..................... 5,000 160,198
Swiss Bank Corp. -- (CHF)........... 1,200 320,871
Toronto Dominion Bank -- (CAD)...... 4,100 121,435
Union Bank of Switzerland Cl-B --
(CHF)............................. 200 228,704
Westpac Banking Corp.
Ltd. -- (AUD)..................... 10,000 60,260
------------
3,698,539
------------
FINANCIAL SERVICES -- 0.2%
Gemina SPA -- (ITL)*................ 5,000 1,879
Holding Di Partecipazioni
Industriali SPA -- (ITL)*......... 45,000 21,574
Mediobanca -- (ITL)................. 7,000 42,494
Societe Generale -- (FRF)........... 1,972 220,110
------------
286,057
------------
FOOD -- 0.5%
Cadbury Schweppes PLC -- (GBP)...... 1,400 12,485
CSM NV -- (NLG)..................... 2,400 120,287
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Danisco AS -- (DKK)..................... 4,000 $ 244,626
Eridania Beghin-Say SA -- (FRF)..... 1,400 209,624
Huhtamaki Group -- (FIM)............ 1,500 64,653
Nestle SA -- (CHF).................. 150 197,823
------------
849,498
------------
INSURANCE -- 0.3%
AXA SA -- (FRF)..................... 3,400 211,444
CKAG Colonia Konzern AG -- (DEM).... 1,500 141,907
Sumitomo Marine & Fire Insurance
Co. -- (JPY)...................... 30,000 246,073
------------
599,424
------------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF)..................... 80 121,063
SIG Holding AG -- (CHF)............. 70 212,099
------------
333,162
------------
METALS & MINING -- 0.3%
CRA Ltd. -- (AUD)................... 6,000 102,435
Lonrho PLC -- (GBP)................. 57,990 123,128
Rustenburg Platinum Holdings Ltd. --
(ZAR)............................. 12,000 219,374
------------
444,937
------------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY)................ 9,000 245,026
Ricoh Corp. Ltd. -- (JPY)........... 13,000 170,157
------------
415,183
------------
OIL & GAS -- 0.1%
Santos Ltd. -- (AUD)................ 32,000 134,765
Societe Nationale Elf Aquitaine
SA -- (FRF)....................... 1,100 118,662
------------
253,427
------------
PAPER & FOREST PRODUCTS -- 0.1%
Bobst SA -- (CHF)................... 60 101,890
Kimberly-Clark de Mexico SA Cl-A --
(MXP)............................. 10,000 40,025
------------
141,915
------------
PHARMACEUTICALS -- 0.7%
Altana AG -- (DEM).................. 210 225,159
Astra AB Cl-B -- (SEK).............. 14,666 261,052
Gehe AG -- (DEM).................... 2,150 147,927
Novartis AG -- (CHF)................ 160 255,492
Takeda Chemical
Industries -- (JPY)............... 13,000 365,271
------------
1,254,901
------------
PRINTING & PUBLISHING -- 0.4%
Dai Nippon Printing Co.
Ltd. -- (JPY)..................... 12,000 271,204
Elsevier NV -- (NLG)................ 12,000 200,479
Pearson PLC -- (GBP)................ 11,600 134,354
------------
606,037
------------
REAL ESTATE -- 0.3%
Cheung Kong Holdings
Ltd. -- (HKD)..................... 38,000 375,252
DBS Land Ltd. -- (SGD).............. 25,000 79,038
Hopewell Holdings Ltd. -- (HKD)..... 59,463 37,611
------------
491,901
------------
RETAIL & MERCHANDISING -- 0.3%
Carrefour Supermarche SA -- (FRF)... 150 108,929
Mauri Co. Ltd. -- (JPY)............. 7,000 130,105
Pinault-Printemps Redoute
SA -- (FRF)....................... 250 120,125
Tesco PLC -- (GBP)................... 33,943 208,862
------------
568,021
------------
TELECOMMUNICATIONS -- 0.4%
Telecom Corp. of New Zealand Ltd. --
(NZD)............................. 22,000 112,077
Telecom Italia Mobile
SPA -- (ITL)...................... 75,000 242,647
Telecom Italia SPA -- (ITL)......... 75,000 240,662
Telekom Malaysia BHD -- (MYR)....... 24,000 112,212
------------
707,598
------------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP).................... 17,600 162,228
------------
UTILITIES -- 0.3%
Electrabel SA -- (BEF).............. 420 89,975
Hong Kong Electric Holdings Ltd. --
(HKD)............................. 30,000 120,824
Veba AG -- (DEM).................... 4,000 225,904
------------
436,703
------------
TOTAL FOREIGN STOCK (COST
$13,637,735).......................... 16,929,863
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 16.1%
AEROSPACE -- 0.6%
BE Aerospace, Inc. Sr. Sub.
Notes
9.875%................... 02/01/06 $ 150 155,438
Boeing Co. Notes
6.35%.................... 06/15/03 120 117,450
Dyncorp, Inc.
Sr. Sub. Notes 144A
9.50%.................... 03/01/07 300 303,750
K&F Industries, Inc.
Sr. Sub. Notes
10.375%.................. 09/01/04 150 158,813
Raytheon Co. Notes
6.50%.................... 07/15/05 350 337,313
------------
1,072,764
------------
AIRLINES -- 0.0%
Southwest Airlines Co.
Debs.
9.25%.................... 02/15/98 25 25,473
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C>
AUTOMOBILE MANUFACTURERS -- 0.0%
Daimler-Benz
Auto Grantor Trust
3.90%.................... 10/15/98 $ 10 $ 9,620
------------
AUTOMOTIVE PARTS -- 0.2%
Chief Auto Parts, Inc. Sr.
Notes
10.50%................... 05/15/05 150 151,500
Safelite Glass Corp.
Sr. Sub. Notes 144A
9.875%................... 12/15/06 250 264,375
------------
415,875
------------
BEVERAGES -- 0.5%
Anheuser-Busch Companies,
Inc. Debs.
7.00%.................... 12/01/25 150 139,875
Coca-Cola Bottling Group
Sr. Sub. Notes
9.00%.................... 11/15/03 100 104,000
Dr. Pepper Bottling Holding
Co. Sr. Notes [STEP]
9.19%.................... 02/15/03 140 138,950
Texas Bottling Group, Inc.
Sr. Sub. Notes
9.00%.................... 11/15/03 100 103,500
TLC Beatrice International
Holdings Sr. Notes
11.50%................... 10/01/05 250 281,563
------------
767,888
------------
BROADCASTING -- 0.2%
Chancellor Radio
Broadcasting Sr. Sub.
Notes
9.375%................... 10/01/04 175 182,000
Young Broadcasting Corp.
Sr. Sub. Notes
10.125%.................. 02/15/05 150 158,250
------------
340,250
------------
BUILDING MATERIALS -- 0.1%
Associated Materials, Inc.
Sr. Sub. Notes
11.50%................... 08/15/03 100 106,000
Building Materials Corp.
Sr. Notes [STEP]
6.56%.................... 07/01/04 150 136,500
------------
242,500
------------
CHEMICALS -- 0.1%
Agricultural Minerals &
Chemicals, Inc. Sr. Notes
10.75%................... 09/30/03 100 106,625
Scotts Co. Sr. Sub. Notes
9.875%................... 08/01/04 100 107,250
------------
213,875
------------
CLOTHING & APPAREL -- 0.4%
Dan River, Inc.
Sr. Sub. Notes
10.125%.................. 12/15/03 150 158,250
Dominion Textile USA, Inc.
Sr. Notes
9.25%.................... 04/01/06 150 156,750
Pillowtex Corp. Sr. Sub.
Notes
10.00%................... 11/15/06 150 159,188
Tultex Corp. Sr. Notes 144A
9.625%................... 04/15/07 125 134,375
------------
608,563
------------
COMPUTER HARDWARE -- 0.1%
International Business
Machines Corp. Notes
6.375%................... 11/01/97 100 100,216
------------
CONGLOMERATES -- 0.1%
Jordan Industries Sr. Notes
10.375%.................. 08/01/03 125 131,250
------------
CONSUMER PRODUCTS & SERVICES -- 0.8%
American Safety Razor Co.
Sr. Notes
9.875%................... 08/01/05 150 157,125
Archibald Candy Corp. Notes
10.25%................... 07/01/04 200 203,000
Consolidated Cigar
Sr. Sub. Notes
10.50%................... 03/01/03 175 184,188
Doane Products Co. Sr.
Notes
10.625%.................. 03/01/06 150 158,625
Herff Jones, Inc.
Sr. Sub. Notes
11.00%................... 08/15/05 175 189,875
MAFCO, Inc. Sr. Sub. Notes
11.875%.................. 11/15/02 100 108,125
PM Holdings Corp.
Sub. Notes [STEP]
9.87%.................... 09/01/05 100 75,875
Revlon Consumer Products
Corp. Sr. Sub. Notes Cl-B
10.50%................... 02/15/03 150 160,500
Westpoint Stevens, Inc. Sr.
Sub. Debs.
9.375%................... 12/15/05 150 157,688
------------
1,395,001
------------
CONTAINERS & PACKAGING -- 0.6%
Container Corp. of America
Sr. Notes
9.75%.................... 04/01/03 150 158,250
11.25%................... 05/01/04 100 109,750
Gaylord Container Corp. Sr.
Sub. Debs.
12.75%................... 05/15/05 150 165,375
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C>
Plastic Containers Sr.
Notes
10.00%................... 12/15/06 $ 250 $ 260,000
Silgan Corp.
11.75%................... 06/15/02 150 159,375
U.S. Can Corp. Sr. Sub.
Notes
10.125%.................. 10/15/06 150 160,125
------------
1,012,875
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.7%
Ametek, Inc. Sr. Notes
9.75%.................... 03/15/04 100 106,125
Celestica International
Sr. Sub. Notes
10.50%................... 12/31/06 150 162,000
Fairchild Semiconductor Sr.
Sub. Notes 144A
10.125%.................. 03/15/07 250 265,000
HCC Industries Sr. Sub.
Notes 144A
10.75%................... 05/15/07 175 184,188
Viasystems, Inc. Sr. Sub.
Notes 144A
9.75%.................... 06/01/07 250 256,250
Westinghouse Electric
Corp. Debs.
8.875%................... 06/01/01 200 210,500
------------
1,184,063
------------
ENTERTAINMENT & LEISURE -- 1.0%
AMC Entertainment, Inc. Sr.
Sub. Notes 144A
9.50%.................... 03/15/09 250 259,375
Grand Casinos, Inc.
First Mtge.
10.125%.................. 12/01/03 150 156,375
Rio Hotel & Casino, Inc.
9.50%.................... 04/15/07 100 103,500
Rio Hotel & Casino, Inc.
Sr. Sub. Notes
10.625%.................. 07/15/05 150 161,813
Six Flags Theme Parks Sr.
Sub. Notes
Cl-A [STEP]
8.44%.................... 06/15/05 150 153,000
Time Warner
Entertainment Debs.
7.25%.................... 09/01/08 500 491,875
Trump Atlantic City Assoc.,
Inc. Notes
11.25%................... 05/01/06 100 98,000
United Artists Theatre Pass
Through Trust
9.30%.................... 07/01/15 246 236,262
------------
1,660,200
------------
ENVIRONMENTAL SERVICES -- 0.2%
Allied Waste North America
Sr. Sub. Notes 144A
10.25%................... 12/01/06 250 270,000
------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%................... 11/15/05 150 166,313
------------
FINANCIAL-BANK & TRUST -- 1.0%
Airplanes Pass Through
Trust
10.875%.................. 03/15/19 150 172,564
Aristar, Inc. Sr. Notes
8.875%................... 08/15/98 200 205,466
7.875%................... 02/15/99 200 205,250
Banesto Delaware Sub. Notes
8.25%.................... 07/28/02 50 52,750
Bank of Nova Scotia Sub.
Notes
6.25%.................... 09/15/08 50 46,375
BankAmerica Corp.
6.85%.................... 03/01/03 150 150,000
CoreStates Home Equity
Trust Cl-A
6.65%.................... 05/15/09 65 65,157
Export-Import Bank of
Korea Notes
6.50%.................... 05/15/00 40 39,900
First Federal Financial
Notes
11.75%................... 10/01/04 125 121,250
Greenpoint Capital Trust I
144A
9.10%.................... 06/01/27 250 255,000
NationsBank Texas Sr. Notes
6.75%.................... 08/15/00 150 150,750
Provident Bank Corp.
Sub. Notes
7.125%................... 03/15/03 175 175,219
U.S. Bancorp Notes
6.72%.................... 06/01/98 100 100,560
------------
1,740,241
------------
FINANCIAL SERVICES -- 2.3%
Advanta Corp. Notes
7.07%.................... 09/15/97 235 235,256
Ahmanson, (H.F.) & Co. Sr.
Notes
9.875%................... 11/15/99 100 106,875
American Express Master
Trust
7.60%.................... 08/15/02 500 517,909
Associates Corp. of North
America Sr. Notes
7.70%.................... 03/15/00 50 51,438
Chrysler Financial Corp.
Notes
8.46%.................... 01/19/00 200 209,000
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
Ciesco L.P. Notes
7.38%.................... 04/19/00 $ 250 $ 253,750
Conseco, Inc. Sr. Notes
8.125%................... 02/15/03 500 518,125
Enhance Financial Services
Group Debs.
6.75%.................... 03/01/03 300 298,125
General Motors Acceptance
Corp. Grantor Trust
6.30%.................... 06/15/99 13 13,317
Household Finance Corp. Sr.
Notes
6.96%.................... 04/27/98 300 302,796
Intertek Finance PLC
Sr. Sub. Notes
10.25%................... 11/01/06 250 259,375
Loomis Fargo & Co.
Sr. Sub. Notes 144A
10.00%................... 01/15/04 250 255,000
Ocwen Financial Corp. Notes
11.875%.................. 10/01/03 150 164,250
Salomon, Inc. Sr. Notes
6.75%.................... 02/15/03 500 490,000
Smith Barney Holdings Notes
6.625%................... 06/01/00 200 200,250
------------
3,875,466
------------
FOOD -- 0.4%
Keebler Corp. Sr. Sub.
Notes
10.75%................... 07/01/06 150 163,688
RJR Nabisco Sr. Notes
7.625%................... 09/01/00 250 247,813
Windy Hill Pet Food Co. Sr.
Sub. Notes 144A
9.75%.................... 05/15/07 250 254,375
------------
665,876
------------
HEALTHCARE SERVICES -- 0.2%
Quest Diagnostic, Inc.
Sr. Sub. Notes
10.75%................... 12/15/06 250 270,625
------------
HOTELS & MOTELS -- 0.2%
Courtyard By Marriott Sr.
Notes
10.75%................... 02/01/08 150 163,500
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%.................... 05/15/05 150 157,125
------------
320,625
------------
INDUSTRIAL PRODUCTS -- 0.4%
American Standard Debs.
9.25%.................... 12/01/16 25 26,063
Hawk Corp. Sr. Notes
10.25%................... 12/01/03 150 155,250
International Knife & Saw,
Inc. Sr. Sub. Notes
11.375%.................. 11/15/06 150 161,250
Synthetic Industries
Debs. 144A
9.25%.................... 02/15/07 250 255,625
------------
598,188
------------
INSURANCE -- 0.2%
New York Life Insurance
Notes 144A
7.50%.................... 12/15/23 420 401,625
------------
MACHINERY & EQUIPMENT -- 0.4%
International Wire Group
Sr. Sub. Notes
11.75%................... 06/01/05 250 273,438
Mettler-Toledo, Inc. Notes
9.75%.................... 10/01/06 150 157,500
Tokheim Corp.
Sr. Sub. Notes Cl-B
11.50%................... 08/01/06 150 161,063
------------
592,001
------------
METALS & MINING -- 0.2%
Freeport-McMoran Resource
Sr. Notes
7.00%.................... 02/15/08 150 143,438
Haynes International, Inc.
Sr. Notes
11.625%.................. 09/01/04 150 162,188
------------
305,626
------------
OIL & GAS -- 0.7%
Dual Drilling Co.
Sr. Sub. Notes
9.875%................... 01/15/04 175 186,594
Falcon Drilling Co., Inc.
Sr. Notes
8.875%................... 03/15/03 150 153,750
Ferrellgas L.P. Financial
Corp. Sr. Notes
10.00%................... 08/01/01 100 104,500
Flores & Rucks Sr. Sub.
Notes
9.75%.................... 10/01/06 50 52,875
Pride Petroleum Services,
Inc. Sr. Notes
9.375%................... 05/01/07 250 260,000
Rowan Co. Sr. Notes
11.875%.................. 12/01/01 112 120,120
Tenneco, Inc. Notes
8.20%.................... 11/15/99 55 57,063
8.075%................... 10/01/02 150 156,938
------------
1,091,840
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
PAPER & FOREST PRODUCTS -- 0.3%
Maxxam Group Holdings, Inc.
Sr. Notes
11.25%................... 08/01/03 $ 50 $ 51,938
12.00%................... 08/01/03 150 154,875
Pen-Tab Industries, Inc.
Sr. Sub. Notes 144A
10.875%.................. 02/01/07 250 256,250
------------
463,063
------------
PHARMACEUTICALS -- 0.0%
Owens & Minor, Inc.
Sr. Sub. Notes
10.875%.................. 06/01/06 75 83,438
------------
REAL ESTATE -- 0.2%
B.F. Saul Sr. Notes [REIT]
11.625%.................. 04/01/02 150 161,625
HMC Acquisition Properties
Sr. Notes Cl-B
9.00%.................... 12/15/07 150 152,438
------------
314,063
------------
RESTAURANTS -- 0.1%
McDonald's Corp. Notes
6.625%................... 09/01/05 100 98,000
------------
RETAIL & MERCHANDISING -- 0.2%
Specialty Retailers Corp.
Notes 144A
8.50%.................... 07/15/05 250 251,875
Wal-Mart Stores, Inc. Debs.
7.25%.................... 06/01/13 85 85,638
------------
337,513
------------
TELECOMMUNICATIONS -- 1.9%
Comcast Cable
Communications Notes 144A
8.125%................... 05/01/04 400 419,000
Communication & Power
Industries Sr. Sub. Notes
12.00%................... 08/01/05 150 165,000
Frontiervision Sr. Sub.
Notes
11.00%................... 10/15/06 150 157,500
Fundy Cable Ltd. Sr. Notes
11.00%................... 11/15/05 150 162,938
GTE Corp. Debs.
7.90%.................... 02/01/27 175 176,531
L-3 Communications Corp.
Sr. Sub. Notes 144A
10.375%.................. 05/01/07 175 186,375
Lucent Technologies,
Inc. Notes
6.90%.................... 07/15/01 500 503,750
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
7.55%.................... 08/01/04 250 217,500
Rogers Cablesystems Ltd.
Notes
10.00%................... 03/15/05 125 135,938
Sprint Spectrum L.P. Sr.
Notes
11.00%................... 08/15/06 250 278,125
TCI Communications, Inc.
Sr. Notes
8.65%.................... 09/15/04 200 209,000
Teleport Communications
Group, Inc. Sr. Notes
9.875%................... 07/01/06 100 106,500
Telewest PLC Debs. [STEP]
11.21%................... 10/01/07 250 181,250
United Telecommunications
Debs.
9.75%.................... 04/01/00 250 269,688
------------
3,169,095
------------
TRANSPORTATION -- 0.4%
Coach USA, Inc. Sr. Sub.
Notes 144A
9.375%................... 07/01/07 125 125,938
Equimar Shipholdings Ltd.
Sub. Notes
9.875%................... 07/01/07 250 249,688
Federal Express Notes
6.25%.................... 04/15/98 70 70,050
Sea Containers Ltd. Sr.
Sub. Notes
12.50%................... 12/01/04 70 78,750
Union Tank Car Co. Notes
7.125%................... 02/01/07 150 149,813
------------
674,239
------------
UTILITIES -- 1.3%
Citizens Utilities Co.
Debs.
8.45%.................... 09/01/01 335 355,938
Commonwealth Edison Notes
9.00%.................... 10/15/99 250 261,875
Consumers Power Co. First
Mtge.
6.00%.................... 07/01/97 65 65,000
6.625%................... 10/01/98 50 50,125
El Paso Electric Co. First
Mtge.
8.90%.................... 02/01/06 150 160,125
Energy Corp. of America Sr.
Sub. Notes 144A
9.50%.................... 05/15/07 250 250,000
Florida Power & Light First
Mtge.
5.70%.................... 03/05/98 200 199,750
Monongahela Power First
Mtge.
8.50%.................... 06/01/22 150 158,438
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C>
Pacific Gas & Electric Co.
First Mtge.
6.75%.................... 12/01/00 $ 200 $ 199,500
Public Service Electric &
Gas First Mtge.
7.00%.................... 09/01/24 300 279,375
Southern California Edison
Notes
6.50%.................... 06/01/01 100 99,250
Wisconsin Electric Power
Co. First Mtge.
5.875%................... 10/01/97 100 100,000
------------
2,179,376
------------
TOTAL CORPORATE OBLIGATIONS
(COST $26,261,991).................. 26,797,626
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.1%
7.00%.................... 11/01/97 141 141,668
7.50%.................... 07/15/20 15 15,111
------------
156,779
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.0%
6.02%.................... 01/20/98 60 60,088
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 9.7%
9.50%.................... 10/15/09 18 19,722
10.00%................... 11/15/09 20 22,190
11.50%................... 06/15/10 35 38,882
12.00%................... 09/15/13 1 1,231
12.00%................... 01/15/14 6 7,340
10.50%................... 08/15/15 13 14,550
11.50%................... 09/15/15 96 108,354
11.50%................... 11/15/15 37 41,082
8.00%.................... 05/15/16 23 23,956
8.50%.................... 06/15/16 35 35,957
9.00%.................... 07/15/16 14 15,148
8.00%.................... 12/15/16 22 22,373
8.00%.................... 12/15/16 24 24,127
8.00%.................... 02/15/17 29 29,675
8.00%.................... 02/15/17 24 25,034
8.00%.................... 02/15/17 40 41,073
8.00%.................... 05/15/17 28 29,140
8.00%.................... 05/15/17 30 31,125
9.00%.................... 05/15/17 76 80,618
8.00%.................... 06/15/17 27 27,626
9.50%.................... 11/15/18 3 3,667
9.50%.................... 03/15/19 13 13,732
9.50%.................... 01/15/20 8 8,369
9.50%.................... 06/15/20 14 15,082
8.00%.................... 06/15/22 134 137,262
8.00%.................... 09/15/22 31 31,294
8.00%.................... 07/15/23 73 75,075
7.00%.................... 09/15/23 345 338,695
6.50%.................... 02/15/24 221 211,226
6.50%.................... 02/15/24 469 448,822
6.50%.................... 04/15/24 82 78,090
6.50%.................... 05/15/24 236 225,892
6.50%.................... 05/15/24 640 612,214
7.50%.................... 06/15/24 82 82,098
7.00%.................... 12/15/25 289 284,497
7.00%.................... 01/15/26 38 37,593
6.00%.................... 02/15/26 400 371,923
7.00%.................... 02/15/26 39 38,390
7.00%.................... 03/15/26 40 39,678
7.00%.................... 03/15/26 65 64,240
7.00%.................... 04/15/26 521 512,116
7.00%.................... 04/15/26 859 844,651
7.50%.................... 04/15/26 139 139,286
6.00%.................... 05/15/26 325 302,315
7.00%.................... 05/15/26 481 473,120
7.00%.................... 05/15/26 886 870,852
7.50%.................... 05/15/26 445 447,037
7.50%.................... 05/15/26 635 637,627
7.00%.................... 06/15/26 42 40,915
7.00%.................... 06/15/26 998 981,239
7.00%.................... 06/15/26 1,053 1,035,021
7.00%.................... 06/15/26 41 40,323
7.50%.................... 06/15/26 294 294,626
8.00%.................... 06/15/26 310 316,845
8.00%.................... 06/15/26 491 501,978
8.50%.................... 06/15/26 607 631,149
8.50%.................... 07/15/26 497 516,997
8.50%.................... 07/15/26 491 510,923
8.50%.................... 07/15/26 46 47,488
7.00%.................... 08/15/26 35 34,063
7.00%.................... 08/15/26 883 875,142
8.50%.................... 10/15/26 492 511,814
7.00%.................... 12/15/26 34 33,221
7.00%.................... 01/15/27 1,091 1,072,274
7.00%.................... 02/15/27 34 33,604
7.00%.................... 02/15/27 648 636,774
7.00%.................... 02/15/27 37 36,356
------------
16,134,798
------------
TENNESSEE VALLEY AUTHORITY -- 0.0%
7.75%.................... 12/15/22 10 10,075
7.25%.................... 07/15/43 20 19,275
6.875%................... 12/15/43 40 36,700
------------
66,050
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $16,296,579).................... 16,417,715
------------
U.S. TREASURY OBLIGATIONS -- 7.4%
U.S. TREASURY BONDS -- 1.4%
11.625%.................. 11/15/02 100 123,606
7.125%................... 02/15/23 240 247,303
7.625%................... 02/15/25 300 328,623
6.875%................... 08/15/25 300 301,272
6.00%.................... 02/15/26 100 89,502
6.625%................... 02/15/27 1,250 1,223,700
------------
2,314,006
------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
U.S. TREASURY NOTES -- 6.0%
6.125%................... 05/15/98 $ 100 $ 100,329
6.00%.................... 05/31/98 450 450,994
5.125%................... 12/31/98 50 49,418
6.375%................... 05/15/99 1,950 1,960,160
6.75%.................... 05/31/99 460 465,446
6.875%................... 03/31/00 250 254,102
6.25%.................... 05/31/00 100 100,071
6.125%................... 09/30/00 150 149,395
5.625%................... 11/30/00 275 269,448
5.625%................... 02/28/01 1,100 1,075,998
5.75%.................... 08/15/03 665 642,370
7.50%.................... 02/15/05 250 264,498
5.875%................... 11/15/05 425 406,704
5.625%................... 02/15/06 500 469,555
6.50%.................... 10/15/06 1,350 1,344,249
6.25%.................... 02/15/07 2,000 1,957,500
------------
9,960,237
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST
$12,250,795).......................... 12,274,243
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 3.2%
AUSTRALIA -- 0.0%
Australian Government
9.50%................. 08/15/03 20 17,231
------------
BELGIUM -- 0.0%
Kingdom of Belgium
7.25%................. 04/29/04 1,550 48,029
------------
CANADA -- 0.2%
Canadian Government
8.50%................. 04/01/02 380 306,424
6.50%................. 06/01/04 110 81,678
9.75%................. 06/01/21 10 9,674
------------
397,776
------------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%................. 12/15/04 275 44,386
------------
FRANCE -- 0.5%
French O.A.T.
8.50%................. 11/25/02 1,406 281,741
8.25%................. 02/27/04 264 52,861
5.50%................. 04/25/07 3,000 507,078
8.50%................. 04/25/23 50 10,733
------------
852,413
------------
GERMANY -- 0.7%
Deutscheland Republic
8.50%................. 08/21/00 375 242,919
8.375%................ 05/21/01 410 269,024
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- --------- ------------
<S> <C> <C> <C>
6.50%................. 07/15/03 110 $ 67,958
6.00%................. 07/04/07 838 491,229
------------
1,071,130
------------
ITALY -- 0.2%
Italian Government
11.50%................ 03/01/03 275,000 198,355
8.50%................. 08/01/04 45,000 28,991
------------
227,346
------------
JAPAN -- 1.2%
European Investment Bank
4.625%................ 02/26/03 53,000 527,225
3.00%................. 09/20/06 102,000 928,436
International Bank
Recovery & Development
Global Bond
6.75%................. 03/15/00 14,000 140,031
Japanese Government
4.50%................. 06/20/03 33,500 332,545
------------
1,928,237
------------
NETHERLANDS -- 0.0%
Netherlands Government
5.75%................. 01/15/04 115 60,566
------------
SPAIN -- 0.0%
Spanish Government
8.00%................. 05/30/04 6,400 48,358
------------
UNITED KINGDOM -- 0.4%
United Kingdom Gilt
9.00%................. 03/03/00 85 148,054
United Kingdom Treasury
8.00%................. 06/10/03 91 157,936
7.50%................. 12/07/06 164 280,194
------------
586,184
------------
TOTAL FOREIGN BONDS (COST
$5,211,122)......................... 5,281,656
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 4.5%
Shell Oil Co.
6.15%
(COST $7,475,000).... 07/01/97 $7,475 7,475,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 3.6%
Temporary Investment Fund
(COST $6,034,744)................. 6,034,744 6,034,744
------------
TOTAL INVESTMENTS -- 99.7%
(COST $141,615,059)................. 166,139,820
OTHER ASSETS LESS
LIABILITIES -- 0.3%................. 462,080
------------
NET ASSETS -- 100.0%.................. $166,601,900
============
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH DEPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy JPY $ 653,607 114.2000 07/97 $ (2,281)
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 2.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C>
CORPORATE OBLIGATIONS -- 11.5%
AIRLINES -- 2.5%
American Airlines Notes
10.19%............... 05/26/15 $ 250 $ 303,338
United Air Lines, Inc.
Notes
10.36%............... 11/13/12 6,925 8,430,772
10.36%............... 11/27/12 500 608,440
10.02%............... 03/22/14 2,000 2,328,260
------------
11,670,810
------------
ENTERTAINMENT & LEISURE -- 0.8%
Time Warner, Inc. Notes
7.45%................ 02/01/98 2,000 2,017,500
6.7725% [VR]......... 08/15/00 437 438,093
7.98%................ 08/15/04 262 271,170
8.11%................ 08/15/06 525 546,656
8.18%................ 08/15/07 525 549,281
------------
3,822,700
------------
FOOD -- 1.4%
RJR Nabisco, Inc. Notes
8.625%............... 12/01/02 6,500 6,630,000
------------
OIL & GAS -- 0.1%
Arkla, Inc. Notes
9.20%................ 12/18/97 500 506,875
------------
REAL ESTATE -- 1.1%
Spieker Properties
Notes
6.95%................ 12/15/02 5,000 4,937,500
------------
UTILITIES -- 5.6%
Cleveland Electric
Illumination Co.
Notes
8.75%................ 11/15/05 100 101,148
CMS Energy Corp. First
Mtge.
9.50%................ 10/01/97 150 153,188
8.125%............... 05/15/02 5,000 5,031,250
Commonwealth Edison
Notes
6.50%................ 07/15/97 750 750,000
Long Island Lighting
Co. Notes
7.85%................ 05/15/99 7,000 7,113,750
8.90%................ 07/15/19 6,000 6,450,000
Louisiana Power & Light
Co. Notes
7.74%................ 07/01/02 6,000 6,082,500
------------
25,681,836
------------
TOTAL CORPORATE OBLIGATIONS
(COST $52,376,233)................. 53,249,721
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 56.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 4.3%
5.95%................ 06/19/98 10,000 9,995,000
8.25%................ 08/01/17 578 596,448
7.00% [IO]........... 04/25/19 321 29,745
7.80% [VR]........... 02/01/24 2,574 2,668,767
6.50%................ 12/01/25 2,829 2,713,188
6.50% [TBA].......... 08/13/27 4,000 3,826,240
------------
19,829,388
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 4.7%
9.40%................ 07/25/03 268 279,893
6.25% [IO]........... 05/25/08 236 69,988
6.50% [IO]........... 06/25/14 1,477 66,179
6.90%................ 05/25/23 199 171,465
7.978% [VR].......... 01/01/24 376 391,860
7.50%................ 04/01/24 3,873 3,884,207
8.50%................ 03/01/25 1,384 1,440,222
8.50%................ 03/01/25 7,018 7,300,621
8.50%................ 05/01/25 5,178 5,386,622
6.12% [TBA].......... 07/24/27 3,000 2,966,250
------------
21,957,307
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 43.5%
6.50%................ 02/15/16 253 241,738
7.00%................ 03/20/17 707 724,539
7.125%............... 06/20/22 2,316 2,374,106
7.125%............... 04/20/23 2,883 2,945,924
7.125%............... 08/20/23 9,777 9,978,537
7.125%............... 09/20/23 6,537 6,672,156
6.875% [VR].......... 10/20/23 642 655,082
7.50%................ 12/20/23 426 425,783
6.50%................ 01/15/24 463 443,504
6.50%................ 04/15/24 365 349,432
6.50%................ 05/15/24 293 280,526
7.125% [VR].......... 09/20/24 1,339 1,375,625
6.875% [VR].......... 10/20/24 3,523 3,611,163
6.50%................ 08/15/25 973 931,748
6.50%................ 08/15/25 324 310,368
6.50%................ 09/15/25 356 341,172
6.50%................ 09/15/25 458 438,751
6.50%................ 09/15/25 952 911,145
6.50%................ 10/15/25 1,213 1,161,039
6.50%................ 11/15/25 577 551,905
6.50%................ 12/15/25 481 460,300
6.50%................ 12/15/25 451 431,388
6.50%................ 12/15/25 484 463,414
6.50%................ 12/15/25 326 311,604
6.50%................ 12/15/25 610 583,580
6.50%................ 12/15/25 620 593,044
6.50%................ 12/15/25 334 319,786
6.50%................ 01/15/26 502 480,645
6.50%................ 01/15/26 359 343,778
6.50%................ 01/15/26 251 240,392
6.50%................ 01/15/26 515 493,053
6.50%................ 01/15/26 231 221,384
6.50%................ 01/15/26 244 233,725
6.50%................ 01/15/26 419 401,289
6.50%................ 01/15/26 492 470,543
6.50%................ 01/15/26 139 132,610
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C> <C>
6.50%................ 01/15/26 $ 247 $ 236,568
6.50%................ 01/15/26 646 618,640
6.50%................ 02/15/26 125 119,323
6.50%................ 02/15/26 843 806,452
6.50%................ 02/15/26 830 794,782
6.50%................ 02/15/26 238 227,767
6.50%................ 02/15/26 144 137,753
6.50%................ 02/15/26 616 589,667
6.50%................ 02/15/26 343 327,997
6.50%................ 02/15/26 2,076 1,987,455
6.50%................ 02/15/26 109 104,438
6.50%................ 02/15/26 229 219,280
6.50%................ 02/15/26 718 686,990
6.50%................ 02/15/26 615 588,621
6.50%................ 02/15/26 388 371,668
6.50%................ 02/15/26 1,383 1,323,674
6.50%................ 02/15/26 539 515,536
6.50%................ 02/15/26 370 354,355
6.50%................ 02/15/26 180 172,015
6.50%................ 02/15/26 1,696 1,623,482
6.50%................ 03/15/26 503 481,866
6.50%................ 03/15/26 345 330,595
6.50%................ 03/15/26 513 491,461
6.50%................ 03/15/26 345 330,381
6.50%................ 03/15/26 748 716,305
6.50%................ 03/15/26 351 335,813
6.50%................ 03/15/26 3,861 3,695,883
6.50%................ 03/15/26 132 126,306
6.50%................ 03/15/26 112 107,296
6.50%................ 03/15/26 147 141,070
6.50%................ 03/15/26 792 757,679
6.50%................ 03/15/26 237 227,287
6.50%................ 03/15/26 776 743,080
6.50%................ 03/15/26 379 362,336
6.50%................ 03/15/26 974 932,619
6.50%................ 03/15/26 3,646 3,489,440
6.50%................ 03/15/26 183 175,034
6.50%................ 03/15/26 839 803,162
6.50%................ 03/15/26 247 236,046
6.50%................ 03/15/26 261 250,002
6.50%................ 04/15/26 229 219,084
6.50%................ 04/15/26 574 549,335
6.50%................ 04/15/26 1,236 1,182,629
6.50%................ 04/15/26 2,265 2,168,066
6.50%................ 04/15/26 243 232,384
6.50%................ 04/15/26 962 920,926
6.50%................ 04/15/26 254 243,100
6.50%................ 04/15/26 379 363,086
6.50%................ 04/15/26 1,566 1,499,418
6.50%................ 04/15/26 457 437,217
6.50%................ 04/15/26 977 935,342
6.50%................ 04/15/26 229 219,139
6.50%................ 04/15/26 238 227,458
6.50%................ 04/15/26 386 369,249
6.50%................ 04/15/26 222 212,092
6.50%................ 04/15/26 243 232,405
6.50%................ 04/15/26 382 365,397
6.50%................ 04/15/26 522 499,594
6.50%................ 04/15/26 126 120,728
6.50%................ 04/15/26 121 115,713
6.50%................ 04/15/26 254 243,130
6.50%................ 04/15/26 517 494,884
6.50%................ 04/15/26 247 236,750
6.50%................ 04/15/26 119 114,298
6.50%................ 04/15/26 244 233,939
6.50%................ 04/15/26 250 238,916
6.50%................ 04/15/26 22 20,834
6.50%................ 04/15/26 364 348,080
6.50%................ 05/15/26 234 224,459
6.50%................ 05/15/26 185 177,075
6.50%................ 05/15/26 370 354,555
6.50%................ 05/15/26 461 441,073
6.50%................ 05/15/26 200 191,298
6.50%................ 05/15/26 328 314,324
6.50%................ 05/15/26 361 345,826
6.50%................ 05/15/26 378 362,149
6.50%................ 05/15/26 113 108,512
6.50%................ 05/15/26 368 352,091
6.50%................ 05/15/26 410 392,280
6.50%................ 05/15/26 234 224,454
6.50%................ 05/15/26 244 233,133
6.50%................ 06/15/26 131 125,225
6.50%................ 06/15/26 132 126,259
6.50%................ 07/15/26 182 174,464
6.50%................ 07/15/26 461 441,690
6.50% [TBA].......... 07/15/26 15,000 14,348,400
6.50%................ 08/15/26 523 500,912
6.50%................ 08/15/26 178 170,010
6.50%................ 08/15/26 231 220,928
6.50% [TBA].......... 09/18/26 30,000 28,603,200
6.50%................ 10/15/26 532 509,001
6.00%................ 11/20/26 15,003 15,200,293
7.00%................ 12/20/26 24,154 24,760,842
6.00%................ 02/20/27 9,926 10,000,780
8.50% [TBA].......... 07/21/27 1,000 1,039,060
8.50% [TBA].......... 08/20/27 20,000 20,737,600
------------
201,167,988
------------
STUDENT LOAN MARKETING ASSOCIATION -- 4.3%
6.00%................ 06/30/98 20,000 20,015,198
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $260,708,677)................ 262,969,881
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 4.5%
Citicorp Mtge.
Securities, Inc. [VR]
7.60%................ 10/25/22 603 615,707
Collateralized Mtge.
Securities Corp. [VR]
7.99%................ 05/01/17 558 565,451
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C> <C>
Countrywide Adjustable
Rate Mtge. [VR]
7.9215%.............. 03/25/24 $ 709 $ 725,178
8.0404%.............. 11/25/24 773 793,297
Guardian Adjustable
Rate Mtge. [VR]
6.80%................ 12/25/19 76 50,507
Mortgage Capital
Trust VI
9.50%................ 02/01/18 674 679,662
Prudential Home Mtge.
Securities
6.50%................ 01/25/00 10,000 10,003,100
Prudential-Bache
CMO Trust
8.40%................ 03/20/21 3,375 3,466,263
Resolution Trust Corp.
8.00%................ 09/25/21 365 368,048
Rothschild L.F.
Mtge. Trust
9.95%................ 08/01/17 2,418 2,596,527
Ryland Mtge. Securities
Corp. [VR]
8.0808%.............. 09/25/23 1,027 1,042,931
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $20,659,264)................. 20,906,671
------------
U.S. TREASURY OBLIGATIONS -- 11.7%
U.S. TREASURY BILLS -- 0.4%
5.08% #.............. 07/03/97 530 529,852
5.08% #.............. 07/03/97 305 304,915
5.09% #.............. 07/03/97 65 64,982
5.14% #.............. 07/03/97 435 434,879
5.24% #.............. 08/07/97 45 44,772
5.12% #.............. 08/21/97 400 397,172
5.20% #.............. 08/21/97 300 297,879
------------
2,074,451
------------
U.S. TREASURY NOTES -- 11.3%
6.125%............... 03/31/98 48,000 48,162,240
6.00%................ 09/30/98 4,000 4,005,200
------------
52,167,440
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $54,254,701)................. 54,241,891
------------
SOVEREIGN ISSUES -- 1.2%
ARGENTINA
Republic of Argentina
[BRB,FRB]
6.75%
(COST $4,388,265).... 03/31/05 5,820 5,470,800
------------
FOREIGN BONDS -- 2.5%
CANADA -- 0.8%
Canadian Government
4.25%................ 12/01/26 5,139 3,695,401
------------
NEW ZEALAND -- 1.7%
New Zealand Government
10.00%............... 03/15/02 10,000 7,654,571
------------
TOTAL FOREIGN BONDS
(COST $11,242,248)................. 11,349,972
------------
<CAPTION>
PAR
(000)
----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 27.8%
Caisse D'Amortissement
5.55%................ 08/05/97 $ 1,000 994,514
5.56%................ 08/11/97 1,600 1,589,774
Central Illinois Public
Service
6.25%................ 07/01/97 12,700 12,700,000
DuPont (E.I.) de
Nemours & Co.
5.52%................ 07/15/97 1,900 1,895,921
5.51%................ 08/06/97 1,200 1,193,388
Emerson Electric Co.
5.54%................ 08/11/97 21,000 20,867,502
Ford Motor Credit Co.
5.57%................ 07/03/97 3,500 3,498,917
5.54%................ 08/13/97 3,500 3,476,454
General Electric
Capital Corp.
5.57%................ 07/01/97 8,400 8,400,000
5.57%................ 08/06/97 300 298,301
General Motors
Acceptance Corp.
5.55%................ 07/30/97 16,000 15,928,467
IBM Corp.
5.53%................ 07/07/97 6,700 6,693,825
IBM Credit Corp.
5.60%................ 07/21/97 2,100 2,093,467
KFW International
Financial Corp.
5.52%................ 07/02/97 700 699,893
5.53%................ 08/22/97 18,800 18,649,830
Minnesota Mining &
Manufacturing Co.
5.51%................ 08/12/97 1,300 1,291,643
National Rural Utility
Corp.
5.57%................ 07/17/97 900 897,711
5.58%................ 07/21/97 700 697,786
5.53%................ 07/22/97 6,500 6,478,683
5.55%................ 08/14/97 12,000 11,917,713
New Center Asset Trust
5.62%................ 07/09/97 1,900 1,897,548
5.56%................ 08/15/97 1,000 993,050
5.56%................ 08/27/97 1,400 1,387,206
5.56%................ 09/10/97 3,800 3,757,592
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C> <C> <C>
Western Australian
Treasury
5.62%................ 08/01/97 $ 400 $ 398,044
------------
TOTAL COMMERCIAL PAPER
(COST $128,700,475)................ 128,697,229
------------
NOTIONAL
AMOUNT
(000)
----------
OTC INTEREST RATE CAPS -- 0.0%
Three-Month LIBOR
Strike at $89.30
(COST $3,618)........ 12/15/97 375,000 3,618
------------
<CAPTION>
SHARES
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.8%
Temporary Investment Cash Fund... 1,754,911 1,754,911
Temporary Investment Fund........ 1,754,911 1,754,911
------------
(COST $3,509,822)................ 3,509,822
------------
TOTAL INVESTMENTS -- 116.8%
(COST $535,843,303)................ 540,399,605
------------
<CAPTION>
NOTIONAL
AMOUNT
(000)
----------
<S> <C> <C>
WRITTEN OPTIONS -- 0.0%
Written CME Put Option on
Eurodollar Futures, Strike
Price $93.75, Expire 12/15/97
(COST ($291,246)).............. $ 350,000 (83,125)
------------
LIABILITES IN EXCESS OF OTHER
ASSETS -- (16.8%).................. (77,693,601)
------------
NET ASSETS -- 100.0%................. $462,622,879
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH APPRECIATION
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell CAD $3,846,182 1.3392 10/98 $ 63,615
Sell NZD 7,386,834 1.4439 08/97 155,728
---------
$ 219,343
=========
</TABLE>
# Securities with an aggregate market value of $2,074,451 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- ----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Municipal Bond 09/97 $15,300 $ 28,688
U.S. Treasury 5 Year
Note 09/97 5,000 (5,468)
U.S. Treasury 10 Year
Note 09/97 40,100 21,312
U.S. Treasury 30 Year
Note 09/97 47,800 (306,000)
Eurodollar 09/97 30,000 (2,250)
Eurodollar 12/97 30,000 (4,875)
Eurodollar 03/98 30,000 (6,000)
----------
$ (274,593)
==========
</TABLE>
Interest rate swap agreements outstanding at June 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATON
- --------------------------------------------------------------
<S> <C> <C> <C>
Receive variable rate
payments on the three-
month LIBOR-BBA
floating rate and pay
fixed rate payments on
the then current U.S.
Treasury 10 Year Note
with a spread of:
36.25 09/97 $ 5,000 $ 5,000
36.50 09/97 7,500 6,750
37.00 09/97 3,000 1,920
37.00 09/97 10,000 6,400
35.75 09/97 6,000 7,200
36.50 09/97 12,000 10,800
--------
$38,070
========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 73.7%
AEROSPACE -- 2.5%
General Motors Corp. Cl-H......... 20,000 $ 1,155,000
Lockheed Martin Corp.............. 20,000 2,071,250
Northrop Grumman Corp............. 100,000 8,781,250
------------
12,007,500
------------
AUTOMOBILE MANUFACTURERS -- 0.9%
Chrysler Corp..................... 30,000 984,375
Ford Motor Co..................... 30,000 1,132,500
General Motors Corp............... 40,000 2,227,500
------------
4,344,375
------------
AUTOMOTIVE PARTS -- 0.6%
Borg Warner Automotive, Inc....... 50,000 2,703,125
------------
BEVERAGES -- 1.6%
Anheuser-Busch Companies, Inc. ... 140,000 5,871,250
Coors, (Adolph) Co. Cl-B.......... 70,000 1,863,750
------------
7,735,000
------------
CHEMICALS -- 2.0%
Agrium, Inc. ..................... 250,000 2,875,000
Arco Chemical Co. ................ 20,000 951,250
General Chemical Group, Inc. ..... 50,000 1,337,500
Lawter International, Inc. ....... 100,000 1,262,500
Olin Corp. ....................... 80,000 3,125,000
------------
9,551,250
------------
COMPUTER HARDWARE -- 0.5%
Hewlett-Packard Co. .............. 40,000 2,240,000
------------
CONGLOMERATES -- 0.4%
Philip Morris Companies, Inc. .... 45,000 1,996,875
------------
CONSTRUCTION -- 0.7%
Fluor Corp........................ 62,000 3,421,625
------------
CONSUMER PRODUCTS & SERVICES -- 0.7%
Avon Products, Inc. .............. 50,000 3,528,125
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.6%
Emerson Electric Co. ............. 80,000 4,405,000
General Electric Co. ............. 74,000 4,837,750
Honeywell, Inc. .................. 40,000 3,035,000
Maxim Integrated Products,
Inc.*........................... 5,800 329,875
Polaroid Corp. ................... 30,000 1,665,000
Sundstrand Corp. ................. 140,000 7,560,000
Tandy Corp. ...................... 100,000 5,600,000
Texas Instruments, Inc. .......... 45,000 3,782,812
------------
31,215,437
------------
ENVIRONMENTAL SERVICES -- 0.7%
Waste Management, Inc............. 100,000 3,212,500
------------
FINANCIAL-BANK & TRUST -- 2.1%
Bank of New York Co., Inc. ....... 60,000 2,610,000
CoreStates Financial Corp. ....... 30,000 1,612,500
Fleet Financial Group, Inc. ...... 50,000 3,162,500
Mellon Bank Corp. ................ 60,000 2,707,500
------------
10,092,500
------------
FINANCIAL SERVICES -- 1.6%
Associates First Capital Corp. ... 80,000 4,440,000
Morgan Stanley, Dean Witter,
Discover & Co.*................. 70,000 3,014,375
------------
7,454,375
------------
FOOD -- 2.9%
General Mills, Inc. .............. 35,000 2,279,375
Heinz, (H.J.) Co. ................ 93,000 4,289,625
Kellogg Co........................ 70,000 5,993,750
Quaker Oats Co.................... 30,000 1,346,250
------------
13,909,000
------------
HEALTHCARE SERVICES -- 0.7%
Tenet Healthcare Corp.*........... 120,000 3,547,500
------------
HOTELS & MOTELS -- 1.4%
Hilton Hotels Corp. .............. 250,000 6,640,625
------------
INDUSTRIAL PRODUCTS -- 0.5%
Albany International Corp. Cl-A... 100,000 2,250,000
------------
INSURANCE -- 8.8%
Allmerica Financial Corp. ........ 60,000 2,392,500
Allmerica Property & Casualty
Companies, Inc. ................ 100,000 3,275,000
American States Financial
Corp. .......................... 200,800 9,236,800
Lincoln National Corp. ........... 80,000 5,150,000
Ohio Casualty Corp................ 100,000 4,400,000
Safeco Corp....................... 150,000 7,003,125
St. Paul Companies, Inc. ......... 50,000 3,812,500
Travelers Property Casualty Corp.
Cl-A............................ 167,500 6,679,062
------------
41,948,987
------------
MACHINERY & EQUIPMENT -- 1.1%
AlliedSignal, Inc. ............... 50,000 4,200,000
Cooper Industries, Inc. .......... 25,000 1,243,750
------------
5,443,750
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.6%
Becton Dickinson & Co. ........... 60,000 3,037,500
------------
METALS & MINING -- 0.7%
Newmont Mining Corp............... 80,994 3,158,766
------------
OIL & GAS -- 10.9%
Amoco Corp. ...................... 30,000 2,608,125
Apache Corp. ..................... 100,000 3,250,000
Atlantic Richfield Co. ........... 60,000 4,230,000
Burlington Resources, Inc. ....... 30,000 1,326,563
Chevron Corp. .................... 70,000 5,175,625
Dresser Industries, Inc........... 70,000 2,607,500
Enron Oil & Gas Co................ 100,000 1,812,500
Exxon Corp........................ 80,000 4,920,000
Mobil Corp........................ 24,000 1,677,000
Phillips Petroleum Co............. 100,000 4,375,000
Royal Dutch Petroleum Co.......... 60,000 3,262,500
Schlumberger Ltd.................. 21,000 2,625,000
Sonat, Inc........................ 85,000 4,356,250
Tenneco, Inc.*.................... 92,500 4,179,844
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Union Pacific Resources Group,
Inc............................. 121,173 $ 3,014,178
USX Marathon Group................ 80,000 2,310,000
------------
51,730,085
------------
PAPER & FOREST PRODUCTS -- 2.7%
Champion International Corp. ..... 100,000 5,525,000
James River Corp. of Virginia..... 100,000 3,700,000
Kimberly-Clark Corp. ............. 70,000 3,482,500
------------
12,707,500
------------
PERSONAL SERVICES -- 0.4%
Service Corp. International....... 52,000 1,709,500
------------
PHARMACEUTICALS -- 6.2%
Abbott Laboratories............... 100,000 6,675,000
American Home Products Corp. ..... 25,000 1,912,500
Biogen, Inc.*..................... 50,000 1,693,750
Glaxo Wellcome PLC [ADR].......... 50,000 2,090,625
Merck & Co., Inc.................. 20,000 2,070,000
Novo Nordisk AS [ADR]............. 20,000 1,097,500
Pfizer, Inc....................... 30,000 3,585,000
Smithkline Beecham PLC [ADR]...... 30,000 2,748,750
Warner-Lambert Co................. 60,000 7,455,000
------------
29,328,125
------------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A........... 35,000 1,456,875
R.R. Donnelley & Sons Co.......... 40,000 1,465,000
------------
2,921,875
------------
RAILROADS -- 3.1%
Kansas City Southern Industries,
Inc. ........................... 100,000 6,450,000
Norfolk Southern Corp............. 50,000 5,037,500
Union Pacific Corp................ 45,000 3,172,500
------------
14,660,000
------------
REAL ESTATE -- 1.1%
Kilroy Realty Corp. [REIT]........ 50,000 1,262,500
Patriot American Hospitality, Inc.
[REIT].......................... 160,000 4,080,000
------------
5,342,500
------------
RETAIL & MERCHANDISING -- 2.3%
Dayton-Hudson Corp................ 60,000 3,191,250
Federated Department Stores,
Inc.*........................... 25,000 868,750
J.C. Penney Co., Inc. ............ 90,000 4,696,875
May Department Stores Co. ........ 50,000 2,362,500
------------
11,119,375
------------
SEMI-CONDUCTORS -- 2.1%
Analog Devices, Inc.*............. 200,000 5,312,500
Motorola, Inc..................... 65,000 4,940,000
------------
10,252,500
------------
TELECOMMUNICATIONS -- 6.3%
Ameritech Corp. .................. 50,000 3,396,875
AT&T Corp. ....................... 40,000 1,402,500
Bell Atlantic Corp. .............. 70,000 5,311,250
BellSouth Corp. .................. 40,000 1,855,000
Deutsche Telekom AG [ADR]*........ 100,000 2,412,500
GTE Corp.......................... 60,000 2,632,500
NYNEX Corp........................ 50,000 2,881,250
SBC Communications, Inc........... 90,000 5,568,750
U.S. West Communications Group.... 120,000 4,522,500
------------
29,983,125
------------
UTILITIES -- 0.4%
IES Industries, Inc. ............. 60,000 1,770,000
------------
TOTAL COMMON STOCK
(COST $276,308,274)................. 350,963,400
------------
PREFERRED STOCK -- 0.2%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575)................... 20,000 1,065,000
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ----------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 13.4%
BROADCASTING -- 0.4%
Allbritton
Communications Co.
Sr. Sub. Debs.
11.50%............... 08/15/04 $ 1,000 1,053,750
9.75%................ 11/30/07 1,000 995,000
------------
2,048,750
------------
BUILDING MATERIALS -- 0.3%
USG Corp. Sr. Notes
8.50%................ 08/01/05 1,500 1,578,750
------------
BUSINESS SERVICES -- 0.4%
CEI Citicorp Holdings
144A
9.75%................ 02/14/07 2,000 2,077,500
------------
COMPUTER HARDWARE -- 0.4%
AST Research Inc. Sub.
Notes
5.32%................ 12/14/13 4,000 1,675,000
COMPUTER SERVICES & SOFTWARE -- 0.6%
Bell & Howell Co. (New)
Debs. [STEP]
8.02%................ 03/01/05 2,000 1,620,000
Unisys Corp. Sr. Notes
12.00%............... 04/15/03 1,000 1,095,000
------------
2,715,000
------------
CONSUMER PRODUCTS & SERVICES -- 0.2%
Ferrellgas LP Financial
Corp. Sr. Notes
10.00%............... 08/01/01 1,000 1,045,000
------------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C>
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.8%
Carolina Power & Light
First Mtge.
8.625%............... 09/15/21 $ 1,000 $ 1,126,350
Detroit Edison Medium-
Term Note
8.30%................ 08/01/22 1,000 1,057,500
Jersey Central Power &
Light Co. First Mtge.
7.50%................ 05/01/23 1,500 1,436,250
------------
3,620,100
------------
ENTERTAINMENT & LEISURE -- 0.4%
Time Warner
Entertainment Co.
L.P. Debs.
8.375%............... 03/15/23 1,000 1,023,750
Time Warner, Inc. Notes
6.85%................ 01/15/03 1,000 993,750
------------
2,017,500
------------
FINANCIAL-BANK & TRUST -- 0.4%
Long Island Savings
Bank Notes
7.00%................ 06/13/02 2,000 2,000,000
------------
FINANCIAL SERVICES -- 1.7%
Donaldson Lufkin &
Jenrette, Inc. Notes
5.625%............... 02/15/16 1,000 965,000
DQU II Funding Corp.
Debs.
8.70%................ 06/01/16 2,000 2,155,000
General Motors
Acceptance Corp.
Notes 144A
6.50%................ 01/17/00 1,000 998,750
General Motors
Acceptance Corp.
Notes
6.70%................ 04/25/01 1,000 996,250
IBM Corp. Debs.
7.125%............... 12/01/23 1,000 946,250
Lehman Brothers
Holdings Sr. Notes
8.80%................ 03/01/15 1,850 2,058,125
------------
8,119,375
------------
HEALTHCARE SERVICES -- 0.6%
Healthsource, Inc. Sub.
Notes [CVT]
5.00%................ 03/01/03 3,000 2,985,000
------------
INDUSTRIAL PRODUCTS -- 0.2%
Kaiser Aluminum
Chemicals Sr. Sub.
Notes
12.75%............... 02/01/03 1,000 1,087,500
------------
METALS & MINING -- 0.4%
Freeport-McMoran Copper
& Gold Sr. Notes
7.20%................ 11/15/03 1,900 1,862,000
------------
OIL & GAS -- 0.5%
Veritas Holdings Sr.
Notes 144A
9.625%............... 12/15/03 2,000 2,082,500
------------
PAPER & FOREST PRODUCTS -- 0.4%
Quno Corp. Sr. Notes
9.125%............... 05/15/05 1,650 1,782,000
------------
PHARMACEUTICALS -- 0.5%
McKesson Corp. Sub.
Debs.
4.50%................ 03/01/04 2,875 2,486,875
------------
PRINTING & PUBLISHING -- 0.2%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Note
8.28%................ 07/01/06 1,000 850,000
------------
REAL ESTATE -- 0.7%
B.F. Saul Sr. Notes
[REIT]
11.625%.............. 04/01/02 1,000 1,077,500
Fisher Brothers
Financial Realty Co.
Notes
10.75%............... 12/17/00 2,000 2,030,000
------------
3,107,500
------------
RETAIL & MERCHANDISING -- 0.4%
J.C. Penney & Co., Inc.
Debs.
6.90%................ 08/15/26 2,000 2,017,500
------------
TELECOMMUNICATIONS -- 1.8%
Brooks Fiber Properties
Sr. Disc. Notes
[STEP]
10.79%............... 03/01/06 2,000 1,365,000
Commnet Cellular, Inc.
Sub. Notes
11.25%............... 07/01/05 1,000 1,150,000
International Cabletel,
Inc. Sr. Notes 144A
10.00%............... 02/15/07 1,000 1,025,000
International Cabletel,
Inc. Sr. Notes [STEP]
10.62%............... 02/01/06 1,000 692,500
Ionica PLC Sr. Disc.
Notes
15.00%............... 05/01/07 2,000 1,060,000
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ---------- ------------
<S> <C>
McLeod, Inc. [STEP]
144A
10.43%............... 03/01/07 $ 2,000 $ 1,275,000
TCI Communications,
Inc. Sr. Notes
6.875%............... 02/15/06 2,000 1,877,500
------------
8,445,000
------------
TRANSPORTATION -- 0.2%
Viking Star Shipping
Notes
9.625%............... 07/15/03 1,000 1,051,250
------------
UTILITIES -- 1.9%
Enersis SA Notes
6.90%................ 12/01/06 1,000 971,250
Long Island Lighting
Co. Debs.
8.20%................ 03/15/23 3,500 3,591,875
Penn Power and Light
First Mtge.
7.875%............... 02/01/23 1,000 1,013,750
Philadelphia Electric
Co. First Mtge.
7.25%................ 11/01/24 2,000 1,897,500
PSI Energy, Inc. Debs.
6.35%................ 11/15/00 1,500 1,483,125
------------
8,957,500
------------
TOTAL CORPORATE OBLIGATIONS
(COST $63,389,269)................. 63,611,600
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 5.9%
Federal Home Loan Mtge. Corp.
6.50%................ 10/01/10 1,716 1,684,497
6.50%................ 11/01/10 1,747 1,714,832
6.50%................ 04/01/11 2,750 2,699,914
6.50%................ 08/01/11 2,865 2,812,514
6.50%................ 09/01/11 5,139 5,044,203
6.50%................ 09/01/11 9,400 9,227,063
6.50%................ 01/01/12 4,889 4,799,191
(COST $27,962,403)............. 27,982,214
U.S. TREASURY OBLIGATIONS -- 2.7%
U.S. Treasury Notes
5.50%................ 12/31/00 2,000 1,949,880
6.50%................ 05/15/05 4,000 3,992,280
6.50%................ 10/15/06 7,000 6,970,179
------------
(COST $13,067,845)............. 12,912,339
------------
COMMERCIAL PAPER -- 1.9%
General Electric
Capital Corp.
5.56%................ 07/02/97 4,000 4,000,000
Heller, (Walter E.)
Corp.
5.62%................ 07/02/97 5,000 5,000,000
------------
(COST $9,000,000).............. 9,000,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.6%
Temporary Investment Cash Fund.... 3,895,531 3,895,531
Temporary Investment Fund......... 3,895,531 3,895,531
------------
(COST $7,791,062)................. 7,791,062
------------
TOTAL INVESTMENTS -- 99.4%
(COST $398,515,428)................. 473,325,615
OTHER ASSETS LESS
LIABILITIES -- 0.6%................. 2,642,908
------------
NET ASSETS -- 100.0%.................. $475,968,523
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.6% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 86.4%
AEROSPACE -- 2.1%
Remec, Inc.*................... 209,625 $ 4,926,187
------------
BROADCASTING -- 0.6%
SFX Broadcasting, Inc. Cl-A*... 34,025 1,435,430
------------
BUSINESS SERVICES -- 2.0%
Caribiner International,
Inc.*........................ 63,800 2,081,475
Teletech Holdings, Inc.*....... 107,450 2,800,416
------------
4,881,891
------------
CHEMICALS -- 1.5%
Crompton & Knowles Corp........ 87,025 1,936,306
O.M. Group, Inc................ 48,575 1,609,047
------------
3,545,353
------------
CLOTHING & APPAREL -- 1.5%
Gymboree Corp.*................ 61,275 1,470,600
Mens Warehouse, Inc.*.......... 65,775 2,071,912
------------
3,542,512
------------
COMPUTER HARDWARE -- 1.7%
Radisys Corp.*................. 59,650 2,371,087
Veritas Software Co.*.......... 35,675 1,792,669
------------
4,163,756
------------
COMPUTER SERVICES &
SOFTWARE -- 13.3%
Avant Corp.*................... 76,575 2,474,330
BA Merchant Services, Inc.*.... 123,250 2,349,453
CDW Computers Centers, Inc.*... 86,975 4,615,111
Cellular Technical Services
Co.*......................... 93,425 852,503
Checkfree Corp.*............... 54,825 966,291
CSG Systems International,
Inc.*........................ 27,750 856,781
Documentum, Inc.*.............. 80,225 1,995,597
Electronic Arts, Inc.*......... 33,875 1,139,047
Geoworks*...................... 255,550 1,485,384
HPR, Inc.*..................... 171,075 3,164,887
HNC Software, Inc.*............ 81,675 3,113,859
Network General Corp.*......... 111,450 1,657,819
PRI Automation, Inc.*.......... 74,250 2,816,859
Scopus Technology, Inc.*....... 58,275 1,303,903
Sterling Commerce, Inc.*....... 69,075 2,270,841
Summit Design, Inc.*........... 126,150 1,024,969
------------
32,087,634
------------
CONSUMER PRODUCTS &
SERVICES -- 4.0%
800 Jr. Cigar, Inc.*........... 30,875 640,656
Linens 'N Things, Inc.*........ 25,200 746,550
Nautica Enterprises, Inc.*..... 60,000 1,586,250
Protection One, Inc.*.......... 108,675 1,467,112
Rexall Sundown, Inc.*.......... 71,450 2,786,550
Warnaco Group, Inc. Cl-A....... 72,000 2,295,000
------------
9,522,118
------------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 4.9%
Berg Electronics Corp.*........ 84,600 3,040,312
Brooks Automation, Inc.*....... 67,075 1,291,194
Concord EFS, Inc.*............. 94,550 2,446,481
Micro Linear Corp.*............ 42,375 444,937
Sanmina Corp.*................. 36,625 2,325,687
Sawtek, Inc.*.................. 66,850 2,256,187
------------
11,804,798
------------
ENERGY SERVICES -- 0.2%
Metzler Group, Inc.*........... 15,900 520,725
------------
ENTERTAINMENT & LEISURE -- 4.3%
Fairfield Communities, Inc.*... 94,475 3,176,722
Midway Games, Inc.*............ 68,900 1,472,737
Signature Resorts, Inc.*....... 93,425 3,229,002
Silverleaf Resorts, Inc.*...... 132,025 2,029,884
Vistana, Inc. *................ 23,825 369,288
------------
10,277,633
------------
ENVIRONMENTAL SERVICES -- 2.5%
Memtec Ltd. [ADR].............. 67,850 1,831,950
United Waste Systems, Inc.*.... 104,525 4,285,525
------------
6,117,475
------------
EQUIPMENT SERVICES -- 0.9%
Rental Service Corp.*.......... 79,625 2,090,156
------------
FINANCIAL-BANK & TRUST -- 0.6%
Banco Latinoamericano de
Exportaciones SA Cl-E [ADR].. 34,000 1,466,250
------------
FINANCIAL SERVICES -- 1.0%
First USA Paymentech, Inc.*.... 82,525 2,388,067
------------
FOOD -- 1.4%
JP Foodservice, Inc.*.......... 119,425 3,426,005
------------
HEALTHCARE SERVICES -- 8.9%
Advance Paradigm, Inc.*........ 49,525 916,213
FPA Medical Management,
Inc.*........................ 56,375 1,335,383
Healthcare Compare Corp.*...... 99,775 5,225,716
Medical Manager Corp.*......... 174,650 2,576,088
Multicare Companies, Inc.*..... 74,000 2,025,750
Omnicare, Inc.................. 93,800 2,942,975
Orthodontic Centers of America,
Inc.*........................ 125,150 2,276,166
Pediatrix Medical Group,
Inc.*........................ 39,575 1,813,030
Sunrise Assisted Living,
Inc.*........................ 65,125 2,279,375
------------
21,390,696
------------
HOTELS & MOTELS -- 2.9%
Doubletree Corp.*.............. 78,925 3,245,791
La Quinta Motor Inns, Inc...... 172,075 3,764,141
------------
7,009,932
------------
INDUSTRIAL PRODUCTS -- 1.2%
Harsco Corp.................... 70,000 2,835,000
------------
INSURANCE -- 2.3%
Executive Risk, Inc............ 42,150 2,191,800
Reliastar Financial Corp....... 45,000 3,290,625
------------
5,482,425
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 0.9%
Henry Schein, Inc.*............ 70,525 2,203,906
------------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
METALS & MINING -- 0.4%
IMCO Recycling, Inc............ 55,350 $ 1,044,731
------------
OFFICE EQUIPMENT -- 3.0%
American Pad & Paper Co.*...... 107,675 1,817,016
U.S. Office Products Co.*...... 180,000 5,501,250
------------
7,318,266
------------
PERSONAL SERVICES -- 0.3%
Sylvan Learning Systems,
Inc.*........................ 17,500 595,000
------------
PHARMACEUTICALS -- 4.8%
Covance, Inc.*................. 85,075 1,643,011
NCS Healthcare, Inc. Cl-A*..... 53,000 1,609,875
Paraxel International Corp.*... 102,550 3,255,963
Scherer, (R.P.) Corp.*......... 21,050 1,086,706
Watson Pharmaceuticals,
Inc.*........................ 93,950 3,969,388
------------
11,564,943
------------
PRINTING & PUBLISHING -- 0.7%
World Color Press, Inc.*....... 69,525 1,651,219
------------
RETAIL & MERCHANDISING -- 7.6%
Consolidated Stores Corp.*..... 40,898 1,421,188
Insight Enterprises, Inc.*..... 70,225 2,111,139
Kenneth Cole Productions, Inc.
Cl-A*........................ 85,150 1,389,009
Meyer, (Fred), Inc.*........... 50,000 2,584,375
Peapod, Inc. *................. 72,925 820,406
Proffitt's, Inc.*.............. 58,550 2,568,881
The Sports Authority, Inc.*.... 133,275 2,590,533
Wolverine World Wide, Inc...... 161,680 4,911,030
------------
18,396,561
------------
SEMI-CONDUCTORS -- 1.4%
Speedfam International,
Inc.*........................ 35,900 1,287,913
Vitesse Semiconductor, Inc.*... 64,612 2,112,005
------------
3,399,918
------------
TELECOMMUNICATIONS -- 8.1%
Cellular Communications
International, Inc.*......... 51,000 1,708,500
Digital Microwave Corp.*....... 137,950 4,138,500
Heartport, Inc.*............... 28,575 503,634
P-Com, Inc.*................... 118,175 3,899,775
Pacific Gateway Exchange,
Inc.*........................ 46,425 1,311,506
Periphonics Corp.*............. 143,675 3,089,013
Powerwave Technologies,
Inc.*........................ 50,425 1,134,563
Tel-Save Holdings, Inc.*....... 53,050 809,013
Telco Communications Group*.... 43,475 1,412,938
Teledata Communications
Ltd.*........................ 41,000 1,409,375
------------
19,416,817
------------
TRANSPORTATION -- 1.4%
Mark VII, Inc.*................ 60,000 1,920,000
Rural Metro Corp.*............. 46,400 1,347,050
------------
3,267,050
------------
TOTAL COMMON STOCK
(COST $169,369,844).............. 207,772,454
------------
FOREIGN STOCK -- 5.0%
BROADCASTING -- 0.7%
Flextech PLC -- (GBP)*......... 167,000 1,788,223
------------
BUILDING MATERIALS -- 0.8%
Hunter Douglas NV -- (NLG)..... 23,356 1,986,682
------------
CONTAINERS & PACKAGING -- 0.8%
Hoya Corp. -- (JPY)............ 45,000 2,002,618
------------
RESTAURANTS -- 0.9%
J.D. Wetherspoon PLC -- (GBP).. 89,533 2,031,486
------------
RETAIL & MERCHANDISING -- 0.9%
Next PLC -- (GBP).............. 190,000 2,146,830
------------
TRANSPORTATION -- 0.9%
IHC Caland NV -- (NLG)......... 40,000 2,186,114
------------
TOTAL FOREIGN STOCK
(COST $7,446,485)................ 12,141,953
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 9.3%
American Express
Credit Corp.
5.60%............... 07/02/97 $ 5,657 5,656,126
Associates Corp. of
North America
5.40%............... 07/01/97 8,462 8,462,000
General Electric
Capital Corp.
5.62%............... 07/07/97 8,168 8,160,349
------------
(COST $22,278,475)............ 22,278,475
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash
Fund......................... 216 $ 216
Temporary Investment Fund...... 215 215
------------
(COST $431).................... 431
------------
TOTAL INVESTMENTS -- 100.7%
(COST $199,095,235).............. 242,193,313
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.7%)........... (1,599,207)
------------
NET ASSETS -- 100.0%............... $240,594,106
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
FOREIGN STOCK -- 94.8%
ARGENTINA -- 0.8%
Banco de Galicia y Buenos Aires
SA de CV [ADR]................ 14,268 $ 376,319
Banco Frances del Rio de la
Plata SA [ADR]................ 16,411 533,358
Compania Naviera Perez Companc
SA............................ 138,525 1,110,971
Sociedad Comercial del Plata SA
[ADR] 144A*................... 1,640 56,728
Telecom Argentina Stet SA Cl-B
[ADR]......................... 941 49,403
Telecom Argentina Stet-Fran Tel
SA Cl-B....................... 10,450 54,654
Telefonica de Argentina SA Cl-B
[ADR]......................... 29,080 1,006,895
Transportadora de Gas del Sur SA
Cl-B [ADR].................... 2,632 32,900
YPF SA [ADR].................... 32,209 990,427
------------
4,211,655
------------
AUSTRALIA -- 1.9%
Australia & New Zealand Bank
Group Ltd..................... 54,000 404,204
Australian Gas Light Co. Ltd.... 146,945 866,604
Boral Ltd....................... 27,180 85,695
Broken Hill Proprietary Co.
Ltd........................... 102,747 1,513,549
Commonwealth Installments
Receipt Trustee Ltd........... 60,900 536,202
Fletcher Challenge Forest
Ltd.*......................... 1,702 2,509
Fosters Brewing Group Ltd....... 242,000 450,113
John Fairfax Holdings Ltd. ..... 85,000 201,799
Lend Lease Corp. Ltd. .......... 22,486 476,038
National Australia Bank Ltd. ... 35,291 506,177
National Mutual Holdings
Ltd.*......................... 130,000 210,343
News Corp. Ltd. ................ 158,178 759,436
Publishing & Broadcasting
Ltd. ......................... 96,300 555,549
St. George Bank Ltd............. 67,000 446,295
Sydney Harbour Casino Holdings
Ltd.*......................... 273,000 429,336
Tabcorp Holdings Ltd............ 99,000 538,938
Westpac Banking Corp. Ltd....... 68,000 409,769
WMC Ltd......................... 80,377 507,446
Woodside Petroleum Ltd.......... 86,000 741,267
------------
9,641,269
------------
AUSTRIA -- 0.0%
Energie-Versorgung
Niederoesterreich AG.......... 624 80,365
Flughafen Wien AG............... 1,581 66,756
------------
147,121
------------
BELGIUM -- 1.1%
Credit Communal Holding Dexia
SA*........................... 3,940 423,120
Generale de Banque SA*.......... 3,274 1,259,931
Generale de Banque SA--Strip*... 214 95
Kredietbank NV.................. 8,450 3,404,418
UCB SA.......................... 251 795,054
------------
5,882,618
------------
BRAZIL -- 3.6%
Brazil Fund, Inc.**............. 29,290 900,668
Centrais Electrobras SA [ADR]... 44,628 1,247,799
Cesp-Cia Energetica de Sao Paolo
[ADR]*........................ 5,020 100,721
Companhia Brasileira de
Distribuicao Grupo Pao de
Acucar [GDR].................. 16,260 369,915
Companhia Energetica de Minas
Geras [ADR]................... 44,868 2,258,924
Lojas Americanas SA [ADR]....... 23,000 316,204
Pao de Acucar [ADR]*............ 5,160 117,390
Telebras SA [ADR]............... 74,490 11,303,858
Telebras SA [ADR] 144A.......... 217 32,957
Uniao Siderurgicas de Minas
Gerais SA [ADR]............... 78,390 859,233
Usinas Siderurgicas de Minas
Gerais SA [ADR]*.............. 61,345 672,403
Usinas Siderurgicas de Minas
Gerais SA [ADR] 144A*......... 11,100 121,667
------------
18,301,739
------------
CANADA -- 0.3%
Alcan Aluminium Ltd. ........... 30,470 1,038,173
Royal Bank of Canada............ 10,980 497,356
------------
1,535,529
------------
CHILE -- 0.7%
A.F.P. Provida SA [ADR]......... 1,152 25,200
Chile Fund, Inc. **............. 9,294 242,806
Chilectra Metropolitana SA [ADR]
144A.......................... 14,905 428,981
Chilgener SA [ADR].............. 6,371 178,388
Chilgener SA [ADR] Rights*...... 2,102 0
Cia de Telecomunicaciones de
Chile SA [ADR]................ 16,090 530,970
Compania Cervecerias Unidas SA
[ADR]......................... 3,628 79,589
Empresa Nacional Electridad SA
[ADR]......................... 18,526 417,993
Enersis SA [ADR]................ 12,553 446,416
Five Arrows Chile Fund Ltd.
**............................ 89,390 306,786
Five Arrows Chile Investment
Trust **...................... 29,340 99,756
Genesis Chile Fund **........... 9,350 469,838
Santa Isabel SA [ADR]........... 8,017 258,548
------------
3,485,271
------------
CHINA -- 0.3%
Huaneng Power International,
Inc. [ADR]*................... 51,000 1,300,500
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
CZECH REPUBLIC -- 0.0%
SPT Telecom AS*................. 1,360 $ 140,933
------------
DENMARK -- 0.2%
Den Danske Bank................. 6,380 620,826
Tele Danmark AS Cl-B............ 2,030 105,495
Unidanmark AS Cl-A.............. 6,110 343,295
------------
1,069,616
------------
FINLAND -- 0.3%
Nokia AB Cl-A................... 17,254 1,290,706
------------
FRANCE -- 7.8%
Accor SA........................ 2,920 437,215
Alcatel Alsthom................. 16,842 2,109,119
Assurances Generales de
France........................ 7,533 240,709
AXA SA.......................... 9,781 608,275
Canal Plus...................... 3,880 755,244
Carrefour Supermarche SA........ 4,730 3,434,908
Chargeurs International SA*..... 2,331 134,295
CLF Dexia France Reg'd.......... 1,928 187,643
Compagnie de Saint-Gobain....... 11,740 1,711,900
Compagnie Generale des Eaux..... 45,490 5,828,280
Credit Local de France.......... 8,295 807,313
GTM Entrepose SA................ 4,510 225,684
Guilbert SA..................... 5,003 708,245
Havas SA........................ 2,940 211,851
L'Oreal......................... 1,607 677,012
Lapeyre SA...................... 10,315 684,484
Legrand SA...................... 3,823 673,247
Louis Vuitton Moet Hennessy..... 11,719 3,150,483
Pathe*.......................... 2,331 462,456
Pinault-Printemps Redoute SA.... 7,081 3,402,427
Rexel SA........................ 1,265 388,290
Sanofi SA....................... 19,997 1,959,823
Schneider SA.................... 35,098 1,868,008
Societe Generale................ 7,336 818,828
Societe Nationale Elf Aquitaine
SA............................ 18,270 1,970,867
Societe Television Francaise.... 11,080 989,757
Sodexho SA...................... 3,633 1,860,018
Total SA Cl-B................... 39,864 4,028,996
------------
40,335,377
------------
GERMANY -- 4.3%
Allianz AG...................... 8,440 1,802,592
Bayer AG........................ 59,256 2,283,128
Bayerische Bank AG.............. 29,712 898,634
Bilfinger & Berger Bau AG....... 10,700 449,693
Buderus AG...................... 807 447,896
Commerzbank AG.................. 15,850 452,572
Deutsche Bank AG................ 30,291 1,778,452
Deutsche Telekom AG............. 46,401 1,140,005
Fielmann AG Pfd. ............... 5,723 173,911
Gehe AG......................... 42,031 2,891,875
Hoechst AG...................... 12,980 549,981
Hornbach Baumarkt AG............ 1,300 54,188
Hornbach Holdings AG Pfd. ...... 5,870 489,700
Krones AG Hermann Kronseder
Maschinenfabrik Pfd. ......... 456 186,154
Mannesmann AG................... 1,880 839,700
Praktiker Bau-Und
Heimwerkemaerkte AG........... 3,779 68,252
Rhoen-Klinikum AG............... 8,250 1,083,223
SAP AG.......................... 5,980 1,199,360
SAP AG Pfd...................... 3,398 700,408
Schering AG..................... 3,695 395,749
Siemens AG...................... 8,446 505,811
Veba AG......................... 41,654 2,352,456
Veba AG Warrants*............... 1,220 427,395
Volkswagen AG................... 1,019 772,386
------------
21,943,521
------------
HONG KONG -- 3.8%
Cathay Pacific Airways Ltd. .... 464,000 961,326
China Light & Power Co. Ltd. ... 100,000 566,686
Dao Heng Bank Group Ltd. ....... 243,000 1,329,994
First Pacific Co. Ltd. ......... 926,954 1,184,598
Guoco Group Ltd. ............... 276,000 1,453,607
Hong Kong Land Holdings Ltd. ... 748,582 1,991,228
Hutchison Whampoa Ltd. ......... 405,000 3,502,737
New World Development Co.
Ltd. ......................... 523,205 3,120,265
Shanghai Petrochemical Co. Ltd.
Cl-H.......................... 1,660,000 398,565
Swire Pacific Ltd. Cl-A......... 241,000 2,169,896
Wharf Holdings Ltd.............. 594,000 2,576,341
Yizheng Chemical Fibre Co. Ltd.
Cl-H.......................... 1,306,000 232,648
------------
19,487,891
------------
ITALY -- 2.4%
Banca Commerciale Italia NA..... 104,000 215,341
Banca Fideuram SPA.............. 220,490 720,484
Credito Italiano SPA............ 636,996 1,165,328
Ente Nazionale Idrocarburi
SPA........................... 380,485 2,154,215
Industrie Natuzzi SPA [ADR]..... 15,260 391,038
Istituto Mobiliare Italiano
SPA........................... 68,710 618,390
Italgas SPA..................... 112,936 365,381
La Rinascente SPA............... 22,800 126,674
Mediolanum SPA*................. 58,344 657,914
Seat RNC SPA*................... 139,220 29,072
Seat SPA*....................... 272,480 87,835
Stet Societa' Finanziaria
Telefonica SPA*............... 371,480 2,163,325
Telecom Italia Mobile RNC SPA... 113,043 202,147
Telecom Italia Mobile SPA....... 821,805 2,658,781
Telecom Italia SPA.............. 291,673 935,927
------------
12,491,852
------------
JAPAN -- 22.4%
Advantest Corp.................. 7,040 540,593
Alps Electric Co. Ltd. ......... 50,000 698,080
Amada Co. Ltd. ................. 109,000 960,646
Canon, Inc. .................... 205,000 5,581,152
Citizen Watch Co. Ltd. ......... 68,000 524,538
Dai Nippon Screen Manufacturing
Co. Ltd. ..................... 122,000 1,149,738
Daifuku Co. Ltd. ............... 18,000 237,173
Daiichi Pharmaceutical Co.
Ltd. ......................... 129,000 2,273,822
Daiwa House Industry Co.
Ltd. ......................... 163,000 1,991,274
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
DDI Corp. ...................... 267 $ 1,971,047
Denso Corp. .................... 188,000 4,494,939
East Japan Railway Co. Ltd. .... 358 1,836,859
Fanuc Co. ...................... 34,000 1,305,410
Hitachi Ltd. ................... 228,000 2,546,597
Hitachi Zosen Corp. ............ 181,000 720,209
Honda Motor Co. ................ 11,000 331,152
Inax............................ 46,000 344,398
Ishihara Sangyo Kaisha Ltd.*.... 56,000 165,654
Ito-Yokado Co. Ltd. ............ 47,000 2,727,312
Kao Corp. ...................... 90,000 1,248,691
Kawada Industries, Inc. ........ 14,000 62,792
Kokuyo.......................... 58,000 1,568,935
Komatsu Ltd. ................... 173,000 1,403,927
Komori Corp. ................... 49,000 1,163,002
Kumagai Gumi Co. Ltd. .......... 88,000 146,667
Kuraray Co. Ltd. ............... 126,000 1,253,403
Kyocera Corp. .................. 65,000 5,161,431
Makita Corp. ................... 84,000 1,231,414
Matsushita Electric Industrial
Co. .......................... 198,000 3,991,099
Mauri Co. Ltd. ................. 137,000 2,546,335
Mitsubishi Corp. ............... 97,000 1,210,384
Mitsubishi Heavy Industries
Ltd. ......................... 578,000 4,433,351
Mitsubishi Paper Mills Ltd. .... 64,000 250,192
Mitsui Fudosan Co. Ltd. ........ 294,000 4,053,403
Mitsui Petrochemical
Industries.................... 43,000 207,120
Murata Manufacturing Co.
Ltd. ......................... 65,000 2,586,387
National House Industrial
Co. .......................... 26,000 342,583
NEC Corp. ...................... 366,000 5,109,948
Nippon Hodo Co. ................ 22,000 190,244
Nippon Steel Co. ............... 819,000 2,615,654
Nippon Telegraph & Telephone
Corp. ........................ 1,830 1,756,545
Nomura Securities Co. Ltd. ..... 194,000 2,674,695
Pioneer Electronic Corp. ....... 68,000 1,649,564
Sangetsu Co. Ltd. .............. 11,000 234,206
Sankyo Co. Ltd. ................ 136,000 4,568,935
Sega Enterprises................ 19,400 643,281
Sekisui Chemical Co. Ltd. ...... 207,000 2,095,288
Sekisui House Ltd. ............. 107,000 1,083,072
Seven-Eleven Japan Co. Ltd. .... 16,000 1,209,075
Sharp Corp. .................... 193,000 2,660,908
Shin-Etsu Chemical Co. ......... 112,000 2,971,030
Shiseido Co. Ltd. .............. 30,000 494,764
Sony Corp. ..................... 49,100 4,280,183
Sumitomo Corp. ................. 218,000 2,073,473
Sumitomo Electric Industries.... 290,000 4,858,639
Sumitomo Forestry Co. .......... 73,000 802,618
TDK Corp. ...................... 48,000 3,522,513
Teijin Ltd. .................... 303,000 1,427,749
Tokio Marine & Fire Insurance
Co. .......................... 47,000 615,183
Tokyo Electron Ltd. ............ 18,700 894,206
Tokyo Steel Manufacturing....... 56,500 631,065
Toppan Printing Co. Ltd. ....... 95,000 1,492,147
UNY Co. Ltd. ................... 66,000 1,290,052
Yurtec Corp. ................... 22,000 255,323
------------
115,362,069
------------
KOREA -- 0.6%
Kookmin Bank.................... 15,422 282,234
Korea Electric Power Corp. ..... 27,700 829,623
Pohang Iron & Steel Co. Ltd. ... 5,030 507,991
Samsung Electronics Co.*........ 12,038 1,333,255
Shinhan Bank.................... 7,110 100,768
------------
3,053,871
------------
MALAYSIA -- 1.8%
Affin Holdings BHD.............. 211,000 501,625
Berjaya Sports Toto BHD......... 222,000 1,046,755
Commerce Asset Holding BHD...... 272,000 716,697
Commerce Asset Holding BHD
Rights*....................... 54,400 3,233
Commerce Asset Holding BHD
Special Rights*............... 34,000 0
Multi-Purpose Holdings BHD...... 380,000 533,006
Multi Purpose Holdings BHD
Iculs*........................ 565,000 190,288
Renong BHD*..................... 937,000 1,225,176
Renong BHD Iculs*............... 79,000 25,042
Resorts World BHD............... 161,000 484,824
Tanjong PLC..................... 371,000 1,278,905
Technology Resources Industries
BHD*.......................... 149,000 256,225
Time Engineering BHD............ 190,000 287,582
United Engineers Ltd............ 396,000 2,855,694
------------
9,405,052
------------
MEXICO -- 1.7%
Cementos de Mexico SA de CV
[ADS]*........................ 65,090 561,727
Cemex SA [ADS] 144A*............ 50,068 432,087
Cemex SA Cl-B................... 67,925 327,442
Cifra SA de CV Cl-B [ADR]*...... 575,870 1,056,721
Fomento Economico Mexicano SA
Cl-B.......................... 46,409 276,293
Gruma SA Cl-B*.................. 112,850 525,544
Gruma SA de CV [ADS] 144A*...... 24,309 469,407
Grupo Embotelladoras de Mexico
SA Cl-B*...................... 10,080 6,344
Grupo Financiero Banamex SA
Cl-B*......................... 146,200 382,751
Grupo Financiero Banamex SA
Cl-L*......................... 4,184 9,848
Grupo Financiero Bancomer SA
Cl-B [GDR]*................... 2,330 23,300
Grupo Financiero Bancomer SA
Cl-L*......................... 1,725 619
Grupo Industrial Maseca SA de CV
Cl-B.......................... 218,095 238,820
Grupo Modelo SA Cl-C............ 67,506 463,918
Grupo Televisia SA [GDR]*....... 5,034 152,908
Kimberly-Clark de Mexico SA
Cl-A.......................... 166,630 666,939
Panamerican Beverages, Inc.
Cl-A.......................... 34,540 1,135,503
Telefonos de Mexico SA Cl-L
[ADR]......................... 46,014 2,197,169
------------
8,927,340
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
NETHERLANDS -- 9.9%
ABN AMRO Bank NV................ 126,196 $ 2,352,556
Akzo Nobel NV................... 1,902 260,601
Baan Co. NV..................... 9,020 621,253
Baan Co. NV*.................... 8,227 557,322
CSM NV.......................... 36,451 1,826,913
Elsevier NV..................... 371,512 6,206,690
Fortis Amev NV.................. 38,702 1,722,892
Gucci Group NV.................. 10,914 702,589
Hagemeyer NV.................... 9,026 466,172
ING Groep NV.................... 123,292 5,683,251
ING Groep NV Warrants*.......... 39,906 459,570
Koninklijke Ahold NV............ 27,381 2,309,527
Nutricia Verenigde Bedrijven
NV............................ 6,130 967,911
Otra NV......................... 6,490 104,128
Polygram NV..................... 60,217 3,159,146
Royal Dutch Petroleum Co........ 217,344 11,302,818
Royal PTT Nederland NV.......... 11,749 460,792
Unilever NV..................... 17,520 3,687,294
Wolters Kluwer NV............... 67,080 8,165,904
------------
51,017,329
------------
NEW ZEALAND -- 0.5%
Air New Zealand Ltd. ........... 148,545 454,050
Carter Holt Harvey Ltd. ........ 79,700 206,261
Fletcher Challenge Building
Ltd. ......................... 127,550 383,811
Fletcher Challenge Energy
Ltd. ......................... 18,250 55,164
Fletcher Challenge Forest
Division...................... 9,212 13,391
Fletcher Challenge Forest
Ltd. ......................... 285,073 414,384
Fletcher Challenge Paper
Ltd. ......................... 84,500 204,908
Telecom Corp. of New Zealand
Ltd. ......................... 111,000 565,480
Tranz Rail Holdings Ltd. ....... 29,000 165,467
------------
2,462,916
------------
NORWAY -- 1.6%
Bergesen D.Y. AS Cl-A........... 5,170 122,417
Norsk Hydro AS.................. 79,880 4,349,717
Orkla AS Cl-A................... 48,710 3,589,732
Saga Petroleum AS Cl-B.......... 15,160 264,825
------------
8,326,691
------------
PANAMA -- 0.0%
Banco Latinoamericano de
Exportaciones SA Cl-E......... 4,035 174,009
------------
PERU -- 0.1%
Credicorp Ltd. [ADR]............ 8,880 195,360
Telefonica del Peru SA Cl-B..... 26,690 71,207
Telefonica del Peru SA Cl-B
[ADR]......................... 11,383 298,092
------------
564,659
------------
PHILIPPINES -- 0.3%
Philippine Long Distance Co. ... 20,800 674,147
Philippine National Bank*....... 92,675 628,841
------------
1,302,988
------------
PORTUGAL -- 0.4%
Estabelecimentos Jeronimo
Martins & Filho............... 33,099 2,311,966
------------
RUSSIA -- 0.0%
Gazprom [ADR]*.................. 5,750 98,210
------------
SINGAPORE -- 1.9%
City Developments Ltd. ......... 65,000 636,497
DBS Land Ltd. .................. 190,000 600,685
Developmental Bank of Singapore
Ltd. Cl-F..................... 41,000 516,192
Fraser & Neave Ltd. ............ 81,000 577,883
Keppel Corp. Ltd. .............. 55,000 244,282
Oversea-Chinese Banking Corp.
Ltd. ......................... 37,200 385,088
Overseas Union Bank Ltd. Cl-F... 217,000 1,350,843
Overseas Union Bank Rights*..... 43,400 60,408
Singapore Land Ltd. ............ 205,000 932,014
Singapore Press Holdings
Ltd. ......................... 90,000 1,812,968
United Industrial Corp. Ltd. ... 327,000 247,017
United Overseas Bank Ltd. ...... 213,400 2,194,153
Wing Tai Holdings Ltd. ......... 137,000 394,796
------------
9,952,826
------------
SPAIN -- 2.2%
Aquas de Barcelona Rfd.*........ 99 3,998
Argentaria SA................... 12,814 717,494
Banco Bilbao Vizcaya SA......... 7,140 580,058
Banco Popular Espanol SA........ 5,670 1,389,215
Banco Santander SA.............. 64,788 1,996,318
Centros Comerciales Pryca SA.... 14,319 310,015
Empresa Nacional de Electridad
SA............................ 16,073 1,349,416
Gas Natural SDG................. 5,403 1,180,417
Iberdrola SA.................... 86,553 1,092,633
Repsol SA....................... 20,855 881,815
Telefonica de Espana SA......... 57,547 1,663,840
------------
11,165,219
------------
SWEDEN--2.7%
ABB AB Cl-A..................... 66,800 938,251
Astra AB Cl-B................... 292,666 5,209,399
Atlas Copco AB Cl-B............. 40,130 1,041,589
Electrolux AB Cl-B.............. 28,770 2,078,198
Esselte AB...................... 5,800 136,651
Granges AB*..................... 14,385 193,667
Hennes & Mauritz AB Cl-B........ 59,900 2,147,926
Nordbanken AB................... 20,990 706,478
Sandvik AB Cl-A................. 6,140 174,468
Sandvik AB Cl-B................. 43,420 1,233,778
Scribona AB Cl-B................ 5,500 64,079
------------
13,924,484
------------
SWITZERLAND --5.7%
ABB AG.......................... 2,959 4,477,807
Adecco SA....................... 7,460 2,860,586
Ciba Specialty Chemicals AG*.... 4,499 415,889
Credit Suisse Group............. 7,130 915,417
Nestle SA....................... 3,698 4,876,984
Novartis AG..................... 5,719 9,140,062
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
Roche Holding AG................ 565 $ 5,108,754
Swiss Bank Corp. ............... 5,920 1,582,964
------------
29,378,463
------------
THAILAND -- 0.1%
Advanced Information Services
PLC........................... 26,700 184,434
Bangkok Bank PLC................ 40,400 288,803
Siam Cement Co. PLC............. 13,900 250,088
------------
723,325
------------
UNITED KINGDOM -- 15.3%
Abbey National PLC.............. 176,000 2,403,371
Argos PLC....................... 182,749 1,666,224
Asda Group PLC.................. 584,450 1,206,878
BG PLC.......................... 126,210 464,494
British Petroleum Co. PLC....... 153,840 1,912,464
Cable & Wireless PLC............ 352,000 3,238,688
Cadbury Schweppes PLC........... 241,456 2,153,236
Caradon PLC..................... 334,530 1,122,547
Centrica PLC*................... 126,210 153,956
Coats Viyella PLC............... 91,270 193,790
Compass Group PLC............... 129,000 1,447,918
David Smith Holdings PLC........ 197,900 619,581
Electrocomponents PLC........... 126,000 941,081
GKN PLC......................... 17,000 292,869
Glaxo Wellcome PLC.............. 244,000 5,038,552
Grand Metropolitan PLC.......... 408,300 3,953,879
Guinness PLC.................... 352,640 3,453,052
Heywood Williams Group PLC...... 32,010 110,344
Hillsdown Holdings PLC.......... 95,160 267,815
Kingfisher PLC.................. 358,950 4,076,736
Ladbroke Group PLC.............. 150,000 587,021
Laing, (John) PLC Cl-A.......... 70,000 435,977
National Westminster Bank PLC... 614,670 8,265,683
Rank Group PLC.................. 207,120 1,312,414
Reed International PLC.......... 624,740 6,055,033
Rolls-Royce PLC................. 78,140 298,642
RTZ Corp. PLC................... 165,600 2,885,983
Safeway PLC..................... 254,660 1,473,702
Shell Transport & Trading Co.
PLC........................... 846,000 5,769,238
Smithkline Beecham PLC.......... 495,120 9,115,142
T&N PLC......................... 181,680 435,676
Tesco PLC....................... 208,000 1,279,888
Tomkins PLC..................... 631,220 2,733,055
United News & Media PLC......... 280,470 3,253,133
------------
78,618,062
------------
VENEZUELA --0.1%
Cia Anonima Nacional Tele
Venezuela [ADS]*.............. 8,050 347,156
------------
TOTAL FOREIGN STOCK (COST
$402,354,286)..................... 488,382,233
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000)
-------- --------
<S> <C> <C>
FOREIGN BONDS -- 0.0%
BELGIUM
Kredietbank NV
5.75%
(COST $27,167).... 11/30/03 900 48,346
------------
TOTAL INVESTMENTS -- 94.8% (COST
$402,381,453)..................... 488,430,579
OTHER ASSETS LESS
LIABILITIES -- 5.2%............... 26,928,593
------------
NET ASSETS -- 100.0%................ $515,359,172
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH DEPRECIATION
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy BEF $ 204,613 35.7800 07/97 $(1,194)
Buy ITL 849,575 1,693.5006 07/97 (3,248)
Buy NLG 552,850 1.9518 07/97 (3,239)
-------
$(7,681)
=======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.3% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- ------------
<S> <C> <C> <C>
FOREIGN BONDS -- 75.1%
AUSTRALIA -- 2.6%
Australian Government
12.00%................. 11/15/01 2,030 $ 1,866,277
Federal National Mtge.
Assoc. Global Bond
6.50%.................. 07/10/02 1,850 1,393,766
----------
3,260,043
----------
CANADA -- 5.5%
Canadian Government
6.25%.................. 09/15/98 5,700 4,228,584
8.00%.................. 06/01/23 2,375 1,955,518
Province of Alberta
8.00%.................. 03/01/00 710 550,962
Province of Quebec
7.75%.................. 03/30/06 200 156,130
----------
6,891,194
----------
CZECH REPUBLIC -- 0.2%
European Investment Bank
11.00%................. 10/10/01 8,000 233,618
----------
DENMARK -- 1.6%
Nykredit
7.00%.................. 10/01/16 8,076 1,241,806
6.00%.................. 10/01/26 20 2,737
7.00%.................. 10/01/29 5,100 739,798
----------
1,984,341
----------
EUROPEAN CURRENCY UNIT -- 3.9%
European Bank
Reconstruction &
Development
6.00%.................. 05/06/99 970 1,126,823
French O.A.T.
9.50%.................. 04/25/00 1,100 1,401,828
Republic of Portugal
6.00%.................. 02/16/04 2,000 2,305,030
----------
4,833,681
----------
FRANCE -- 1.9%
French Government
6.50%.................. 10/25/06 4,500 819,651
French O.A.T. Principal
Strip 6.01%............ 10/25/05 10,000 1,086,912
6.32%.................. 10/25/08 5,500 487,094
----------
2,393,657
----------
GERMANY -- 9.8%
Deutscheland Republic
7.25%.................. 10/21/02 1,160 741,187
Federal National Mtge.
Assoc. Global Bond
5.00%.................. 02/16/01 3,500 2,052,420
Inter-America Development
Bank
7.00%.................. 06/08/05 4,500 2,818,789
KFW International
Finance, Inc.
6.75%.................. 06/20/05 3,500 2,168,310
Land Baden-Wuerttemberg
6.50%.................. 07/21/06 1,500 906,533
Minnesota Mining &
Manufacturing Co.
5.00%.................. 10/15/01 900 525,572
Republic of Germany
5.75%.................. 08/22/00 5,000 3,012,442
----------
12,225,253
----------
HUNGARY -- 0.7%
Hungarian Government
23.50%................. 11/06/97 60,000 323,164
24.00%................. 03/21/98 45,000 246,596
23.50%................. 05/17/98 50,000 275,578
----------
845,338
----------
ITALY -- 9.7%
Italian Government
9.50%.................. 02/01/01 5,150,000 3,339,624
8.25%.................. 07/01/01 4,675,000 2,943,600
9.00%.................. 10/01/03 4,320,000 2,840,019
9.50%.................. 01/01/05 1,260,000 853,835
8.75%.................. 07/01/06 3,295,000 2,186,329
----------
12,163,407
----------
JAPAN -- 12.6%
European Investment Bank
3.00%.................. 09/20/06 190,000 1,729,439
Export-Import Bank of
Japan
4.375%................. 10/01/03 360,000 3,549,738
2.875%................. 07/28/05 200,000 1,808,464
International Bank
Reconstruction &
Development Global Bond
4.75%.................. 12/20/04 400,000 4,085,951
Japan Development Bank
2.875%................. 12/20/06 130,000 1,168,412
Japanese Government
2.70%.................. 03/20/07 192,000 1,696,117
Republic of Austria
4.50%.................. 09/28/05 180,000 1,814,136
----------
15,852,257
----------
NETHERLANDS -- 2.0%
Netherlands Government
7.50%.................. 11/15/99 1,950 1,075,763
9.00%.................. 01/15/01 2,500 1,466,918
----------
2,542,681
----------
NEW ZEALAND -- 1.6%
New Zealand Government
10.00%................. 03/15/02 2,610 1,997,843
----------
PHILIPPINES -- 0.2%
Philippines Government
12.50%................. 04/25/01 8,000 300,552
----------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- --------- ------------
<S> <C> <C> <C>
PORTUGAL -- 0.9%
Republic of Portugal
5.375%................. 03/23/00 200,000 $ 1,139,026
----------
RUSSIA -- 0.4%
Russian Treasury Bill
29.65%................. 11/26/97 2,855,000 458,420
----------
SOUTH AFRICA -- 0.8%
Republic of South Africa
12.00%................. 02/28/05 4,800 942,623
----------
SPAIN -- 6.9%
Spanish Government
7.90%.................. 02/28/02 501,500 3,728,404
10.90%................. 08/30/03 341,000 2,909,169
8.00%.................. 05/30/04 130,000 982,279
10.00%................. 02/28/05 128,000 1,070,721
----------
8,690,573
----------
SWEDEN -- 0.9%
Swedish Government
5.50%.................. 04/12/02 9,000 1,152,673
----------
UNITED KINGDOM -- 12.9%
Alliance & Leicester BLD
8.75%.................. 12/07/06 1,000 1,750,654
Annington Finance
7.75%.................. 10/02/11 500 862,317
Bank of Scotland
8.375%................. 10/29/49 450 760,629
Federal National Mtge.
Assoc. Global Bond
6.875%................. 06/07/02 550 904,470
Guaranteed Export Finance
Corp.
7.24%.................. 09/29/00 900 1,187,780
10.625%................ 09/15/01 950 1,754,088
Halifax Building Society
8.75%.................. 07/10/06 1,150 2,035,994
9.38%.................. 05/15/21 530 1,007,833
National Power Co. PLC
8.375%................. 08/02/06 600 1,028,535
Swiss Bank Corp. Jersey
8.75%.................. 12/18/25 520 942,813
United Kingdom Treasury
8.00%.................. 09/25/09 730 1,300,391
8.00%.................. 12/07/15 600 1,092,032
8.75%.................. 08/25/17 770 1,502,862
----------
16,130,398
----------
TOTAL FOREIGN BONDS
(COST $95,679,261)................... 94,037,578
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- ------------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 5.5%
ARGENTINA -- 1.0%
Republic of Argentina
[FRB, BRB]
6.75%.................. 03/31/05 $ 286 $ 268,981
Republic of Argentina
Bocon PRE II [FRN]
5.44%.................. 04/01/01 579 583,481
Republic of Argentina
Bocon PRO II [FRN]
5.70%.................. 04/01/07 392 352,004
------------
1,204,466
------------
BRAZIL -- 0.6%
Republic of Brazil
Capitalization [FRB,
BRB]
8.00%.................. 04/15/14 672 540,011
Republic of Brazil DCB
[FRN, BRB]
6.9375%................ 04/15/12 200 165,250
------------
705,261
------------
BULGARIA -- 0.2%
National Republic of
Bulgaria [FRN]
6.5625%................ 07/28/11 200 144,625
2.25%.................. 07/28/12 320 182,800
------------
327,425
------------
DOMINICAN REPUBLIC -- 0.2%
Dominican Republic Disc.
[FRN]
6.375%................. 08/30/24 250 202,500
------------
ECUADOR -- 0.1%
Republic of Ecuador PDI
[FRN]
6.50%.................. 02/27/15 242 156,199
------------
MEXICO -- 0.3%
Banco Nacional de
Comercio Exterier
7.25%.................. 02/02/04 120 111,825
Grupo Elektra SA 144A
12.75%................. 05/15/01 200 221,375
------------
333,200
------------
PANAMA -- 0.1%
Republic of Panama [FRN]
7.03125%............... 05/10/02 154 152,310
------------
PERU -- 0.3%
Government of Peru
[FLIRB]
3.25%.................. 03/07/17 560 336,700
------------
PHILIPPINES -- 0.7%
Philippines Peso Linked
Note
9.3253%................ 12/11/97 950 902,232
------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- ------------
<S> <C> <C> <C>
POLAND -- 0.4%
Government of Poland PDI
4.00%.................. 10/27/14 $ 225 $ 193,359
Poland Communications,
Inc. 144A
9.875%................. 11/01/03 300 299,625
------------
492,984
------------
RUSSIA -- 1.1%
City of Moscow
9.50%.................. 05/31/00 100 100,938
Republic of Kazakhstan
9.25%.................. 12/20/99 100 101,625
Russia Loan
Participation* 0.00%... 06/20/26 1,050 963,375
Russian Interest Note
[WI]*
0.75%.................. 12/29/49 250 190,938
------------
1,356,876
------------
VENEZUELA -- 0.5%
Republic of Venezuela
(FRN, BRB)
6.50%.................. 12/18/07 750 695,400
------------
TOTAL SOVEREIGN ISSUES
(COST $6,009,001).................... 6,865,553
------------
TOTAL INVESTMENTS -- 80.6%
(COST $101,688,262).................. 100,903,131
OTHER ASSETS LESS
LIABILITES -- 19.4%.................. 24,359,620
------------
NET ASSETS -- 100.0%................... $125,262,751
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
(DOLLAR BASED)
<S> <C> <C> <C> <C> <C>
Buy DEM $1,200,000 1.7440 07/97 $ 682
=======
Sell AUD $ 231,614 1.3414 07/97 $ (3,295)
=======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL UNREALIZED
IN LOCAL IN LOCAL EXPIRATION APPRECIATION
BUY CURRENCY SELL CURRENCY MONTH (DEPRECIATION)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUD 1,150,532 NZD 1,264,089 07/97 $ 10,694
DEM 1,686,060 GRD 266,490,288 07/97 (3,527)
FRF 16,473,946 GBP 1,732,276 07/97 (75,766)
JPY 53,385,635 AUD 625,125 07/97 (5,147)
JPY 134,117,939 NZD 1,719,461 07/97 8,112
JPY 270,227,188 GBP 275,199,250 07/97 87,856
NOK 8,421,000 DEM 2,000,000 10/97 2,120
-------
$ 24,342
=======
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.4% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 90.3%
AEROSPACE -- 1.0%
Boeing Co. ....................... 29,800 $ 1,581,262
------------
BEVERAGES -- 0.9%
Pepsico, Inc...................... 35,000 1,314,687
------------
BUILDING MATERIALS -- 1.2%
Lowe's Companies, Inc. ........... 50,000 1,856,250
------------
BUSINESS SERVICES -- 0.7%
Paging Network, Inc.*............. 127,500 1,119,609
------------
CLOTHING & APPAREL -- 3.6%
Gucci Group NV.................... 19,800 1,274,625
Hilfiger, (Tommy) Corp.*.......... 60,800 2,443,400
Jones Apparel Group, Inc.*........ 37,000 1,766,750
------------
5,484,775
------------
COMPUTER HARDWARE -- 1.5%
Hewlett-Packard Co. .............. 40,000 2,240,000
------------
COMPUTER SERVICES & SOFTWARE -- 13.4%
Baan Co. NV*...................... 35,000 2,410,625
BMC Software, Inc.*............... 24,500 1,356,687
Cadence Design Systems, Inc.*..... 145,000 4,857,500
Cisco Systems, Inc.*.............. 44,250 2,970,281
First Data Corp................... 40,000 1,757,500
HBO & Co.......................... 29,000 1,997,375
Microsoft Corp.*.................. 12,500 1,579,687
Parametric Technology Corp.*...... 35,000 1,489,687
Sun Microsystems, Inc.*........... 55,000 2,047,031
------------
20,466,373
------------
CONGLOMERATES -- 1.7%
Philip Morris Companies, Inc. .... 60,000 2,662,500
------------
CONSUMER PRODUCTS & SERVICES -- 1.0%
Loewen Group, Inc. ............... 45,000 1,563,750
------------
CONTAINERS & PACKAGING -- 1.0%
Owens-Illinois, Inc.*............. 50,000 1,550,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.7%
Altera Corp.*..................... 40,000 2,020,000
Applied Materials, Inc.*.......... 10,000 708,125
KLA Instruments Corp.*............ 20,000 975,000
LAM Research Corp.*............... 19,000 704,187
Linear Technology Corp............ 44,000 2,277,000
Maxim Integrated Products,
Inc.*........................... 10,000 568,750
Sanmina Corp.*.................... 24,000 1,524,000
UCAR International, Inc.*......... 30,000 1,372,500
------------
10,149,562
------------
ENTERTAINMENT & LEISURE -- 1.8%
Time Warner, Inc. ................ 40,000 1,930,000
Walt Disney Co. .................. 10,000 802,500
------------
2,732,500
------------
ENVIRONMENTAL SERVICES -- 4.7%
U.S. Filter Corp.*................ 87,000 2,370,750
United Waste Systems, Inc.*....... 60,000 2,460,000
USA Waste Services, Inc.*......... 60,000 2,317,500
------------
7,148,250
------------
FINANCIAL-BANK & TRUST -- 4.6%
Banc One Corp. ................... 50,000 2,421,875
Chase Manhattan Corp. ............ 35,000 3,397,187
Citicorp.......................... 10,000 1,205,625
------------
7,024,687
------------
FINANCIAL SERVICES -- 4.2%
American Express Co. ............. 16,000 1,192,000
Fannie Mae........................ 27,000 1,177,875
Federal Home Loan Mtge. Corp. .... 37,000 1,271,875
Green Tree Financial Corp. ....... 48,000 1,710,000
The Money Store, Inc. ............ 34,200 981,113
------------
6,332,863
------------
FOOD -- 3.4%
American Stores Co. .............. 35,000 1,728,125
Kroger Co.*....................... 33,200 962,800
Safeway, Inc.*.................... 53,500 2,467,688
------------
5,158,613
------------
HEALTHCARE SERVICES -- 4.9%
Columbia-HCA Healthcare Corp. .... 60,000 2,358,750
Medpartners, Inc.*................ 51,000 1,102,875
Tenet Healthcare Corp.*........... 70,000 2,069,375
United Healthcare Corp............ 20,000 1,040,000
Vencor, Inc.*..................... 23,000 971,750
------------
7,542,750
------------
HOTELS & MOTELS -- 3.4%
HFS, Inc.*........................ 35,000 2,030,000
Hilton Hotels Corp................ 67,000 1,779,688
La Quinta Motor Inns, Inc. ....... 60,000 1,312,500
------------
5,122,188
------------
INSURANCE -- 3.7%
American International Group,
Inc............................. 6,000 896,250
Conseco, Inc...................... 91,000 3,367,000
MGIC Investment Corp.............. 30,000 1,438,125
------------
5,701,375
------------
OIL & GAS -- 2.0%
Baker Hughes, Inc. ............... 40,000 1,547,500
Diamond Offshore Drilling,
Inc.*........................... 20,000 1,562,500
------------
3,110,000
------------
PAPER & FOREST PRODUCTS -- 0.7%
Kimberly-Clark Corp............... 20,000 995,000
------------
PHARMACEUTICALS -- 7.6%
Cardinal Health, Inc.............. 46,000 2,633,500
Centocor, Inc.*................... 33,000 1,025,063
Lilly, (Eli) & Co. ............... 12,000 1,311,750
McKesson Corp. ................... 40,000 3,100,000
Merck & Co., Inc. ................ 10,000 1,035,000
Pfizer, Inc. ..................... 11,000 1,314,500
Warner-Lambert Co. ............... 10,000 1,242,500
------------
11,662,313
------------
</TABLE>
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
RESTAURANTS -- 1.8%
Boston Chicken, Inc.*............. 127,500 $ 1,785,000
Lone Star Steakhouse & Saloon*.... 35,000 910,000
------------
2,695,000
------------
RETAIL & MERCHANDISING -- 6.5%
Autozone, Inc.*................... 46,400 1,093,300
Consolidated Stores Corp.*........ 68,750 2,389,063
CVS Corp. ........................ 36,000 1,845,000
Federated Department Stores,
Inc.*........................... 55,000 1,911,250
Home Depot, Inc. ................. 20,000 1,378,750
Kohls Corp.*...................... 25,000 1,323,438
------------
9,940,801
------------
SEMI-CONDUCTORS -- 3.8%
Intel Corp. ...................... 10,000 1,418,125
Motorola, Inc. ................... 5,000 380,000
National Semiconductor Corp.*..... 59,500 1,822,188
Xilinx, Inc.*..................... 45,200 2,217,625
------------
5,837,938
------------
TELECOMMUNICATIONS -- 4.5%
Ascend Communications, Inc.*...... 45,000 1,771,875
Nokia Corp. Cl-A [ADR]............ 22,000 1,622,500
Tellabs, Inc.*.................... 26,500 1,480,688
Worldcom, Inc.*................... 60,000 1,920,000
------------
6,795,063
------------
TOTAL COMMON STOCK
(COST $125,440,676)................. 137,788,109
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 7.9%
U.S. Treasury Bills
4.77%................ 07/03/97 $10,000 $ 9,997,350
4.85%................ 07/24/97 2,000 1,993,803
-----------
(COST $11,991,153)............. 11,991,153
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.7%
Temporary Investment Cash
Fund......................... 1,324,974 1,324,974
Temporary Investment Fund...... 1,324,973 1,324,973
------------
(COST $2,649,947).... 2,649,947
------------
TOTAL INVESTMENTS -- 99.9%
(COST $140,081,776).............. 152,429,209
OTHER ASSETS LESS
LIABILITIES -- 0.1%.............. 93,787
------------
NET ASSETS -- 100.0%............... $152,522,996
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCK -- 89.7%
AUSTRALIA -- 1.4%
AAPC Ltd....................... 600,000 $ 399,214
Village Roadshow Ltd........... 396,000 1,443,157
------------
1,842,371
------------
BRAZIL -- 0.7%
Multicanal Participacoes SA*... 66,000 899,250
------------
CANADA -- 3.1%
Cinar Films, Inc. Cl-B*........ 47,500 1,543,750
Gulf Canada Resources Ltd.*.... 309,000 2,568,563
------------
4,112,313
------------
CHILE -- 2.1%
Banco de A. Edwards [ADR]...... 53,000 1,106,375
Compania Cervecerias Unidas SA
[ADR]........................ 75,100 1,647,506
------------
2,753,881
------------
DENMARK -- 1.7%
Kobenhavns Lufthavne........... 22,000 2,334,312
------------
FINLAND -- 3.4%
Amer Group Ltd.*............... 35,500 640,115
KCI Konecranes
International*............... 41,250 1,813,746
Raision Tehtaat Oy............. 29,525 2,032,712
------------
4,486,573
------------
FRANCE -- 7.4%
Altran Technologies SA......... 5,425 1,772,273
Dassault Systems SA*........... 25,700 1,823,470
Guilbert SA.................... 8,775 1,242,224
S.T. Dupont SA*................ 11,950 321,258
Salomon SA..................... 31,450 2,397,867
Skis Rossignol SA.............. 46,825 984,750
Sylea SA....................... 14,208 1,358,622
------------
9,900,464
------------
GERMANY -- 8.5%
Marschollek, Lautenschlaeger
Unq Partner AG............... 14,550 3,503,813
Porsche AG Pfd................. 1,900 2,472,909
Schmalbach Lubeca AG........... 10,785 2,424,012
Schwarz Pharma AG.............. 20,700 1,570,214
Turbon International AG........ 42,000 1,293,160
------------
11,264,108
------------
HONG KONG -- 4.2%
Asia Satellite
Telecommunications Holdings
Ltd. [ADR]................... 71,225 2,145,653
Elec & Eltek International
Holdings Ltd................. 2,500,000 734,174
First Tractor Co. Ltd.*........ 164,000 107,967
SA SA International Holdings
Ltd.*........................ 1,420,000 462,836
VTech Holdings Ltd............. 1,117,000 2,105,153
------------
5,555,783
------------
INDONESIA -- 3.4%
London Sumatra................. 140,500 445,206
Bank Tiara Asia................ 800,000 954,733
Lippo Life Insurance Co........ 670,000 792,696
Matahari Putra Prima........... 756,000 1,524,444
United Tractors................ 213,500 790,741
------------
4,507,820
------------
IRELAND -- 0.7%
Ryanair Holdings PLC [ADR]*.... 32,425 879,528
------------
ITALY -- 2.3%
Bulgari SPA.................... 340,000 1,924,000
Industrie Natuzzi SPA [ADR].... 46,000 1,178,750
------------
3,102,750
------------
JAPAN -- 6.0%
Doutor Coffee Co. Ltd. ........ 48,000 1,947,644
Fuji Soft ABC, Inc. ........... 15,000 654,450
Laox Ltd. ..................... 85,000 1,194,154
Net One System Co. Ltd. ....... 800 736,475
Nippon System Development
Ltd. ........................ 36,000 857,592
Noritsu Koki Co. Ltd. ......... 54,000 2,662,304
------------
8,052,619
------------
MALAYSIA -- 1.2%
Chemical Co. of Malaysia BHD... 10,000 27,142
Kentucky Fried Chicken Holdings
Warrants*.................... 21,333 25,189
Malaysian Assurance Alliance
BHD.......................... 277,200 1,614,565
------------
1,666,896
------------
MEXICO -- 2.5%
Grupo Iusacell [ADR]*.......... 127,325 2,339,597
Grupo Posadas SA*.............. 1,675,000 1,011,957
------------
3,351,554
------------
NETHERLANDS -- 5.6%
Baan Co. NV*................... 30,400 2,093,800
Beter Bed Holding NV........... 14,875 325,791
Hunter Douglas NV.............. 34,800 2,960,118
IHC Caland NV.................. 37,600 2,054,948
------------
7,434,657
------------
NEW ZEALAND -- 1.1%
Tranz Rail Holdings [ADR]...... 91,125 1,537,734
------------
NORWAY -- 4.1%
Kverneland AS.................. 85,000 2,308,459
Petroleum Geo Services
[ADR]*....................... 30,000 1,466,250
Tomra Systems AS............... 84,175 1,723,156
------------
5,497,865
------------
PANAMA -- 1.1%
Banco Latinoamericano de
Exportaciones SA Cl-E........ 33,000 1,423,125
------------
</TABLE>
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PHILIPPINES -- 1.2%
International Container
Terminal Services, Inc.*..... 2,060,000 $ 1,054,208
Solid Group.................... 3,526,000 574,746
------------
1,628,954
------------
SINGAPORE -- 1.0%
Creative Technology Ltd.*...... 76,000 1,292,000
------------
SPAIN -- 1.6%
Tele Pizza SA*................. 36,900 2,153,794
------------
SWEDEN -- 1.5%
Enator AB*..................... 41,500 741,378
NetCom Systems AB Cl-B*........ 90,000 1,269,936
------------
2,011,314
------------
UNITED KINGDOM -- 23.9%
Avis Europe PLC 144A*.......... 478,025 1,086,619
British Biotechnology PLC*..... 405,425 1,539,358
British-Borneo Petroleum
Syndicate PLC................ 100,200 2,365,293
BTG PLC........................ 49,000 514,896
Cairn Energy PLC*.............. 229,625 1,854,621
Capital Radio PLC.............. 184,950 1,655,492
DFS Furniture Co. PLC.......... 201,000 1,881,164
Flextech PLC*.................. 207,200 2,218,681
J.D. Wetherspoon PLC........... 126,000 2,858,915
JBA Holdings PLC............... 237,950 3,467,273
Medeva PLC [ADR]............... 103,450 1,771,581
Misys PLC...................... 92,975 2,109,584
Next PLC....................... 187,000 2,112,933
Parity PLC..................... 213,800 1,771,312
Pizza Express PLC.............. 222,200 2,327,496
Psion PLC...................... 226,000 1,469,683
Regent Inns PLC................ 186,125 883,372
------------
31,888,273
------------
TOTAL FOREIGN STOCK (COST
$104,715,916).................... 119,577,938
------------
COMMON STOCK -- 4.0%
EQUIPMENT SERVICES -- 2.6%
Rofin-Sinar Technologies,
Inc.*........................ 176,600 3,377,475
------------
TELECOMMUNICATIONS -- 1.4%
Cellular Communications
International, Inc.*......... 56,500 1,892,750
------------
TOTAL COMMON STOCK (COST
$4,227,415)...................... 5,270,225
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C>
COMMERCIAL PAPER -- 7.7%
American Express Credit
Corp.
5.56%.................... 07/02/97 $4,860 4,859,249
Associates Corp. of North
America
5.40%.................... 07/01/97 2,150 2,150,000
Merrill Lynch & Co., Inc.
6.22%.................... 07/01/97 3,309 3,309,000
------------
TOTAL COMMERCIAL PAPER (COST
$10,318,249)........................... 10,318,249
------------
TOTAL INVESTMENTS -- 101.4% (COST
$119,261,580).......................... 135,166,412
LIABILITIES IN EXCESS OF OTHER ASSETS --
(1.4%)................................. (1,931,768)
------------
NET ASSETS -- 100.0%..................... $133,234,644
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy FRF $ 320,463 5.8468 07/97 $ (1,558)
Buy GBP 537,269 0.6006 07/97 104
Buy IDR 36,646 2,427.9776 07/97 (30)
Buy JPY 947,624 113.0500 07/97 (12,817)
Buy NLG 340,326 1.9422 07/97 (3,644)
--------
$(17,945)
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.8% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 76.6%
CHEMICALS -- 6.6%
Applied Extrusion Technologies,
Inc.*.......................... 20,600 $ 242,050
Dupont, (E.I.) de Nemours &
Co. ........................... 6,400 402,400
FMC Corp.*....................... 18,000 1,429,875
Great Lakes Chemical Corp. ...... 24,300 1,272,712
Lyondell Petrochemical Co. ...... 58,300 1,271,669
Millennium Chemicals, Inc. ...... 63,000 1,433,250
Polymer Group, Inc.*............. 20,000 322,500
Witco Corp. ..................... 20,000 758,750
-----------
7,133,206
-----------
DIVERSIFIED METALS -- 4.9%
Freeport-McMoran Copper & Gold,
Inc. Cl-A...................... 31,900 933,075
Freeport-McMoran Copper & Gold,
Inc. Cl-B...................... 13,000 404,625
Nucor Corp. ..................... 28,500 1,610,250
Reynolds Metals Co. ............. 24,800 1,767,000
Steel Dynamics, Inc.*............ 26,000 650,000
-----------
5,364,950
-----------
DIVERSIFIED RESOURCES -- 2.9%
Burlington Northern Santa Fe
Corp. ......................... 13,700 1,231,287
Penn Virginia Corp. ............. 12,850 629,650
Western Water Co.*............... 28,000 371,000
Zeigler Coal Holding Co. ........ 39,600 925,650
-----------
3,157,587
-----------
ENERGY SERVICES -- 11.0%
Ashland, Inc. ................... 19,500 904,312
Camco International, Inc. ....... 10,800 591,300
Carbo Ceramics, Inc. ............ 43,750 1,192,187
Coflexip SA [ADR]................ 47,600 1,433,950
Cooper Cameron Corp.*............ 45,800 2,141,150
Energy Group PLC [ADR]........... 7,875 333,703
Halliburton Co. ................. 9,800 776,650
McDermott International, Inc. ... 76,300 2,227,006
Western Atlas, Inc.*............. 10,000 732,500
Wheelabrator Technologies,
Inc. .......................... 103,000 1,590,062
-----------
11,922,820
-----------
INTEGRATED PETROLEUM -- 15.4%
Amerada Hess Corp. .............. 25,500 1,416,844
Atlantic Richfield Co. .......... 13,000 916,500
British Petroleum Co. PLC [ADR].. 25,600 1,916,800
Ente Nazionale Idrocarburi SPA
[ADR].......................... 13,000 739,375
Mobil Corp. ..................... 49,200 3,437,850
Phillips Petroleum Co. .......... 33,000 1,443,750
Repsol SA [ADR].................. 32,600 1,383,462
Texaco, Inc. .................... 26,000 2,827,500
Total SA [ADR]................... 45,000 2,278,125
Ultramar Diamond Shamrock
Corp. ......................... 10,800 352,350
-----------
16,712,556
-----------
MISCELLANEOUS ENERGY -- 0.5%
Uranium Resources, Inc.*......... 101,000 593,375
-----------
OIL & GAS -- 6.1%
Daniel Industries................ 80,000 1,235,000
Northstar Energy Corp.*.......... 65,000 553,081
Ocean Energy, Inc.*.............. 6,500 300,625
Royal Dutch Petroleum Co. ....... 22,000 1,196,250
Santa Fe International Corp.*.... 12,000 408,000
USX-Delhi Group.................. 46,000 603,750
USX-Marathon Group............... 80,500 2,324,437
-----------
6,621,143
-----------
PAPER & FOREST PRODUCTS -- 6.3%
Georgia Pacific Corp. ........... 13,300 1,135,487
International Paper Co. ......... 22,000 1,068,375
James River Corp. of Virginia.... 22,800 843,600
Jefferson Smurfit Corp.*......... 104,600 1,673,600
Kimberly-Clark Corp. ............ 15,200 756,200
Louisiana-Pacific Corp. ......... 23,000 485,875
Willamette Industries, Inc. ..... 12,400 868,000
-----------
6,831,137
-----------
PETROLEUM EXPLORATION & PRODUCTION -- 7.5%
Barrett Resources Corp.*......... 13,100 392,181
Bouygues Offshore SA [ADR]....... 50,000 625,000
Enserch Exploration, Inc.*....... 106,000 1,159,375
Houston Exploration Co.*......... 50,500 785,906
Noble Affiliates, Inc. .......... 9,900 383,006
Rutherford-Moran Oil Corp.*...... 35,300 829,550
Triton Energy Ltd.*.............. 10,300 471,869
Union Texas Petroleum Holdings,
Inc. .......................... 98,700 2,066,531
United Meridian Corp.*........... 47,800 1,434,000
-----------
8,147,418
-----------
PRECIOUS METALS -- 12.1%
Ashanti Goldfields Co. Ltd.
[GDR].......................... 78,200 913,962
Battle Mountain Gold Co. ........ 252,000 1,433,250
Cambior, Inc. ................... 95,400 1,079,213
Canyon Resources Corp.*.......... 368,400 897,975
Dayton Mining Corp.*............. 60,000 228,750
Driefontein Consolidated Ltd.
[ADR].......................... 65,000 438,750
Durban Roodepoort Deep Ltd.
[ADR]*......................... 113,640 461,663
Gold Fields of South Africa Ltd.
[ADR].......................... 30,000 699,375
Golden Star Resources Ltd.*...... 23,000 186,875
Homestake Mining Co. ............ 80,200 1,047,613
Newmont Mining Corp. ............ 81,224 3,167,736
Pegasus Gold, Inc.*.............. 6,300 38,588
Placer Dome, Inc. ............... 105,300 1,724,288
TVX Gold, Inc.*.................. 150,900 801,656
-----------
13,119,694
-----------
REAL ESTATE -- 3.3%
Apartment Investment & Management
Co. Cl-A [REIT]................ 23,700 669,525
Beacon Properties Corp. [REIT]... 25,800 861,075
Boston Properties, Inc.
[REIT]*........................ 8,600 236,500
Security Capital Pacific Trust
[REIT] 144A.................... 30,000 686,250
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
The Rouse Co. [REIT]............. 13,200 $ 389,400
United Dominion Realty Trust
[REIT]......................... 50,000 709,375
-----------
3,552,125
-----------
TOTAL COMMON STOCK
(COST $73,842,403)................. 83,156,011
-----------
PREFERRED STOCK -- 0.3%
OIL & GAS -- 0.3%
Cross Timbers Oil Co. $1.5625
Cl-A [CVT]
(COST $225,345)................ 9,890 316,480
-----------
FOREIGN STOCK -- 14.5%
DIVERSIFIED METALS -- 4.7%
Bougainville Copper
Ltd. -- (AUD)*................. 882,542 353,657
English China Clays
PLC -- (GBP)................... 416,000 1,430,565
Lonrho PLC -- (GBP).............. 1,382,600 2,935,628
Pechiney SA -- (FRF)............. 9,100 358,444
-----------
5,078,294
-----------
PRECIOUS METALS -- 8.8%
Banro International
Capital -- (CAD)*.............. 120,000 630,024
Banro Resources Corp. Special
Warrants 144A -- (CAD)*........ 83,300 349,873
Delta Gold NL -- (AUD)........... 650,000 1,086,118
Gold Fields of South Africa
Ltd. -- (ZAR).................. 3,800 89,556
Goldfields Ltd. -- (AUD)*........ 365,000 543,664
Impala Platinum Holdings Ltd. --
(ZAR).......................... 94,900 1,060,785
Normandy Mining Ltd. -- (AUD).... 448,900 505,717
Potgietersrust Platinums Ltd. --
(ZAR).......................... 124,730 940,928
Prime Resources Group, Inc. --
(CAD).......................... 298,000 2,158,013
Rustenburg Platinum Holdings
Ltd. -- (ZAR).................. 80,000 1,462,491
Samax 144A -- (CAD)*............. 150,000 624,593
War Eagle Mining Co., Inc. --
(CAD)*......................... 118,000 47,853
War Eagle Mining Co., Inc.
Warrants -- (CAD)*............. 59,000 0
-----------
9,499,615
-----------
REAL ESTATE -- 1.0%
Security Capital U.S. Realty
[REIT] -- (NLG)*............... 30,000 447,000
Sun International -- (ZAR)....... 1,150,000 648,430
-----------
1,095,430
-----------
TOTAL FOREIGN STOCK
(COST $15,684,523)................. 15,673,339
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 7.9%
Becton Dickinson Co.
5.52%................... 07/17/97 $4,000 3,990,187
Bell Atlantic Financial
Services, Inc.
5.52%................... 07/11/97 549 548,155
Ciesco L.P.
5.55%................... 07/02/97 650 649,900
Kellogg Co.
5.50%................... 07/24/97 900 896,838
Motorola Credit Co.
5.50%................... 08/05/97 2,000 1,989,306
RTZ America, Inc.+
5.56%................... 07/07/97 500 499,537
------------
TOTAL COMMERCIAL PAPER
(COST $8,573,923)..................... 8,573,923
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash Fund
(COST $1,120,734).............. 1,120,734 1,120,734
------------
TOTAL INVESTMENTS -- 100.3%
(COST $99,446,928)............... 108,840,487
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.3%)........... (283,536)
------------
NET ASSETS -- 100.0%............... $108,556,951
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stocks.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 1.5% of net assets.
+ Security is restricted as to resale and may not be resold except to qualified
institutional buyers. At the end of the period, these securities amounted to
0.5% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C>
CORPORATE OBLIGATIONS -- 10.4%
FINANCIAL SERVICES -- 1.8%
Salomon, Inc. Sr. Notes
7.00%................... 01/20/98 $ 2,650 $ 2,665,476
9.375%.................. 04/15/98 2,000 2,050,860
------------
4,716,336
------------
INDUSTRIAL PRODUCTS -- 3.3%
Chesapeake Energy Corp.
Sr. Notes
12.00%.................. 03/01/01 8,000 8,520,000
------------
UTILITIES -- 5.3%
CMS Energy Corp. First
Mtge.
9.50%................... 10/01/97 1,000 1,021,250
Long Island Lighting Co.
Notes
8.50%................... 05/15/06 5,000 5,212,500
9.75%................... 05/01/21 1,000 1,013,440
9.625%.................. 07/01/24 5,000 5,162,500
Texas Utilities Co. First
Mtge. [VR]
6.25781%................ 05/01/99 1,500 1,502,158
------------
13,911,848
------------
TOTAL CORPORATE OBLIGATIONS
(COST $27,255,200).................... 27,148,184
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 58.0%
FEDERAL HOME LOAN MORTGAGE CORP. -- 7.5%
5.51%................... 07/03/97 3,300 3,298,992
5.95%................... 06/19/98 10,000 9,995,000
8.75%................... 10/01/01 2,180 2,229,474
5.00%................... 02/15/11 4,109 4,094,607
------------
19,618,073
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 32.7%
4.90%................... 12/25/12 4,636 4,608,376
6.206% [VR]............. 03/01/17 2,410 2,388,870
7.50%................... 01/25/22 4,000 4,048,560
7.50%................... 10/01/22 24,480 24,548,758
8.00%................... 11/25/23 4,553 4,659,097
7.50%................... 05/01/24 42,898 43,045,324
7.445% [VR]............. 01/01/25 584 597,464
6.813% [VR]............. 05/01/25 1,539 1,560,936
------------
85,457,385
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 14.0%
7.125% [VR]............. 07/20/17 312 320,522
7.125% [VR]............. 08/20/17 402 413,033
7.125% [VR]............. 09/20/17 342 351,665
7.00%................... 01/15/24 39 37,862
7.00%................... 02/15/24 55 53,802
7.00%................... 04/15/24 338 331,774
7.125% [VR]............. 05/20/24 3,364 3,454,714
7.00%................... 06/15/24 54 52,872
7.125% [VR]............. 07/20/24 410 421,314
7.00%................... 07/15/25 419 411,493
7.00%................... 08/15/25 467 458,528
7.00%................... 08/15/25 427 419,654
7.00%................... 08/15/25 490 481,701
7.00%................... 08/15/25 466 458,122
6.50% [TBA]............. 09/18/26 2,000 1,906,880
6.00%................... 11/20/26 26,506 26,853,853
------------
36,427,789
------------
STUDENT LOAN MARKETING ASSOCIATION -- 3.8%
6.00%................... 06/30/98 10,000 10,007,599
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $152,394,208)................... 151,510,846
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 4.4%
Merrill Lynch Mtge.
Investors, Inc. Cl-B
[VR]
7.354%.................. 06/15/21 1,249 1,260,165
Resolution Trust Corp.
[VR]
7.56251%................ 07/25/28 10,000 10,126,995
------------
(COST $11,422,432)................ 11,387,160
------------
U.S. TREASURY OBLIGATIONS -- 0.0%
U.S. Treasury Bills
5.08% #................. 07/03/97 10 9,997
5.12% #................. 08/07/97 20 19,899
------------
(COST $29,896).................... 29,896
------------
SOVEREIGN ISSUES -- 2.6%
ARGENTINA
Republic of Argentina
Bote 10 [FRN]
5.625%.................. 04/01/00 2,187 2,133,511
Republic of Argentina
[FRB,BRB]
6.75%................... 03/31/05 4,850 4,559,000
------------
(COST $5,961,380)................. 6,692,511
------------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
-------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.6%
NEW ZEALAND
New Zealand Government
10.00%
(COST $6,959,200)....... 03/15/02 8,900 6,812,569
------------
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 21.6%
American Express Credit
Corp.
5.55%................... 07/23/97 $ 3,600 3,587,790
Central Illinois Public
Service Co.
6.25%................... 07/01/97 8,000 8,000,000
</TABLE>
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C>
Ford Motor Credit Co.
5.62%................... 07/07/97 $ 1,000 $ 999,063
General Electric Capital
Corp.
5.57%................... 07/01/97 12,000 12,000,000
General Motors Acceptance
Corp.
5.61%................... 07/01/97 3,400 3,400,000
KFW International
Financial Corp.
5.52%................... 07/01/97 8,400 8,400,000
5.52%................... 07/03/97 1,800 1,799,448
Kingdom of Sweden
5.56%................... 07/11/97 2,800 2,795,590
National Rural Utility Co.
5.56%................... 08/04/97 1,800 1,790,356
5.55%................... 09/04/97 9,800 9,700,285
New Center Asset Trust Co.
5.58%................... 08/06/97 1,200 1,193,192
5.56%................... 09/10/97 700 692,188
Shell Oil Co.
5.49%................... 07/07/97 600 599,452
Western Australian
Treasury
5.55%................... 09/22/97 1,600 1,579,280
------------
TOTAL COMMERCIAL PAPER
(COST $56,538,927).................... 56,536,644
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.2%
Temporary Investment Cash Fund..... 285,549 284,549
Temporary Investment Fund.......... 285,549 284,549
------------
(COST $569,098).................... 569,098
------------
TOTAL INVESTMENTS -- 99.8%
(COST $261,130,341).................. 260,686,908
OTHER ASSETS LESS
LIABILITIES -- 0.2%.................. 506,682
------------
NET ASSETS -- 100.0%................... $261,193,590
------------
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED
COVERED EXCHANGE EXPIRATION UNREALIZED
TYPE BY CONTRACT RATE MONTH APPRECIATION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell NZD $6,882,752 1.4535 09/97 $ 100,379
=========
</TABLE>
# Securities with an aggregate market value of $29,896 have been segregated with
the custodian to cover margin requirements for the following open futures
contracts at June 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
- ----------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 10 Year
Note 09/97 $2,000 $ 23,750
========
</TABLE>
Interest rate swap agreement outstanding at June 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
- ----------------------------------------------------------
<S> <C> <C> <C>
Receive variable rate
payments on the three-
month LIBOR-BBA
floating rate and pay
fixed rate payments on
the then current U.S.
Treasury 10 Year Note
with a spread of:
36.50 09/97 $7,000 $6,300
======
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 98.7%
AEROSPACE -- 1.3%
BE Aerospace, Inc.*................ 56,100 $ 1,774,162
------------
AIRLINES -- 1.6%
Delta Air Lines, Inc. ............. 16,000 1,312,000
UAL Corp.*......................... 13,500 966,094
------------
2,278,094
------------
COMPUTER HARDWARE -- 9.4%
3Com Corp.*........................ 96,600 4,347,000
Compaq Computer Corp.*............. 45,728 4,538,504
Dell Computer Corp.*............... 36,500 4,286,469
------------
13,171,973
------------
COMPUTER SERVICES & SOFTWARE -- 19.6%
BMC Software, Inc.*................ 58,100 3,217,287
Cisco Systems, Inc.*............... 39,200 2,631,300
Computer Sciences Corp.*........... 24,500 1,767,062
Compuware Corp.*................... 54,000 2,578,500
Electronic Arts, Inc.*............. 70,200 2,360,475
HBO & Co. ......................... 55,700 3,836,337
Microsoft Corp.*................... 12,800 1,617,600
Oracle Corp.*...................... 77,000 3,878,875
Parametric Technology Corp.*....... 71,200 3,030,450
Synopsys, Inc.*.................... 69,100 2,539,425
------------
27,457,311
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 11.5%
Altera Corp.*...................... 59,200 2,989,600
Applied Materials, Inc.*........... 72,100 5,105,581
Inacom Corp.*...................... 59,200 1,842,600
LSI Logic Corp.*................... 39,300 1,257,600
Teradyne, Inc.*.................... 60,000 2,355,000
Texas Instruments, Inc............. 31,000 2,605,938
------------
16,156,319
------------
FINANCIAL-BANK & TRUST -- 7.1%
BankBoston Corp. .................. 20,000 1,441,250
Chase Manhattan Corp. ............. 19,800 1,921,838
First Chicago NBD Corp. ........... 28,000 1,694,000
MBNA Corp. ........................ 69,600 2,549,100
NationsBank Corp. ................. 36,000 2,322,000
------------
9,928,188
------------
FINANCIAL SERVICES -- 7.8%
Charles Schwab Corp. .............. 20,930 851,589
Franklin Resources, Inc. .......... 26,700 1,937,419
Household International, Inc. ..... 24,300 2,853,731
Merrill Lynch & Co., Inc. ......... 62,576 3,731,094
State Street Boston Corp. ......... 34,000 1,572,500
------------
10,946,333
------------
HEALTHCARE SERVICES -- 7.0%
Columbia-HCA Healthcare Corp. ..... 54,800 2,154,325
Oxford Health Plans, Inc.*......... 49,000 3,515,750
United Healthcare Corp. ........... 79,300 4,123,600
------------
9,793,675
------------
HOTELS & MOTELS -- 1.0%
Prime Hospitality Corp.*........... 73,000 1,441,750
------------
INSURANCE -- 1.1%
Aetna, Inc. ....................... 15,700 1,607,288
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.9%
McKesson Corp. .................... 16,000 1,240,000
------------
PHARMACEUTICALS -- 8.9%
Cardinal Health, Inc. ............. 18,000 1,030,500
Lilly, (Eli) & Co. ................ 30,700 3,355,894
Merck & Co., Inc. ................. 45,800 4,740,300
Pfizer, Inc. ...................... 28,400 3,393,800
------------
12,520,494
------------
RETAIL & MERCHANDISING -- 5.6%
CompUSA, Inc.*..................... 132,152 2,841,268
Ross Stores, Inc................... 63,400 2,072,388
Walgreen Co. ...................... 25,000 1,340,625
Williams-Sonoma, Inc.*............. 37,500 1,603,125
------------
7,857,406
------------
SEMI-CONDUCTORS -- 12.4%
Adaptec, Inc.*..................... 39,000 1,355,250
Intel Corp. ....................... 25,797 3,658,337
Micron Technology, Inc. ........... 91,990 3,673,851
Motorola, Inc. .................... 54,700 4,157,200
National Semiconductor Corp.*...... 25,000 765,625
Xilinx, Inc.*...................... 77,700 3,812,156
------------
17,422,419
------------
TELECOMMUNICATIONS -- 3.2%
Ericsson, (L.M.) Telephone Co.
[ADR]............................ 25,000 984,375
Northern Telecom Ltd............... 39,400 3,585,400
------------
4,569,775
------------
UTILITIES -- 0.3%
Worldcom, Inc.*.................... 15,000 480,000
------------
TOTAL COMMON STOCK (COST
$122,526,461)........................ 138,645,187
------------
</TABLE>
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.3%
Temporary Investment Cash Fund..... 909,906 $ 909,906
Temporary Investment Fund.......... 909,906 909,906
------------
(COST $1,819,812).................. 1,819,812
------------
TOTAL INVESTMENTS -- 100.0% (COST
$124,346,273)........................ 140,464,999
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.0%)............... (46,485)
------------
NET ASSETS -- 100.0%................... $140,418,514
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCK -- 80.1%
ARGENTINA -- 2.4%
Banco Frances del Rio de la
Plata SA [ADR]............... 2,450 $ 79,625
Nortel Inversora [ADR]......... 77,225 2,094,728
Telecom Argentina Stet SA Cl-B
[ADR]........................ 5,775 303,188
Telefonica de Argentina SA Cl-B
[ADR]*....................... 6,400 221,600
YPF SA [ADR]................... 10,675 328,256
------------
3,027,397
------------
AUSTRALIA -- 0.4%
Colonial Ltd. 144A*............ 3,473 8,876
CI Technologies Group Ltd.
144A*........................ 441,535 500,758
------------
509,634
------------
AUSTRIA -- 0.2%
Wolford AG..................... 2,742 265,975
------------
BRAZIL -- 1.5%
Companhia Energetica de Minas
Geras [ADR].................. 5,650 284,455
Ericsson Telecomunicacoes SA... 10,000 601,351
Telebras SA [ADR].............. 3,275 496,981
Unibanco Holdings SA Sponsored
[GDR]*....................... 12,775 474,272
------------
1,857,059
------------
CHILE -- 0.4%
Quinenco SA [ADR]*............. 24,150 446,775
------------
DENMARK -- 1.2%
Amtssparekassen Fyn............ 1,880 121,204
BG Bank AS..................... 2,064 114,102
FIH Cl-B....................... 358 9,114
Jyske Bank..................... 1,297 111,751
SAS Danmark AS................. 14,779 172,530
Sophus Berendsen AS............ 5,520 798,229
Spar Nord Holding.............. 119 5,557
Sydbank SA..................... 3,002 137,016
Unidanmark AS Cl-A............. 1,269 71,300
------------
1,540,803
------------
FINLAND -- 2.4%
Amer Group Ltd.*............... 17,377 313,332
Hartwall Oy AB................. 5,421 314,153
Metra Oy Cl-B.................. 3,682 111,126
Nokia AB Cl-A.................. 12,931 967,319
Nokia Corp. Cl-A [ADR]*........ 3,875 285,781
Orion-Yhtyma Oy Cl-B........... 15,096 572,934
Pohjola Insurance Co. ......... 1,697 50,399
Raision Tehtaat Oy............. 4,887 336,456
Sampo Insurance Co. Ltd. ...... 583 56,778
------------
3,008,278
------------
FRANCE -- 7.4%
Alcatel Alsthom................ 2,414 302,305
Axime*......................... 4,156 491,462
Banque Nationale de Paris...... 15,850 653,180
Cap Gemini SA.................. 20,297 1,070,590
Carrefour Supermarche SA....... 464 336,955
Compagnie Bancaire SA.......... 281 35,859
Compagnie de Suez.............. 7,760 18,617
Dexia France................... 10,155 988,338
Dassault Systemes SA [ADR]*.... 875 62,344
Grand Optical-Photoservice..... 3,123 473,987
Lagardere S.C.A. .............. 8,893 258,292
Le Carbone Lorraine 144A....... 333 81,023
Michelin C.G.D.E. Cl-B......... 14,532 872,583
Rhone-Poulenc.................. 48,782 1,992,051
Sligos SA*..................... 481 66,292
Societe Generale............... 452 50,451
Societe Nationale Elf Aquitaine
SA........................... 14,286 1,541,095
------------
9,295,424
------------
GERMANY -- 8.7%
Adidas AG...................... 4,214 471,148
Altana AG...................... 666 714,076
BASF AG*....................... 26,292 970,065
Bayerische Motoren Werke AG.... 315 259,716
Deutsche Bank AG............... 33,680 1,977,428
Deutsche Lufthansa AG.......... 33,533 645,050
Deutsche Pfandbrief &
Hypothekenbank AG............ 20,389 1,171,950
Fresenius AG Pfd. ............. 1,982 450,015
Fresenius Medical Care AG
[ADR]*....................... 24,725 720,116
Pfeiffer Vacuum Technology AG
[ADR]*....................... 6,675 194,409
Siemens AG..................... 2,485 148,821
Tarkett AG..................... 12,072 311,819
Veba AG........................ 9,773 551,941
Volkswagen AG.................. 3,116 2,361,878
------------
10,948,432
------------
GREECE -- 0.1%
Hellenic Telecommunication
Organization Co. SA 144A..... 6,846 154,679
Hellenic Telecommunication
Organization Co. SA Rights
144A*........................ 6,846 0
------------
154,679
------------
HONG KONG -- 1.7%
First Pacific Co. Ltd. ........ 658,000 840,889
Hutchison Whampoa Ltd. ........ 41,000 354,598
Jiangsu Expressway Co. Ltd.
144A*........................ 1,550,000 550,227
Pacific Ports Co. 144A*........ 1,552,000 310,528
Shenzhen Expressway Co.
144A*........................ 114,000 31,271
------------
2,087,513
------------
HUNGARY -- 1.0%
Gedeon Richter [ADR] 144A*..... 11,000 1,006,500
Mol Magyar Olaj Es Gazipari
[GDR] 144A................... 11,059 240,533
------------
1,247,033
------------
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
INDONESIA -- 0.8%
Putra Surya Multidana*......... 607,000 $ 967,953
------------
IRELAND -- 1.6%
Elan Corp. PLC [ADR]*.......... 4,575 207,019
Ryanair Holdings PLC SP
[ADR]*....................... 63,275 1,716,334
------------
1,923,353
------------
ISRAEL -- 0.1%
Teva Pharmaceutical Industries
Ltd. [ADR]................... 2,375 153,781
------------
ITALY -- 2.0%
Credito Italiano SPA........... 319,312 584,153
Gewiss SPA..................... 46,128 793,673
Pirelli SPA.................... 171,106 423,739
Stet Societa Finanziaria
Telefonica SPA*.............. 103,609 603,370
Telecom Italia Mobile SPA...... 3,477 11,249
Telecom Italia SPA............. 9,870 31,671
------------
2,447,855
------------
JAPAN -- 9.0%
Canon, Inc. ................... 20,000 544,503
Denso Corp. ................... 26,000 621,640
Eisai Co. Ltd. ................ 5,000 94,677
Fujitsu Ltd. .................. 29,000 402,356
Hitachi Ltd. .................. 86,000 960,558
Isetan Co. .................... 2,000 24,782
Mitsubishi Corp. .............. 6,000 74,869
Mitsubishi Estate Co. Ltd. .... 47,000 680,803
Mitsubishi Motors Corp. ....... 46,000 329,145
Mitsubishi Trust & Banking
Corp. ....................... 10,000 157,941
Mitsui & Co. Ltd. ............. 18,000 172,775
Mitsui Fudosan Co. Ltd. ....... 25,000 344,677
Mitsui Trust and Banking Co.
Ltd. ........................ 30,000 226,440
Nippon Telegraph & Telephone
Corp. ....................... 1,590 1,526,178
Nomura Securities Co. Ltd. .... 36,000 496,335
NTT Data Communications Systems
Co. ......................... 270 1,043,717
Ryohin Keikaku Co. Ltd. ....... 2,000 157,766
Shiseido Co. Ltd. ............. 22,000 362,827
Sony Corp. .................... 8,000 697,382
Sumitomo Trust & Banking....... 31,000 332,723
Takeda Chemical Industries..... 30,000 842,932
Tokio Marine & Fire Insurance
Co. ......................... 30,000 392,670
Torii Pharmaceutical Co.
Ltd. ........................ 34,000 798,080
Yamaha Motor Co. Ltd. ......... 1,000 9,948
------------
11,295,724
------------
MEXICO -- 0.9%
Fomento Economico Mexicano SA
Cl-B......................... 58,200 346,490
Grupo Casa Autrey SA de C.V.
[ADR]........................ 14,075 285,898
Grupo Televisia SA [GDR]*...... 17,250 523,969
------------
1,156,357
------------
NETHERLANDS -- 8.9%
Ahrend Groep NV................ 14,982 1,011,111
Akzo Nobel NV.................. 5,284 723,983
Brunel International NV
144A*........................ 52,493 1,165,739
Getronics NV................... 9,188 296,704
Gucci Group NV................. 4,950 318,656
ING Groep NV................... 20,866 961,836
Koninklijke Nedlloyd Groep
NV........................... 5,194 150,002
Nutricia Verenigde Bedrijven
NV........................... 1,719 271,426
Philips Electronics NV......... 43,383 3,106,835
Philips Electronics NV [ADR]... 34,659 2,491,116
Polygram NV.................... 784 41,131
Simac Techniek NV.............. 55 4,706
Vedior NV 144A*................ 7,366 194,721
Wolters Kluwer NV.............. 3,560 433,372
------------
11,171,338
------------
NORWAY -- 0.9%
Ekornes ASA.................... 24,877 210,494
Merkantildata ASA.............. 13,549 268,118
SAS Norge ASA Cl-B............. 31,120 327,025
Tomra Systems ASA.............. 17,824 364,877
------------
1,170,514
------------
PERU -- 0.5%
Millicom International Cellular
SA*.......................... 3,600 171,900
Telefonica del Peru SA Cl-B
[ADR]........................ 17,000 445,188
------------
617,088
------------
PHILIPPINES -- 0.1%
Equitable Banking Corp. ....... 27,810 100,677
Manila Electric Co. ........... 4,690 23,112
------------
123,789
------------
PORTUGAL -- 0.2%
Electricidade de Portugal SA... 11,183 205,210
Portugal Telecommunications SA
[ADR]........................ 1,900 76,238
------------
281,448
------------
RUSSIA -- 0.4%
Lukoil Oil Co. [ADR]........... 5,050 398,526
Mosenergo [ADR] 144A........... 1,650 69,300
------------
467,826
------------
SOUTH KOREA -- 0.0%
SK Telecom Co. Ltd. [ADR]...... 3,450 34,716
------------
SPAIN -- 0.9%
Adolfo Dominguez SA*........... 7,883 310,312
Azkoyen SA..................... 246 30,554
Azkoyen RFD.................... 61 7,576
Corp. Financiera Reunida SA*... 15,082 63,464
Cortefiel SA................... 376 16,409
Cubiertas y Mzov SA............ 1,135 127,874
Sol Melia SA................... 1,601 65,739
Tele Pizza SA*................. 9,277 541,484
------------
1,163,412
------------
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SWEDEN -- 7.1%
Assa Abloy AB Cl-B............. 37,714 $ 771,387
Astra AB Cl-A.................. 27,211 507,253
Autoliv AB..................... 5,214 200,803
Castellum AB 144A*............. 23,800 178,697
Electrolux AB Cl-B............. 19,011 1,373,257
Enator AB*..................... 14,500 259,036
Ericsson, (L.M.) Telephone Co.
[ADR]........................ 6,950 273,656
Ericsson, (L.M.) Telephone Co.
Cl-B......................... 11,798 465,059
Hemkopskedjan AB 144A*......... 132,599 1,364,646
Incentive AB................... 38 3,478
Medical Invest Svenska AB*..... 10,572 432,471
NK Cityfastigheter AB 144A*.... 62,675 446,241
Pricer AB*..................... 20,176 694,751
Prosolvia AB Cl-B 144A*........ 9,200 141,725
Sardus AB 144A*................ 40,741 350,724
SAS Sverige AB................. 30,666 373,162
Securitas AB................... 27,850 785,949
Tornet Fastighets AB........... 26,729 314,874
------------
8,937,169
------------
SWITZERLAND -- 7.0%
Ares-Serono Group.............. 726 1,051,417
Baloise Holding Ltd.*.......... 72 171,569
Clariant AG.................... 393 254,304
Credit Suisse Group............ 3,682 472,730
Hero AG 144A................... 1,491 832,077
Kuoni Reisen AG................ 387 1,324,979
Novartis AG.................... 598 955,719
Roche Holding AG............... 137 1,238,760
Selectra Group 144A*........... 1,305 198,377
Sulzer AG...................... 615 526,397
Sulzer Rights*................. 615 0
Sairgroup...................... 24 26,886
TAG Heuer International SA..... 339 50,836
Union Bank of Switzerland
Cl-B......................... 537 614,072
Zurich
Versicherungsgesellschaft.... 2,660 1,058,244
------------
8,776,367
------------
UNITED KINGDOM -- 12.3%
Barclays PLC................... 23,891 474,247
Biocompatibles International
PLC*......................... 3,423 74,190
BOC Group PLC.................. 35,145 611,609
BTG PLC........................ 54,227 569,822
Capita Group PLC............... 254,217 996,988
Compass Group PLC.............. 27,895 313,098
Compass Group PLC 144A......... 9,626 108,044
Doncasters PLC [ADR]........... 4,500 104,063
Electrocomponents PLC.......... 32,567 243,240
Freepages Group PLC*........... 405,267 246,336
Glaxo Wellcome PLC............. 27,505 567,973
Harvey Nichols PLC 144A........ 7,067 33,188
Hays PLC....................... 67,126 638,295
J.D. Wetherspoon PLC........... 498 11,300
JBA Holdings PLC............... 39,281 572,380
Johnson Matthey PLC............ 5,774 55,674
Lloyds TSB Group PLC........... 133,233 1,366,743
Logica PLC..................... 72,664 837,979
London Clubs International
PLC.......................... 51,915 327,662
Misys PLC...................... 12,897 292,630
Powerscreen International
PLC.......................... 53,882 587,283
Provident Financial PLC........ 29,747 275,926
Rentokil Initial PLC........... 566,971 1,992,221
Siebe PLC...................... 167,812 2,842,092
Smithkline Beecham PLC [ADR]... 500 45,813
Stagecoach Holdings PLC........ 35,434 374,114
TI Group PLC................... 50,405 439,425
Victrex PLC.................... 124,529 354,618
------------
15,356,953
------------
TOTAL FOREIGN STOCK
(COST $93,077,240)............... 100,434,645
------------
COMMON STOCK -- 3.0%
BROADCASTING -- 0.1%
Canwest Global Communications
Corp. ....................... 2,950 43,697
Central European Media
Enterprises Ltd.*............ 1,200 31,200
------------
74,897
------------
CAPITAL GOODS -- 0.6%
Amway Asia Pacific Ltd. ....... 16,350 713,269
------------
CHEMICALS -- 0.1%
Dupont, (E.I.) de Nemours &
Co. ......................... 400 25,150
Monsanto Co. .................. 3,250 139,953
------------
165,103
------------
CONSUMER PRODUCTS &
SERVICES -- 0.9%
Movado Group, Inc. ............ 44,225 1,127,738
------------
EQUIPMENT SERVICES -- 0.2%
Rofin-Sinar Technologies,
Inc.*........................ 12,925 247,191
------------
FINANCIAL SERVICES -- 0.2%
Romanian Investment Fund
144A**....................... 185 195,175
------------
HEALTHCARE SERVICES -- 0.1%
United Healthcare Corp. ....... 1,725 89,700
------------
MEDICAL SUPPLIES &
EQUIPMENT -- 0.0%
Boston Scientific Corp. ....... 400 24,575
------------
PERSONAL SERVICES -- 0.0%
Nu Skin Asia Pacific, Inc.*.... 650 17,225
------------
PHARMACEUTICALS -- 0.7%
Bristol-Meyers Squibb Co. ..... 2,600 210,600
Rhone-Poulenc Rorer, Inc. ..... 7,325 665,654
------------
876,254
------------
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
TELECOMMUNICATIONS -- 0.1%
MAS Technology Ltd. [ADR]*..... 12,625 $ 187,797
------------
TOTAL COMMON STOCK
(COST $3,386,366)................ 3,718,924
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 14.3%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 1.6%
5.50%................... 07/02/97 $ 2,000 1,999,694
----------
FEDERAL HOME LOAN MORTGAGE
CORP. -- 12.7%
5.75%................... 07/01/97 3,000 3,000,000
5.36%................... 07/07/97 13,000 12,988,387
----------
15,988,387
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $17,988,081).................. 17,988,081
----------
COMMERCIAL PAPER -- 6.6%
General Electric Capital
Corp.
5.50%................. 07/03/97 5,000 4,998,472
Prudential Funding Corp.
6.00%................. 07/01/97 3,300 3,300,000
----------
(COST $8,298,472)............... 8,298,472
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
------------
<S> <C> <C>
FOREIGN BONDS -- 0.6%
JAPAN
STB Cayman Capital Ltd.
144A
0.50%................ 10/01/07 75,000 736,256
------------
(COST $650,420)
TOTAL INVESTMENTS -- 104.6%
(COST $123,400,579)............... 131,176,378
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (4.6%)............ (5,819,848)
------------
NET ASSETS -- 100.0%................ $125,356,530
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy AUD $ 497,290 1.3318 07/97 $ 3,484
Buy DEM 293,829 1.7340 07/97 (1,669)
Buy DKK 66,120 6.5715 07/97 (669)
Buy ESP 29,167 145.8047 07/97 (304)
Buy FRF 1,916,637 5.8244 07/97 (13,046)
Buy GBP 1,494,790 0.6007 07/97 550
Buy HKD 151,821 7.7482 07/97 21
Buy ITL 223,991 1,684.7615 07/97 (2,018)
Buy JPY 354,249 112.9149 11/97 1,437
Buy MXP 22,369 7.9360 07/97 (25)
Buy NLG 14,510 1.9418 07/97 (159)
Buy NOK 256,283 7.2659 07/97 (2,151)
Buy SEK 108,763 7.6844 07/97 (570)
--------
$(15,119)
========
Sell CHF $ 282,067 1.3949 07/97 $ 12,096
Sell CHF 636,406 1.4142 08/97 16,928
Sell CHF 380,518 1.4454 09/97 584
Sell CHF 1,102,860 1.3601 11/97 57,345
Sell DEM 262,726 1.6177 07/97 21,636
Sell DEM 191,637 1.6568 08/97 8,985
Sell DEM 2,112,634 1.6567 11/97 83,683
Sell FRF 317,224 5.5166 08/97 18,695
Sell FRF 1,517,775 5.6003 11/97 57,022
Sell GBP 382,593 0.6142 07/97 (8,465)
Sell GBP 976,140 0.6147 08/97 (21,698)
Sell ITL 3,857 1,689.1092 07/97 25
Sell JPY 175,085 114.2302 07/97 (40)
Sell JPY 769,809 120.8092 08/97 (47,203)
Sell JPY 1,792,716 112.6782 11/97 (5,520)
Sell NLG 458,936 1.7976 07/97 38,026
Sell NLG 617,056 1.8637 08/97 29,418
Sell NLG 805,283 1.8627 11/97 33,070
--------
$294,587
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Closed-end funds.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 7.1% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
COMMON STOCK -- 97.1%
AEROSPACE -- 3.4%
General Motors Corp. Cl-H......... 8,570 $ 494,917
Northrop Grumman Corp. ........... 6,460 567,269
Rockwell International Corp. ..... 7,443 439,137
United Technologies Corp. ........ 4,686 388,938
------------
1,890,261
------------
AIRLINES -- 0.8%
Delta Air Lines, Inc. ............ 5,508 451,656
------------
AUTOMOBILE MANUFACTURERS -- 2.1%
Ford Motor Co. ................... 13,988 528,047
General Motors Corp. ............. 11,787 656,389
------------
1,184,436
------------
AUTOMOTIVE PARTS -- 4.4%
Dana Corp......................... 12,011 456,418
Eaton Corp........................ 4,843 422,854
Goodyear Tire & Rubber Co. ....... 7,790 493,204
Lear Corp.*....................... 8,414 373,371
TRW, Inc. ........................ 13,318 756,629
------------
2,502,476
------------
BEVERAGES -- 0.7%
Anheuser-Busch Companies, Inc. ... 8,907 373,537
------------
BUILDING MATERIALS -- 3.1%
Armstrong World Industries,
Inc. ........................... 7,248 531,822
Lowe's Companies, Inc. ........... 15,224 565,191
Masco Corp. ...................... 15,279 637,898
------------
1,734,911
------------
CHEMICALS -- 4.0%
Dupont, (E.I.) de Nemours &
Co. ............................ 9,843 618,879
Eastman Chemical Co. ............. 8,888 564,388
Hercules, Inc. ................... 7,917 379,026
Witco Corp. ...................... 18,323 695,129
------------
2,257,422
------------
COMPUTER HARDWARE -- 3.9%
Hewlett-Packard Co. .............. 11,826 662,256
Intel Corp. ...................... 2,529 358,091
International Business Machines
Corp. .......................... 13,345 1,203,552
------------
2,223,899
------------
COMPUTER SERVICES & SOFTWARE -- 1.8%
Computer Associates International,
Inc. ........................... 10,472 583,159
NCR Corp.*........................ 14,570 433,457
------------
1,016,616
------------
CONGLOMERATES -- 4.1%
Minnesota Mining & Manufacturing
Co. ............................ 11,023 1,124,346
Philip Morris Companies, Inc. .... 16,364 726,152
Tenneco, Inc. .................... 9,913 447,944
------------
2,298,442
------------
CONSUMER PRODUCTS & SERVICES -- 5.6%
Colgate-Palmolive Co. ............ 8,495 554,299
Eastman Kodak Co. ................ 8,370 642,397
Fortune Brands, Inc. ............. 12,453 464,653
Tupperware Corp. ................. 16,633 607,104
Whirlpool Corp. .................. 8,450 461,053
Whitman Corp. .................... 17,500 420,000
------------
3,149,506
------------
CONTAINERS & PACKAGING -- 2.7%
Crown Cork & Seal Co., Inc. ...... 9,360 500,175
Gallaher Group PLC [ADR]*......... 11,018 203,144
Owens-Illinois, Inc.*............. 18,825 583,575
Temple-Inland, Inc................ 4,758 256,932
------------
1,543,826
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.2%
General Signal Corp. ............. 8,401 366,494
Polaroid Corp. ................... 18,429 1,022,809
Texas Instruments, Inc. .......... 4,859 408,460
------------
1,797,763
------------
ENVIRONMENTAL SERVICES -- 0.4%
Waste Management, Inc. ........... 6,819 219,060
------------
FINANCIAL-BANK & TRUST -- 11.1%
Banc One Corp. ................... 13,716 664,369
Bankers Trust New York Corp. ..... 6,190 538,530
First Tennessee National Corp. ... 2,851 136,848
Fleet Financial Group, Inc. ...... 12,195 771,334
Huntington Bancshares, Inc. ...... 4,697 137,974
Keycorp........................... 8,870 495,611
Mellon Bank Corp. ................ 6,937 313,032
Mercantile Bancorporation,
Inc. ........................... 3,818 231,943
Morgan, (J.P.) & Co., Inc. ....... 9,743 1,016,926
Old Kent Financial Corp. ......... 2,778 149,988
PNC Bank Corp. ................... 24,280 1,010,655
Regions Financial Corp. .......... 6,286 198,795
Summit Bancorp.................... 5,617 281,552
Union Planters Corp. ............. 5,571 288,996
------------
6,236,553
------------
FINANCIAL SERVICES -- 1.6%
Ahmanson, (H.F.) & Co. ........... 4,383 188,469
Beneficial Corp. ................. 4,379 311,183
Salomon, Inc. .................... 7,227 402,002
------------
901,654
------------
FOOD -- 2.7%
General Mills, Inc. .............. 8,186 533,113
RJR Nabisco Holdings Corp. ....... 14,030 462,990
Sara Lee Corp. ................... 12,693 528,346
------------
1,524,449
------------
INSURANCE -- 3.2%
American General Corp. ........... 12,660 604,515
AON Corp. ........................ 13,204 683,307
CIGNA Corp. ...................... 1,252 222,230
USF&G Corp. ...................... 11,859 284,616
------------
1,794,668
------------
</TABLE>
<PAGE>
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
MACHINERY & EQUIPMENT -- 2.1%
Cooper Industries, Inc. .......... 10,890 $ 541,777
New Holland NV.................... 22,748 622,726
------------
1,164,503
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.6%
Baxter International, Inc. ....... 17,792 929,632
------------
METALS & MINING -- 1.0%
Freeport-McMoran Copper & Gold,
Inc. Cl-A....................... 19,063 557,593
------------
OFFICE EQUIPMENT -- 2.1%
Xerox Corp. ...................... 14,977 1,181,311
------------
OIL & GAS -- 9.7%
Amoco Corp. ...................... 7,963 692,283
Atlantic Richfield Co. ........... 4,031 284,186
British Petroleum Co. PLC [ADR]... 8,296 621,163
Coastal Corp. .................... 7,641 406,406
Ente Nazionale Idrocarbure SPA
[ADR]........................... 2,000 113,750
Exxon Corp. ...................... 9,441 580,622
Mobil Corp. ...................... 9,124 637,540
Occidental Petroleum Corp. ....... 21,148 530,022
Societe Nationale Elf Aquitaine SA
[ADR]........................... 14,275 777,095
Total SA [ADR].................... 12,569 636,306
YPF SA [ADR]...................... 6,366 195,755
------------
5,475,128
------------
PAPER & FOREST PRODUCTS -- 3.3%
Kimberly-Clark Corp. ............. 20,822 1,035,895
Weyerhaeuser Co. ................. 15,328 797,056
------------
1,832,951
------------
PHARMACEUTICALS -- 3.9%
American Home Products Corp. ..... 8,514 651,321
Bristol-Meyers Squibb Co. ........ 7,607 616,167
Pharmacia & Upjohn, Inc. ......... 27,162 943,880
------------
2,211,368
------------
PRINTING & PUBLISHING -- 1.1%
McGraw-Hill Co., Inc. ............ 10,235 601,946
------------
RAILROADS -- 2.5%
Canadian National Railway Co. .... 6,708 293,475
Norfolk Southern Corp. ........... 5,544 558,558
Union Pacific Corp. .............. 7,775 548,138
------------
1,400,171
------------
RETAIL & MERCHANDISING -- 2.0%
Kmart Corp.*...................... 50,827 622,631
Sears Roebuck & Co. .............. 9,968 535,780
------------
1,158,411
------------
SEMI-CONDUCTORS -- 1.1%
Motorola, Inc. ................... 7,943 603,668
------------
TELECOMMUNICATIONS -- 6.9%
Ameritech Corp. .................. 8,267 561,639
AT&T Corp. ....................... 9,639 337,967
BellSouth Corp. .................. 14,809 686,767
SBC Communications, Inc. ......... 12,772 790,268
Sprint Corp. ..................... 22,161 1,166,223
U.S. West Communications Group.... 10,111 381,058
------------
3,923,922
------------
TRANSPORTATION -- 0.3%
Ryder Systems, Inc................ 5,606 184,998
------------
UTILITIES -- 0.7%
Duke Power Co..................... 8,666 415,426
------------
TOTAL COMMON STOCK
(COST $52,225,158).................. 54,742,163
------------
PREFERRED STOCK -- 0.8%
MACHINERY & EQUIPMENT
Case Corp. Cl-A $4.50 [CVT]
(COST $425,418)................... 3,084 476,478
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 3.0%
UBS Securities Funding
Inc. 5.90% dated
06/30/97, repurchase
price $1,673,274
(Collateralized by
U.S. Treasury Note,
par value $1,137,000
market value
$1,696,352 due
02/15/15)
(COST $1,673,000).... 07/01/97 $1,673 1,673,000
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund...... 108 108
Temporary Investment Fund........... 108 108
------------
(COST $216)......................... 216
------------
TOTAL INVESTMENTS -- 100.9%
(COST $54,323,792).................... 56,891,857
LIABILITIES IN EXCESS OF OTHER ASSETS --
(0.9%)................................ (495,553)
------------
NET ASSETS -- 100.0%.................... $56,396,304
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
COMMON STOCK -- 48.6%
ADVERTISING -- 1.4%
Outdoor Systems, Inc.*................ 4,700 $ 179,775
----------
AEROSPACE -- 2.1%
BE Aerospace, Inc.*................... 2,600 82,225
United Technologies Corp. ............ 2,200 182,600
----------
264,825
----------
BROADCASTING -- 1.6%
Clear Channel Communications, Inc.*... 3,300 202,950
----------
CAPITAL GOODS -- 0.6%
American Standard Co, Inc.*........... 1,800 80,550
----------
CLOTHING & APPAREL -- 0.2%
Gucci Group NV........................ 400 25,750
----------
COMPUTER HARDWARE -- 0.8%
Compaq Computer Corp.*................ 600 59,500
Western Digital Corp.*................ 1,400 44,275
----------
103,825
----------
COMPUTER SERVICES & SOFTWARE -- 2.5%
BMC Software, Inc.*................... 1,500 83,062
Compuware Corp.*...................... 3,100 148,025
Oracle Corp.*......................... 500 25,187
Sun Microsystems, Inc.*............... 1,600 59,550
----------
315,824
----------
CONGLOMERATES -- 2.6%
Tyco Labs, Inc. ...................... 4,800 333,900
----------
CONSUMER PRODUCTS & SERVICES -- 5.8%
Avon Products, Inc. .................. 1,700 119,956
Ecolab, Inc. ......................... 1,400 66,850
Gillette Co. ......................... 2,100 198,975
Procter & Gamble Co. ................. 900 127,125
Samsonite Corp.*...................... 3,200 141,200
U.S. Industries, Inc.*................ 2,500 89,062
----------
743,168
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 7.3%
Altera Corp.*......................... 1,400 70,700
Electronics For Imaging, Inc.*........ 2,000 94,500
General Electric Co. ................. 4,100 268,037
Honeywell, Inc. ...................... 1,600 121,400
KLA Instruments Corp.*................ 1,500 73,125
LSI Logic Corp.*...................... 2,700 86,400
Philips Electronics NV [ADR].......... 3,000 215,625
----------
929,787
----------
ENTERTAINMENT & LEISURE -- 0.4%
Callaway Golf Co. .................... 1,500 53,250
----------
ENVIRONMENTAL SERVICES -- 0.6%
USA Waste Services, Inc.*............. 2,100 81,112
----------
FINANCIAL-BANK & TRUST -- 4.0%
BankAmerica Corp. .................... 2,600 167,863
Charter One Financial, Inc. .......... 1,100 59,263
Chase Manhattan Corp. ................ 1,600 155,300
Citicorp.............................. 1,100 132,619
----------
515,045
----------
FINANCIAL SERVICES -- 1.5%
Fannie Mae............................ 1,100 47,988
SunAmerica, Inc....................... 2,900 141,375
----------
189,363
----------
INDUSTRIAL PRODUCTS -- 0.6%
Johnson Controls, Inc................. 500 20,531
Tubos de Acero de Mexico SA [ADR]*.... 3,300 60,844
----------
81,375
----------
INSURANCE -- 0.8%
Conseco, Inc.......................... 2,800 103,600
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.2%
Bio-Technology General Corp.*......... 1,800 24,300
----------
OIL & GAS -- 2.8%
Diamond Offshore Drilling, Inc.*...... 1,100 85,938
Evi, Inc.*............................ 1,400 58,800
Falcon Drilling Co., Inc.*............ 2,800 161,350
Global Marine, Inc.*.................. 2,500 58,125
----------
364,213
----------
PHARMACEUTICALS -- 10.4%
American Home Products Corp. ......... 1,300 99,450
Cardinal Health, Inc. ................ 1,300 74,425
Johnson & Johnson Co. ................ 2,500 160,938
Lilly, (Eli) & Co. ................... 2,100 229,556
Merck & Co., Inc. .................... 2,000 207,000
Pfizer, Inc. ......................... 2,100 250,950
Warner-Lambert Co. ................... 2,500 310,625
----------
1,332,944
----------
SEMI-CONDUCTORS -- 2.0%
Intel Corp. .......................... 1,400 198,538
Motorola, Inc. ....................... 700 53,200
----------
251,738
----------
TELECOMMUNICATIONS -- 0.4%
Westell Technologies, Inc. Cl-A*...... 1,800 45,000
----------
TOTAL COMMON STOCK
(COST $5,519,201)....................... 6,222,294
----------
FOREIGN STOCK -- 1.3%
BEVERAGES -- 0.6%
Panamerican Beverages, Inc. Cl-A --
(MXP)............................... 2,200 71,225
----------
PHARMACEUTICALS -- 0.7%
Novartis AG -- (CHF).................. 58 92,695
----------
TOTAL FOREIGN STOCK
(COST $133,741)......................... 163,920
----------
</TABLE>
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ----- -----------
<S> <C>
CORPORATE OBLIGATIONS -- 4.7%
AEROSPACE -- 1.6%
Lockheed Martin Corp. Notes
7.25%....................... 05/15/06 $ 200 $ 202,500
----------
FINANCIAL-BANK & TRUST -- 0.8%
First Bank System Sub. Notes
7.625%...................... 05/01/05 100 103,375
----------
FINANCIAL SERVICES -- 0.8%
General Motors Acceptance
Corp. Notes
7.125%...................... 05/01/03 100 101,000
----------
RETAIL & MERCHANDISING -- 1.5%
Sears Roebuck & Co. Notes
6.25%....................... 01/15/04 200 193,250
----------
TOTAL CORPORATE OBLIGATIONS
(COST $596,011).......................... 600,125
----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 29.5%
FEDERAL HOME LOAN BANK -- 19.6%
5.30%......................... 07/01/97 2,515 2,515,000
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 5.5%
7.50%......................... 03/01/27 200 201,145
7.50% [TBA]................... 06/25/27 500 501,095
----------
702,240
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 4.4%
8.75%......................... 01/15/27 149 156,346
8.00%......................... 03/15/27 198 203,007
8.75%......................... 04/15/27 200 209,526
----------
568,879
----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $3,780,665)........................ 3,786,119
----------
U.S. TREASURY OBLIGATIONS -- 14.4%
U.S. Treasury Notes
6.25%......................... 01/10/00 1,100 1,092,201
6.25%......................... 01/31/02 650 646,646
6.625%........................ 05/15/07 100 100,817
----------
(COST $1,828,766)...................... 1,839,664
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- -------- ----------
<S> <C> <C> <C>
FOREIGN BONDS -- 3.4%
AUSTRALIA -- 1.3%
Queensland Treasury Corp.
8.00%..................... 08/14/01 200 $ 160,260
-----------
CANADA -- 0.6%
Canadian Government
6.50%..................... 06/01/04 100 74,252
-----------
GERMANY -- 1.5%
German Government Unity Fund
8.00%..................... 01/21/02 300 196,072
-----------
TOTAL FOREIGN BONDS
(COST $433,303)........................ 430,584
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund...... 2,332 2,332
Temporary Investment Fund........... 2,332 2,332
-----------
(COST $4,664)....................... 4,664
-----------
TOTAL INVESTMENTS -- 101.9%
(COST $12,296,351).................... 13,047,370
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (1.9%)................ (242,940)
-----------
NET ASSETS -- 100.0%.................... $12,804,430
===========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
FOREIGN STOCK -- 95.0%
ARGENTINA -- 0.5%
Telecom Argentina Stet SA C1-B
[ADR].......................... 1,600 $ 84,000
------------
AUSTRALIA -- 1.2%
Woodside Petroleum Ltd. ......... 20,400 175,835
Macquarie Bank Ltd. ............. 6,400 55,261
------------
231,096
------------
AUSTRIA -- 0.9%
VA Technologie AG................ 900 164,642
------------
BRAZIL -- 4.9%
Banco Bradesco SA PN............. 6,156,000 61,509
Light-Servicos de Eletricidade
SA............................. 280,000 134,703
Petroleo Brasileiro SA PN........ 445,900 121,695
Telebras SA [ADR]................ 3,900 591,825
------------
909,732
------------
CANADA -- 6.7%
Bank of Nova Scotia.............. 6,600 289,159
Bombardier, Inc. ................ 8,400 190,398
Canadian Hotel Income Properties
[REIT]*........................ 26,900 136,360
Northern Telecom Ltd. ........... 1,200 108,147
QLT Phototherapeutics, Inc.*..... 9,700 204,410
Rigel Energy Corp.*.............. 3,500 37,195
Rogers Communications, Inc.
Cl-B*.......................... 13,800 86,444
St. Laurent Paperboard, Inc.
144A*.......................... 3,574 55,969
Talisman Energy, Inc.*........... 4,600 141,408
------------
1,249,490
------------
FINLAND -- 2.1%
Nokia Corp. Cl-A [ADR]........... 3,300 243,375
Raision Tehtaat Oy............... 200 13,769
Sampo Insurance Co. Ltd. ........ 1,400 136,344
------------
393,488
------------
FRANCE -- 5.6%
Alcatel Alsthom.................. 1,400 175,322
AXA SA........................... 3,300 205,225
Compagnie Bancaire SA............ 400 51,045
Compagnie Generale des Eaux...... 1,000 128,122
Rhone-Poulenc SA................. 1,600 65,337
Pinault-Printemps-Redoute SA..... 200 96,100
Schneider SA..................... 2,100 111,768
Societe Generale................. 1,900 212,074
------------
1,044,993
------------
GERMANY -- 9.7%
Altana AG........................ 78 83,631
Bayerische Motoren Werke AG...... 247 203,650
BHW Holding AG*.................. 5,000 84,571
Daimler Benz AG.................. 2,528 205,678
Deutsche Bank AG................. 1,800 105,682
Deutsche Pfandbrief &
Hypothekenbank AG.............. 3,000 172,439
Henkel KGAA...................... 2,400 127,217
Henkel KGAA Pfd. ................ 800 45,043
Mannesmann AG.................... 300 133,995
SAP AG Pfd. ..................... 200 41,225
SGL Carbon AG.................... 500 68,287
Siemens AG....................... 2,200 131,753
Volkswagen AG.................... 376 285,002
Wella Aktiengesellschaft Pfd. ... 180 121,576
------------
1,809,749
------------
HONG KONG -- 2.8%
HSBC Holdings PLC................ 12,300 369,946
Hutchison Whampoa Ltd. .......... 10,000 86,487
New World Infrastructure Ltd.*... 24,400 68,978
------------
525,411
------------
IRELAND -- 0.6%
Ryanair Holdings PLC [ADR]*...... 4,000 108,500
------------
ITALY -- 1.2%
Credito Italiano SPA............. 123,400 225,749
------------
JAPAN -- 17.5%
Advantest Corp. ................. 1,660 127,469
Bridgestone Corp. ............... 6,000 139,267
Canon, Inc. ..................... 6,000 163,351
Circle K Japan Co. Ltd. ......... 3,000 172,251
Dai Nippon Ink & Chemical
Corp. ......................... 12,000 51,728
Fuji Machine Manufacturing
Co. ........................... 1,000 36,213
Fujikura Ltd. ................... 5,000 46,684
Hoya Corp. ...................... 4,000 178,010
JUSCO Co. ....................... 1,000 33,770
Keyence Corp. ................... 1,200 178,010
Konami Co. Ltd. ................. 3,100 115,777
Mitsubishi Estate Co. Ltd. ...... 5,000 72,426
Nintendo Co. Ltd. ............... 2,600 217,801
Nippon Telegraph & Telephone
Corp. ......................... 290 277,094
Rohm Co. ........................ 2,000 205,934
Sankyo Co. Ltd. ................. 10,000 335,951
Sony Corp. ...................... 2,900 252,801
Sumitomo Realty & Development
Corp. ......................... 9,000 79,319
Terumo Corp. .................... 12,000 229,319
Uni-Charm Corp. ................. 5,000 178,010
Yamaha Corp. .................... 10,000 183,246
------------
3,274,431
------------
MEXICO -- 1.3%
Grupo Financiero Banamex SA Cl-
B*............................. 65,900 172,526
Grupo Televisia SA [GDR]*........ 2,600 78,975
------------
251,501
------------
NETHERLANDS -- 13.8%
Assurantieconcern Stad Rotterdam
NV............................. 2,900 132,496
Getronics NV..................... 5,000 161,463
Gucci Group NV................... 1,000 64,375
Hunter Douglas NV................ 400 34,024
ING Groep NV..................... 12,600 580,808
Koninklijke Ahold NV............. 1,916 161,610
Philips Electronics NV [ADR]..... 6,900 495,938
</TABLE>
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------
<S> <C> <C>
Randstad Holdings NV............. 2,300 $ 242,500
Stork NV......................... 5,300 215,963
Unilever PLC [ADR]............... 400 87,200
Vedior NV 144A*.................. 4,000 105,740
Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit.......................... 13,000 287,373
------------
2,569,490
------------
NORWAY -- 0.7%
Smedvig ASA...................... 5,100 127,371
------------
PORTUGAL -- 0.5%
Electricidade de Portugal*....... 5,200 95,421
------------
SPAIN -- 1.5%
Cortefiel SA..................... 2,658 115,997
Telefonica de Espana SA.......... 5,700 164,803
------------
280,800
------------
SWEDEN -- 2.9%
Ericsson, (L.M.) Telephone Co.
[ADR].......................... 4,700 185,063
Hennes & Mauritz AB Cl-B......... 4,200 150,606
Skandia Forsakrings AB........... 5,500 202,918
------------
538,587
------------
SWITZERLAND -- 11.6%
ABB AG........................... 131 198,240
Credit Suisse Group.............. 3,200 410,846
Julius Baer Holdings AG Cl-B..... 116 177,527
Nestle SA........................ 180 237,387
Novartis AG...................... 500 799,096
Roche Holding AG................. 38 343,598
------------
2,166,694
------------
UNITED KINGDOM -- 9.0%
BBA Group PLC.................... 10,700 63,257
British Aerospace PLC............ 13,400 298,241
British-Borneo Petroleum
Syndicate PLC.................. 4,400 103,865
Cable & Wireless Communications
PLC............................ 8,500 45,084
Cairn Energy PLC*................ 9,600 77,537
Flextech PLC*.................... 6,000 64,248
Granada Group PLC................ 7,000 92,091
Misys PLC........................ 9,300 211,015
Next PLC......................... 20,200 228,242
Norwich Union PLC*............... 6,100 32,456
Royal Bank of Scotland PLC....... 1,200 11,181
Siebe PLC........................ 12,700 215,089
Stagecoach Holdings PLC.......... 13,700 144,645
Standard Chartered Bank PLC...... 6,600 100,678
------------
1,687,629
------------
TOTAL FOREIGN STOCK
(COST $16,700,839)................. 17,738,774
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 3.2%
Federal Home Loan Bank
5.30%
(COST $605,000)....... 07/01/97 $ 605 605,000
-----------
TOTAL INVESTMENTS -- 98.2%
(COST $17,305,839)................... 18,343,774
OTHER ASSETS LESS
LIABILITIES -- 1.8%.................. 331,102
-----------
NET ASSETS -- 100.0%................... $18,674,876
===========
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CONTRACTED UNREALIZED
COVERED EXCHANGE EXPIRATION APPRECIATION
TYPE BY CONTRACT RATE MONTH (DEPRECIATION)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Buy ATS $ 18,278 12.1168 07/97 $ (225)
Buy AUD 21,366 1.3304 07/97 127
Buy DEM 63,633 1.7409 07/97 (103)
Buy FRF 36,481 5.8190 07/97 (282)
Buy GBP 76,946 0.5997 07/97 (178)
Buy NLG 50,289 1.9557 07/97 (96)
--------
$ (757)
========
Sell CAD $ 24,681 1.3804 07/97 $ 5
Sell CHF 495,844 1.4337 07/97 7,127
Sell DEM 355,708 1.7267 07/97 2,700
Sell FRF 200,672 123.3442 07/97 1,581
Sell GBP 265,228 0.6011 07/97 (28)
Sell JPY 55,096 114.2509 07/97 151
Sell NLG 458,523 1.9415 07/97 4,026
--------
$ 15,562
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
144A -- Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. At the end of the period, these securities
amounted to 0.9% of net assets.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCK -- 92.3%
AIRLINES -- 1.3%
Midwest Express Holdings, Inc.*.... 30,000 $ 821,250
------------
AUTOMOTIVE PARTS -- 2.7%
Modine Manufacturing Co. .......... 30,000 892,500
TBC Corp.*......................... 100,000 837,500
------------
1,730,000
------------
BUILDING MATERIALS -- 7.4%
Gibraltar Steel Corp.*............. 30,000 690,000
Holophane Corp.*................... 40,000 800,000
Juno Lighting, Inc. ............... 35,000 568,750
Lone Star Technologies, Inc.*...... 25,000 715,625
Republic Group, Inc. .............. 30,000 603,750
Skyline Corp. ..................... 23,000 566,375
Thomas Industries, Inc. ........... 26,000 747,500
------------
4,692,000
------------
BUSINESS SERVICES -- 1.9%
Aaron Rents, Inc. Cl-A*............ 17,000 202,938
Aaron Rents, Inc. Cl-B*............ 23,000 307,625
Grey Advertising, Inc. ............ 2,200 726,000
------------
1,236,563
------------
CHEMICALS -- 3.0%
Furon Co. ......................... 30,000 941,250
Schulman, (A.), Inc. .............. 40,000 985,000
------------
1,926,250
------------
CLOTHING & APPAREL -- 1.5%
Unitog Co.......................... 35,000 945,000
------------
COMPUTER HARDWARE -- 1.2%
Analogic Corp. .................... 22,700 771,800
------------
COMPUTER SERVICES & SOFTWARE -- 1.6%
Analysts International Corp. ...... 30,000 1,005,000
------------
CONSUMER PRODUCTS & SERVICES -- 0.6%
Culp, Inc. ........................ 22,400 406,000
------------
CONTAINERS & PACKAGING -- 1.6%
Aptargroup, Inc. .................. 22,000 995,500
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.5%
Electro Rental Corp.*.............. 55,000 1,361,250
Littelfuse, Inc.*.................. 25,000 706,250
Nichols Research Corp.*............ 40,000 840,000
Pioneer Standard Electronics,
Inc. ............................ 40,000 540,000
Scotsman Industries, Inc. ......... 24,000 684,000
------------
4,131,500
------------
ENERGY SERVICES -- 1.1%
Offshore Logistics, Inc.*.......... 36,000 679,500
------------
ENTERTAINMENT & LEISURE -- 0.6%
Carmike Cinemas, Inc.*............. 12,000 393,000
------------
ENVIRONMENTAL SERVICES -- 1.2%
Landauer, Inc. .................... 33,000 765,187
------------
EQUIPMENT SERVICES -- 4.0%
Cort Business Services Corp.*...... 20,000 590,000
Rival Co. ......................... 45,000 663,750
Unifirst Corp. .................... 35,000 700,000
VWR Scientific Products, Inc.*..... 40,000 630,000
------------
2,583,750
------------
FINANCIAL-BANK & TRUST -- 5.2%
Commercial Federal Savings & Loan
Corp. ........................... 16,000 594,000
Community First Bank Corp. ........ 18,000 690,750
First Republic Bancorp, Inc.*...... 35,000 813,750
Silicon Valley Bancshares.......... 16,000 724,000
Sirrom Capital Corp. .............. 15,000 517,500
------------
3,340,000
------------
FINANCIAL SERVICES -- 6.0%
Amresco, Inc.*..................... 40,000 860,000
First Financial Fund, Inc. ........ 45,000 776,250
McGrath Rentcorp................... 50,000 1,025,000
Medallion Financial Corp. ......... 32,000 612,000
Quick & Reilly Group, Inc. ........ 24,000 558,000
------------
3,831,250
------------
FOOD -- 1.1%
Suiza Foods Corp.*................. 17,000 697,000
------------
HEALTHCARE SERVICES -- 1.1%
Quest Diagnostics, Inc.*........... 33,000 678,562
------------
INSURANCE -- 6.5%
FBL Financial Group, Inc. Cl-A..... 24,000 906,000
Harleysville Group, Inc. .......... 23,000 871,125
Phoenix Resources Corp. Cl-A....... 25,000 768,750
Poe & Brown, Inc. ................. 28,000 1,036,000
Selective Insurance Group.......... 12,000 581,250
------------
4,163,125
------------
LUMBER & WOOD PRODUCTS -- 1.0%
Deltic Timber Corp. ............... 22,000 644,875
------------
MACHINERY & EQUIPMENT -- 4.3%
Carbo Ceramics, Inc. .............. 27,100 738,475
Greenfield Industries, Inc. ....... 35,000 945,000
Woodward Governor Co. ............. 30,000 1,080,000
------------
2,763,475
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.1%
Owens & Minor, Inc. ............... 45,000 672,187
------------
METALS & MINING -- 6.2%
Dayton Mining Corp.*............... 140,000 533,750
Golden Star Resources Ltd.*........ 40,000 325,000
Material Sciences Corp.*........... 50,000 771,875
Myers Industries, Inc. ............ 20,000 337,500
Penn Virginia Corp. ............... 15,000 735,000
Texas Industries, Inc. ............ 15,000 398,438
TriMas Corp. ...................... 30,000 843,750
------------
3,945,313
------------
</TABLE>
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
OFFICE EQUIPMENT -- 1.2%
CSS Industries, Inc.*.............. 24,000 $ 759,000
-----------
OIL & GAS -- 2.6%
Cross Timbers Oil Co. ............. 15,000 288,750
Devon Energy Corp. ................ 19,000 698,250
Rutherford-Moran Oil Corp.*........ 30,000 705,000
-----------
1,692,000
-----------
PAPER & FOREST PRODUCTS -- 1.1%
Mosinee Paper Corp. ............... 28,000 686,000
-----------
PERSONAL SERVICES -- 1.1%
Matthews International Corp. ...... 20,000 730,000
-----------
REAL ESTATE -- 5.8%
Allied Capital Commercial Corp.
[REIT]........................... 28,900 693,600
Apartment Investment & Management
Co. Cl-A [REIT].................. 25,000 706,250
Columbus Realty Trust [REIT]....... 37,000 841,750
National Health Investors, Inc.
[REIT]........................... 18,000 706,500
Sun Communities, Inc. [REIT]....... 23,000 771,938
-----------
3,720,038
-----------
RESTAURANTS -- 4.1%
Consolidated Products, Inc.*....... 50,000 931,250
Ruby Tuesday, Inc. ................ 40,000 897,500
Sbarro, Inc. ...................... 28,000 777,000
-----------
2,605,750
-----------
RETAIL & MERCHANDISING -- 4.2%
Compucom Systems, Inc.*............ 80,000 570,000
Fabri-Centers of America, Inc.
Cl-B*............................ 45,000 1,051,875
Hancock Fabrics, Inc............... 45,000 618,750
Stein Mart, Inc.*.................. 15,000 450,000
-----------
2,690,625
-----------
TELECOMMUNICATIONS -- 2.4%
Aliant Communications, Inc......... 37,000 721,500
CommNet Cellular, Inc.*............ 23,400 813,150
-----------
1,534,650
-----------
UTILITIES -- 1.1%
United Water Resources, Inc........ 35,000 678,125
-----------
TOTAL COMMON STOCK
(COST $52,962,664) .................. 58,914,275
-----------
PREFERRED STOCK -- 0.4%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT]
(COST $262,747) ................. 8,000 256,000
-----------
FOREIGN STOCK -- 0.8%
METALS & MINING
Prime Resources Group,
Inc. -- (CAD)
(COST $512,833) ................... 65,000 470,708
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 0.2%
Federal Home Loan Mortgage Corp.
5.44%
(COST $122,981)......... 07/02/97 $ 123 122,981
---------
U.S. TREASURY OBLIGATIONS -- 4.5%
U.S. Treasury Bills
4.75%#.................. 07/24/97 1,781 1,775,595
5.11%................... 08/21/97 1,102 1,094,209
---------
(COST $2,869,625)................. 2,869,804
---------
COMMERCIAL PAPER -- 9.3%
AlliedSignal, Inc.
5.53%................... 07/03/97 1,000 999,693
Bell Atlantic Network
Funding
5.52%................... 07/17/97 1,033 1,030,466
Ciesco L.P.
6.20%................... 07/01/97 2,620 2,620,000
Pitney Bowes Credit Corp.
5.52%................... 07/09/97 270 269,669
Procter & Gamble Co.
5.51%................... 08/15/97 1,034 1,026,763
---------
TOTAL COMMERCIAL PAPER
(COST $5,946,706)..................... 5,946,591
---------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund
(COST $527)........................ 527 527
------------
TOTAL INVESTMENTS -- 107.5%
(COST $62,678,083)................... 68,580,886
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (7.5%)..................... (4,775,811)
------------
NET ASSETS -- 100.0%................... $63,805,075
============
</TABLE>
# Securities with an aggregate market value of $1,775,595 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
- ---------------------------------------------------------------
<S> <C> <C> <C>
Russell 2000 09/97 $1,182 $14,700
=======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
<PAGE>
DEFINITION OF ABBREVIATIONS
- --------------------------------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
- -----------------------
ADR-American Depositary Receipts
ADS-American Depositary Shares
BRB-Brady Bond
CVT-Convertible Security
FLIRB-Floating Interest Rate Bond
FRB-Floating Rate Bond (1)
FRN-Floating Rate Note (1)
GDR-Global Depositary Receipts
IO-Interest Only Security
PIK-Payment-in-Kind Security
REIT-Real Estate Investment Trust
STEP-Stepped Coupon Security (2)
TBA-To be Announced Security
VR-Variable Rate Bond (1)
WI-When Issued Security (2)
ZCB-Zero Coupon Security (2)
(1)- Rates shown for variable and floating rate securities are the coupon rates
as of June 30, 1997.
(2)- Rates shown are the effective yields at purchase date.
COUNTRIES/CURRENCIES:
- -----------------------
ATS-Austria/Austrian Schilling
AUD-Australia/Australian Dollar
BEF-Belgium/Belgian Franc
CAD-Canada/Canadian Dollar
CHF-Switzerland/Swiss Franc
DEM-Germany/German Deutschemark
DKK-Denmark/Danish Kroner
ESP-Spain/Spanish Peseta
FIM-Finland/Finnish Markka
FRF-France/French Franc
GBP-United Kingdom/British Pound
GRD-Greece/Greek Drachma
HKD-Hong Kong/Hong Kong Dollar
IDR-Indonesia/Indonesian Rupiah
IEP-Ireland/Irish Punt
ITL-Italy/Italian Lira
JPY-Japan/Japanese Yen
MXP-Mexico/Mexican Peso
MYR-Malaysia/Malaysian Ringgit
NLG-Netherlands/Netherland Guilder
NOK-Norway/Norwegian Kroner
NZD-New Zealand/New Zealand Dollar
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Krona
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST PUTNAM LORD ABBETT AST FEDERATED AST
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- ---------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at
value (A)................... $ 403,632 $ 722,816 $1,293,419 $668,239 $128,634 $327,068 $310,592
Cash in bank, including
foreign currency holdings... 1,204 -- -- 4 2,438 109 65
Receivable for:
Securities sold............. 3,747 9,453 2,151 3,327 1,713 13,400 --
Dividends and interest...... 1,983 1,777 406 -- 399 1,538 5,265
Fund shares sold............ 3 864 11,919 -- 120 275 285
Futures variation margin.... -- -- -- -- -- -- --
Other assets.................. 6 3 5 3 1 2 1
Unrealized appreciation on
foreign currency exchange
contracts and interest rate
swap agreements............. 347 -- 1,749 -- -- 16 --
--------- -------- --------- -------- -------- -------- --------
TOTAL ASSETS.............. 410,922 734,913 1,309,649 671,573 133,305 342,408 316,208
--------- -------- --------- -------- -------- -------- --------
LIABILITIES
Cash overdraft................ -- -- 6,020 -- -- -- --
Written options outstanding,
at value.................... -- -- -- -- -- -- --
Sale commitments, at value.... -- -- -- -- -- 4,193 --
Payable for:
Securities purchased........ 4,953 8,731 349 19,975 3,313 16,982 4,171
Fund shares redeemed........ 353 7 1 -- 13 4 1
Futures variation margin.... -- -- -- -- -- -- --
Advisory fees............... 197 266 555 92 37 118 82
Shareholder servicing
fees...................... 33 59 104 52 11 26 24
Accrued expenses............ 30 61 92 65 27 45 49
Accrued dividends........... -- -- -- 2,687 -- -- --
Unrealized depreciation on
foreign currency exchange
contracts and interest rate
swap agreements............. 290 -- 61 -- -- 20 --
--------- -------- --------- -------- -------- -------- --------
TOTAL LIABILITIES......... 5,856 9,124 7,182 22,871 3,401 21,388 4,327
--------- --------- ---------- -------- -------- -------- --------
NET ASSETS....................... $ 405,066 $ 725,789 $1,302,467 $648,702 $129,904 $321,020 $311,881
========= ========= ========== ======== ======== ======== ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of
shares authorized, $.001 par
value per share)................ $ 19 $ 38 $ 61 $ 649 $ 10 $ 25 $ 25
Additional paid-in capital....... 322,876 560,435 936,198 648,001 106,996 281,621 287,992
Undistributed net investment
income (loss)................... 400 5,398 912 -- 2,225 4,863 12,257
Accumulated net realized gain
(loss) on investments and
foreign currency transactions... 24,135 20,944 51,843 52 4,459 7,337 (21)
Accumulated net unrealized
appreciation (depreciation) on
investments, foreign currency
transactions, and forward
currency contracts.............. 57,636 138,974 313,453 -- 16,214 27,174 11,628
--------- --------- ---------- -------- -------- -------- --------
NET ASSETS....................... $ 405,066 $ 725,789 $1,302,467 $648,702 $129,904 $321,020 $311,881
========= ========= ========== ======== ======== ======== ========
Shares of common stock
outstanding..................... 19,252 37,684 60,931 648,650 9,932 25,078 25,500
Net asset value, offering and
redemption price per share...... $ 21.04 $ 19.26 $ 21.38 $ 1.00 $ 13.08 $ 12.80 $ 12.23
========= ========= ========== ======== ======== ======== ========
(A) Investments at cost.......... $ 346,050 $ 583,842 $ 981,654 $668,239 $112,421 $299,890 $298,963
========= ========= ========== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO T. ROWE T. ROWE T. ROWE
PRICE TOTAL INVESCO FOUNDERS PRICE PRICE BERGER PRICE
ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS ASSET
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT ALLOCATION
---------- -------- -------- ------------ ------------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$166,140 $540,400 $473,326 $242,193 $ 488,430 $ 100,903 $152,429 $135,166 $108,840
87 -- -- -- 29,383 21,148 -- 832 --
92 29,604 -- 1,871 694 3,820 1,518 -- --
1,160 3,249 2,095 56 1,651 2,635 85 181 103
172 836 788 517 4 759 199 170 --
-- -- -- -- -- -- -- -- --
1 2 2 1 2 1 1 1 1
-- 257 -- -- -- 25 -- -- --
-------- -------- -------- -------- --------- --------- -------- -------- --------
167,652 574,348 476,211 244,638 520,164 129,291 154,232 136,350 108,944
-------- -------- -------- -------- --------- --------- -------- -------- --------
-- 128 -- -- -- -- -- -- --
-- 83 -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
941 110,712 -- 2,654 2,252 3,964 1,615 2,969 247
2 215 -- 1,207 2,207 2 -- 29 55
-- 393 -- -- -- -- -- -- --
48 106 158 124 227 42 60 68 49
13 35 39 20 41 9 13 11 9
44 53 45 39 70 8 21 20 27
-- -- -- -- -- -- -- -- --
2 -- -- -- 8 3 -- 18 --
-------- -------- -------- -------- --------- --------- -------- -------- --------
1,050 111,725 242 4,044 4,805 4,028 1,709 3,115 387
-------- -------- -------- -------- --------- --------- -------- -------- --------
$166,602 $462,623 $475,969 $240,594 $ 515,359 $ 125,263 $152,523 $133,235 $108,557
======== ======== ======== ======== ========= ========= ======== ======== ========
$ 12 $ 42 $ 31 $ 15 $ 39 $ 12 $ 10 $ 11 $ 7
139,563 450,258 379,053 203,670 419,492 125,403 128,709 119,142 95,044
2,138 11,468 5,414 (377) 2,714 4,437 141 412 533
372 (3,892) 16,661 (5,812) 7,080 (3,848) 11,316 (2,217) 3,579
24,517 4,747 74,810 43,098 86,034 (741) 12,347 15,887 9,394
-------- -------- -------- -------- --------- --------- -------- -------- --------
$166,602 $462,623 $475,969 $240,594 $ 515,359 $ 125,263 $152,523 $133,235 $108,557
======== ======== ======== ======== ========= ========= ======== ======== ========
11,726 42,096 31,211 14,480 38,883 12,288 10,080 10,770 7,268
$ 14.21 $ 10.99 $ 15.25 $ 16.62 $ 13.25 $ 10.19 $ 15.13 $ 12.37 $ 14.94
======== ======== ======== ======== ========= ========= ======== ======== ========
$141,615 $535,843 $398,516 $199,095 $ 402,381 $ 101,688 $140,082 $119,262 $ 99,447
======== ======== ======== ======== ========= ========= ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST
PIMCO ROBERTSON PUTNAM TWENTIETH TWENTIETH T. ROWE
LIMITED STEPHENS AST JANUS VALUE CENTURY CENTURY PRICE SMALL
MATURITY VALUE + OVERSEAS GROWTH & STRATEGIC INTERNATIONAL COMPANY
BOND GROWTH GROWTH INCOME BALANCED GROWTH VALUE
-------- --------- --------- -------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at
value (A)..................... $260,687 $140,465 $131,176 $56,892 $13,047 $18,344 $68,581
Cash in bank, including foreign
currency holdings............. -- -- 523 -- -- 226 --
Receivable for:
Securities sold............... 6,851 4,792 882 439 140 293 --
Dividends and interest........ 1,984 84 206 103 72 19 66
Fund shares sold.............. 259 635 2 1,055 214 643 --
Futures variation margin...... -- -- -- -- -- -- 6
Other assets.................... 1 -- -- -- -- -- --
Unrealized appreciation on
foreign currency exchange
contracts and interest rate
swap agreements............... 107 -- 295 -- -- 15 --
-------- -------- -------- ------- ------- ------- -------
TOTAL ASSETS................ 269,889 145,976 133,084 58,489 13,473 19,540 68,653
-------- -------- -------- ------- ------- ------- -------
LIABILITIES
Cash overdraft.................. -- -- -- -- -- -- --
Written options outstanding, at
value......................... -- -- -- -- -- -- --
Sale commitments, at value...... -- -- -- -- -- -- --
Payable for:
Securities purchased.......... 8,567 5,443 7,032 2,063 661 847 4,448
Fund shares redeemed.......... -- 16 583 -- -- -- 361
Futures variation margin...... 6 -- -- -- -- -- --
Advisory fees................. 64 72 62 19 5 8 27
Shareholder servicing fees.... 20 11 9 4 1 1 5
Accrued expenses.............. 38 15 26 7 2 8 7
Accrued dividends............. -- -- -- -- -- -- --
Unrealized depreciation on
foreign currency exchange
contracts and interest rate
swap agreements............... -- -- 15 -- -- 1 --
-------- -------- -------- ------- ------- ------- -------
TOTAL LIABILITIES........... 8,695 5,557 7,727 2,093 669 865 4,848
-------- -------- -------- ------- ------- ------- -------
NET ASSETS......................... $261,194 $140,419 $125,357 $56,396 $12,804 $18,675 $63,805
======== ======== ======== ======= ======= ======= =======
COMPONENTS OF NET ASSETS
Common stock (unlimited number of
shares authorized, $.001 par value
per share)........................ $ 25 $ 11 $ 11 $ 5 $ 1 $ 2 $ 6
Additional paid-in capital......... 256,345 124,345 114,622 53,189 12,154 17,564 57,559
Undistributed net investment income
(loss)............................ 6,456 (181) 637 212 64 34 163
Accumulated net realized gain
(loss) on investments and foreign
currency transactions............. (1,319) 125 2,032 422 (166) 22 160
Accumulated net unrealized
appreciation (depreciation) on
investments, foreign currency
transactions, and forward currency
contracts......................... (313) 16,119 8,055 2,568 751 1,053 5,917
-------- -------- -------- ------- ------- ------- -------
NET ASSETS......................... $261,194 $140,419 $125,357 $56,396 $12,804 $18,675 $63,805
======== ======== ======== ======= ======= ======= =======
Shares of common stock
outstanding....................... 24,670 11,055 10,789 4,938 1,201 1,614 5,606
Net asset value, offering and
redemption price per share........ $ 10.59 $ 12.70 $ 11.62 $ 11.42 $ 10.66 $ 11.57 $ 11.38
======== ======== ======== ======= ======= ======= =======
(A) Investments at cost............ $261,130 $124,346 $123,401 $54,324 $12,296 $17,306 $62,678
======== ======== ======== ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST
PUTNAM LORD ABBETT AST FEDERATED AST
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY PUTNAM FEDERATED
EQUITY INCOME GROWTH MARKET INCOME BALANCED HIGH YIELD
------------- ----------- -------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest..................... $ 378 $ 1,496 $ 2,422 $17,055 $ 182 $ 3,901 $ 13,323
Dividends.................... 4,830 6,771 5,165 -- 2,603 2,071 178
------- ------- -------- ------- ------- ------- -------
Total Investment
Income................. 5,208 8,267 7,587 17,055 2,785 5,972 13,501
------- ------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees..... 1,592 2,278 4,795 1,524 412 1,103 933
Shareholder servicing fees... 181 304 533 305 62 147 124
Administration and accounting
fees....................... 148 197 266 196 62 128 114
Custodian fees............... 136 50 82 50 22 90 26
Professional fees............ 11 19 32 19 4 9 8
Trustees' fees and
expenses................... 5 9 16 9 2 4 4
Insurance fees............... 2 3 6 4 1 2 1
Miscellaneous expenses....... 6 9 14 8 4 21 34
------- ------- -------- ------- ------- ------- -------
Total Expenses........... 2,081 2,869 5,744 2,115 569 1,504 1,244
Less: Advisory fee
waivers and expense
reimbursements......... -- -- -- (286) -- -- --
------- ------- -------- ------- ------- ------- -------
Net Expenses............. 2,081 2,869 5,744 1,829 569 1,504 1,244
------- ------- -------- ------- ------- ------- -------
Net Investment Income (Loss).... 3,127 5,398 1,843 15,226 2,216 4,468 12,257
------- ------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Securities and foreign
exchange
transactions........... 21,583 21,152 51,162 52 4,544 7,788 (22)
Futures contracts........ -- -- -- -- -- -- --
Written option
contracts.............. -- -- -- -- -- -- --
Interest rate swaps...... -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net realized gain (loss)..... 21,583 21,152 51,162 52 4,544 7,788 (22)
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation (depreciation)
on:
Securities and foreign
exchange
transactions........... 33,482 68,008 132,706 -- 4,114 19,478 2,719
Futures contracts........ -- -- -- -- -- -- --
Written option
contracts.............. -- -- -- -- -- -- --
Interest rate swaps...... -- -- -- -- -- -- --
------- ------- -------- ------- ------- ------- -------
Net change in unrealized
appreciation
(depreciation)............. 33,482 68,008 132,706 -- 4,114 19,478 2,719
------- ------- -------- ------- ------- ------- -------
Net Increase (Decrease) in
Net Assets Resulting from
Operations................. $58,192 $94,558 $185,711 $15,278 $10,874 $31,734 $ 14,954
======= ======= ======== ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO T. ROWE T. ROWE
PRICE TOTAL INVESCO FOUNDERS PRICE PRICE BERGER
ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH
----------- --------- ------- ------------ -------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest................... $ 2,125 $12,786 $4,102 $ 616 $ 465 $ 3,052 $ 429
Dividends.................. 816 1 3,295 229 5,385 -- 422
------- ------- ------- -------- -------- -------- -------
Total Investment
Income............... 2,941 12,787 7,397 845 5,850 3,052 851
------- ------- ------- -------- -------- -------- -------
EXPENSES
Investment advisory fees... 591 1,258 1,519 963 2,192 417 537
Shareholder servicing
fees..................... 70 194 203 107 219 52 72
Administration and
accounting fees.......... 70 155 159 104 166 53 72
Custodian fees............. 29 60 37 32 138 38 18
Professional fees.......... 4 12 12 7 13 3 4
Trustees' fees and
expenses................. 2 6 6 3 7 2 2
Insurance fees............. 1 2 2 1 3 1 1
Miscellaneous expenses..... 29 11 11 5 31 8 4
------- ------- ------- -------- -------- -------- -------
Total Expenses......... 796 1,698 1,949 1,222 2,769 574 710
Less: Advisory fee
waivers and expense
reimbursements....... -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net Expenses........... 796 1,698 1,949 1,222 2,769 574 710
------- ------- ------- -------- -------- -------- -------
Net Investment Income
(Loss)....................... 2,145 11,089 5,448 (377) 3,081 2,478 141
------- ------- ------- -------- -------- -------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss)
on:
Securities and foreign
exchange
transactions......... 395 838 16,627 (5,285) 8,150 (2,478) 11,380
Futures contracts...... -- (983) -- -- -- -- --
Written option
contracts............ -- 873 -- -- -- -- --
Interest rate swaps.... -- 2 -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net realized gain (loss)... 395 730 16,627 (5,285) 8,150 (2,478) 11,380
------- ------- ------- -------- -------- -------- -------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
exchange
transactions......... 12,811 187 32,602 5,716 39,493 (2,056) (2,949)
Futures contracts...... -- 256 -- -- -- -- --
Written option
contracts............ -- (399) -- -- -- -- --
Interest rate swaps.... -- 26 -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net change in unrealized
appreciation
(depreciation)........... 12,811 70 32,602 5,716 39,493 (2,056) (2,949)
------- ------- ------- -------- -------- -------- -------
Net Increase (Decrease) in
Net Assets Resulting from
Operations............... $15,351 $11,889 $54,677 $ 54 $ 50,724 $ (2,056) $ 8,572
======= ======= ======= ======== ======== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on January 2, 1997.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
AST T. ROWE
T. ROWE PIMCO ROBERTSON PUTNAM TWENTIETH TWENTIETH PRICE
PRICE LIMITED STEPHENS AST JANUS VALUE CENTURY CENTURY SMALL
FOUNDERS NATURAL MATURITY VALUE + OVERSEAS GROWTH & STRATEGIC INTERNATIONAL COMPANY
PASSPORT RESOURCES BOND GROWTH GROWTH(1) INCOME(1) BALANCED(1) GROWTH(1) VALUE(1)
-------- --------- -------- --------- --------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 550 $ 290 $ 7,458 $ 137 $ 403 $ 65 $ 87 $ 22 $ 107
528 810 -- 239 559 264 11 55 218
------- -------- ------- -------- -------- -------- ---------- ----------- -------
1,078 1,100 7,458 376 962 329 98 77 325
------- -------- ------- -------- -------- -------- ---------- ----------- -------
631 443 729 451 251 78 23 26 122
63 49 112 45 25 11 3 2 13
63 49 107 45 25 11 7 7 13
60 22 28 9 18 15 5 7 12
4 3 7 3 2 1 -- -- 1
2 1 3 1 1 -- -- -- --
1 1 1 1 -- -- -- -- --
8 5 7 2 3 1 1 1 1
------- -------- ------- -------- -------- -------- ---------- ----------- -------
832 573 994 557 325 117 39 43 162
-- -- -- -- -- -- (5) -- --
------- -------- ------- -------- -------- -------- ---------- ----------- -------
832 573 994 557 325 117 34 43 162
------- -------- ------- -------- -------- -------- ---------- ----------- -------
246 527 6,464 (181) 637 212 64 34 163
------- -------- ------- -------- -------- -------- ---------- ----------- -------
(2,023) 3,618 85 182 2,032 422 (166) 22 95
-- -- (2) -- -- -- -- -- 65
-- -- 44 -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
------- -------- ------- -------- -------- -------- ---------- ----------- -------
(2,023) 3,618 127 182 2,032 422 (166) 22 160
------- -------- ------- -------- -------- -------- ---------- ----------- -------
10,614 1,659 758 13,304 8,055 2,568 751 1,053 5,902
-- -- (18) -- -- -- -- -- 15
-- -- (35) -- -- -- -- -- --
-- -- 6 -- -- -- -- -- --
------- -------- ------- -------- -------- -------- ---------- ----------- -------
10,614 1,659 711 13,304 8,055 2,568 751 1,053 5,917
------- -------- ------- -------- -------- -------- ---------- ----------- -------
$ 8,837 $ 5,804 $ 7,302 $ 13,305 $ 10,724 $ 3,202 $ 649 $ 1,109 $ 6,240
======= ======== ======= ======== ======== ======== ========== =========== =======
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
AST
PUTNAM LORD ABBETT
INTERNATIONAL GROWTH AND
EQUITY INCOME
-------------------------------- --------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)............... $ 3,127 $ 2,746 $ 5,398 $ 7,379
Net realized gain (loss) on investments and
foreign currency transactions............ 21,583 20,748 21,152 13,085
Net change in unrealized appreciation
(depreciation) on investments, foreign
currency transactions, and forward
currency contracts....................... 33,482 4,755 68,008 46,955
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets
from Operations....................... 58,192 28,249 94,558 67,419
--------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net
investment income........................ (5,413) (5,032) (7,379) (3,534)
Distributions to shareholders from capital
gains.................................... (17,443) (5,923) (13,267) (7,139)
--------- -------- --------- --------
Total Dividends and Distributions to
Shareholders.......................... (22,856) (10,955) (20,646) (10,673)
--------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................. 68,230 101,730 219,958 217,780
Net asset value of shares issued in
reinvestment of dividends and
distributions............................ 22,856 10,955 20,646 10,673
Cost of shares redeemed.................... (67,567) (51,824) (119,224) (43,451)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions.......................... 23,519 60,861 121,380 185,002
--------- -------- --------- --------
Total Increase in Net Assets.......... 58,855 78,155 195,292 241,748
NET ASSETS
Beginning of Period........................ 346,211 268,056 530,497 288,749
--------- -------- --------- --------
End of Period.............................. $ 405,066 $346,211 $ 725,789 $530,497
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold................................ 3,547 5,530 12,287 13,666
Shares issued in reinvestment of dividends
and distributions........................ 1,229 610 1,185 707
Shares redeemed............................ (3,534) (2,856) (6,684) (2,755)
--------- -------- --------- --------
Net Increase in Shares Outstanding....... 1,242 3,284 6,788 11,618
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
AST FEDERATED AST
JANCAP MONEY UTILITY PUTNAM
GROWTH MARKET INCOME BALANCED
- ------------------------------ ------------------------------ ------------------------------ -------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
- ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,843 $ 1,593 $ 15,226 $ 22,641 $ 2,216 $ 3,613 $ 4,468 $ 7,010
51,162 42,941 52 80 4,544 7,915 7,788 29,898
132,706 108,269 -- -- 4,114 978 19,478 (8,583)
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
185,711 152,803 15,278 22,721 10,874 12,506 31,734 28,325
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
(2,524) (753) (15,226) (22,641) (3,604) (4,103) (6,615) (5,212)
(42,072) (24,162) (80) (149) (5,148) -- (30,342) (8,816)
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
(44,596) (24,915) (15,306) (22,790) (8,752) (4,103) (36,957) (14,028)
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
457,091 517,512 1,188,215 1,478,919 32,728 59,384 20,201 27,031
44,596 24,915 14,796 22,199 8,752 4,103 36,957 14,028
(232,659) (209,312) (1,103,751) (1,295,804) (36,836) (56,151) (17,394) (24,083)
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
269,028 333,115 99,260 205,314 4,644 7,336 39,764 16,976
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
410,143 461,003 99,232 205,245 6,766 15,739 34,541 31,273
892,324 431,321 549,470 344,225 123,138 107,399 286,479 255,206
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
$ 1,302,467 $ 892,324 $ 648,702 $ 549,470 $ 129,904 $123,138 $ 321,020 $286,479
=========== ========== =========== =========== ========= ======== ========= ========
23,460 30,067 1,188,215 1,478,919 2,588 4,958 1,608 2,155
2,311 1,569 14,796 22,199 711 351 3,095 1,158
(12,335) (12,155) (1,103,751) (1,295,804) (2,963) (4,710) (1,347) (1,954)
- ----------- ---------- ----------- ----------- --------- -------- --------- --------
13,436 19,481 99,260 205,314 336 599 3,356 1,359
=========== ========== =========== =========== ========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
T. ROWE
PRICE
FEDERATED ASSET
HIGH YIELD ALLOCATION
-------------------------------- --------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)............... $ 12,257 $ 10,610 $ 2,145 $ 2,587
Net realized gain (loss) on investments and
foreign currency transactions............ (22) 1,294 395 2,313
Net change in unrealized appreciation
(depreciation) on investments, foreign
currency transactions, and forward
currency contracts....................... 2,719 6,820 12,811 6,558
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets
from Operations....................... 14,954 18,724 15,351 11,458
--------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net
investment income........................ (10,610) (4,032) (2,585) (1,316)
Distributions to shareholders from capital
gains.................................... (1,263) -- (2,403) (226)
--------- -------- --------- --------
Total Dividends and Distributions to
Shareholders.......................... (11,873) (4,032) (4,988) (1,542)
--------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................. 134,751 151,204 34,446 52,390
Net asset value of shares issued in
reinvestment of dividends and
distributions............................ 11,874 4,032 4,988 1,542
Cost of shares redeemed.................... (43,087) (48,358) (3,344) (3,098)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions.......................... 103,538 106,878 36,090 50,834
--------- -------- --------- --------
Total Increase in Net Assets.......... 106,619 121,570 46,453 60,750
NET ASSETS
Beginning of Period........................ 205,262 83,692 120,149 59,399
--------- -------- --------- --------
End of Period.............................. $ 311,881 $205,262 $ 166,602 $120,149
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold................................ 11,207 13,287 2,545 4,228
Shares issued in reinvestment of dividends
and distributions........................ 1,000 368 377 128
Shares redeemed............................ (3,625) (4,248) (247) (249)
--------- -------- --------- --------
Net Increase in Shares Outstanding....... 8,582 9,407 2,675 4,107
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
PIMCO PIMCO
TOTAL INVESCO FOUNDERS TOTAL
RETURN EQUITY CAPITAL RETURN
BOND INCOME APPRECIATION BOND
- --------------------------- ------------------------------ ------------------------------ ------------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
- ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 11,089 $ 15,701 $ 5,448 $ 7,107 $ (377) $ (527) $ 3,081 $ 2,541
730 (3,854) 16,627 9,984 (5,285) (527) 8,150 2,395
70 1,208 32,602 24,709 5,716 24,027 39,493 34,967
--------- -------- --------- -------- --------- ---------- ---------- --------
11,889 13,055 54,677 41,800 54 22,973 50,724 39,903
--------- -------- --------- -------- --------- ---------- ---------- --------
(15,321) (6,111) (7,141) (3,685) -- -- (2,360) (1,759)
-- (6,703) (9,950) (4,986) -- (1,655) (2,682) --
--------- -------- --------- -------- --------- ---------- ---------- --------
(15,321) (12,814) (17,091) (8,671) -- (1,655) (5,042) (1,759)
--------- -------- --------- -------- --------- ---------- ---------- --------
116,427 196,298 166,116 184,426 75,333 237,559 119,601 222,719
15,321 12,814 17,091 8,671 -- 1,655 5,042 1,759
(25,703) (74,678) (93,504) (54,262) (54,861) (130,924) (57,525) (55,730)
--------- -------- --------- -------- --------- ---------- ---------- --------
106,045 134,434 89,703 138,835 20,472 108,290 67,118 168,748
--------- -------- --------- -------- --------- ---------- ---------- --------
102,613 134,675 127,289 171,964 20,526 129,608 112,800 206,892
360,010 225,335 348,680 176,716 220,068 90,460 402,559 195,667
--------- -------- --------- -------- --------- ---------- ---------- --------
$ 462,623 $360,010 $ 475,969 $348,680 $ 240,594 $ 220,068 $ 515,359 $402,559
========= ======== ========= ======== ========= ========== ========== ========
10,619 18,267 11,595 14,201 4,794 15,149 9,765 19,721
1,429 1,211 1,227 705 -- 115 420 161
(2,357) (6,938) (6,534) (4,116) (3,416) (8,512) (4,642) (4,907)
--------- -------- --------- -------- --------- ---------- ---------- --------
9,691 12,540 6,288 10,790 1,378 6,752 5,543 14,975
========= ======== ========= ======== ========= ========== ========== ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
T.ROWE
PRICE BERGER
INTERNATIONAL CAPITAL
BOND GROWTH
-------------------------------- --------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)............... $ 2,478 $ 3,520 $ 141 $ 223
Net realized gain (loss) on investments and
foreign currency transactions............ (2,478) 1,092 11,380 1,487
Net change in unrealized appreciation
(depreciation) on investments, foreign
currency transactions, and forward
currency contracts....................... (2,056) 458 (2,949) 10,400
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets
from Operations....................... (2,056) 5,070 8,572 12,110
--------- -------- --------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net
investment income........................ (1,563) (697) (223) (150)
Distributions to shareholders from capital
gains.................................... (2,503) (884) (1,347) --
--------- -------- --------- --------
Total Dividends and Distributions to
Shareholders.......................... (4,066) (1,581) (1,570) (150)
--------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................. 41,200 60,046 121,578 147,599
Net asset value of shares issued in
reinvestment of dividends and
distributions............................ 4,066 1,581 1,570 150
Cost of shares redeemed.................... (12,116) (12,483) (113,874) (69,441)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions.......................... 33,150 49,144 9,274 78,308
--------- -------- --------- --------
Total Increase in Net Assets.......... 27,028 52,633 16,276 90,268
NET ASSETS
Beginning of Period........................ 98,235 45,602 136,247 45,979
--------- -------- --------- --------
End of Period.............................. $ 125,263 $ 98,235 $ 152,523 $136,247
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold................................ 4,060 5,742 8,350 10,695
Shares issued in reinvestment of dividends
and distributions........................ 405 156 109 12
Shares redeemed............................ (1,192) (1,183) (7,848) (4,945)
--------- -------- --------- --------
Net Increase in Shares Outstanding....... 3,273 4,715 611 5,762
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO
PRICE LIMITED
FOUNDERS NATURAL MATURITY FOUNDERS
PASSPORT RESOURCES BOND PASSPORT
- ------------------------------ ------------------------------ ------------------------------ ----------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996 (UNAUDITED) 1996
- ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <S> <C>
$ 246 $ 974 $ 527 $ 423 $ 6,464 $ 10,849 $ (181) $ (66)
(2,023) (20) 3,618 2,036 127 (1,321) 182 (57)
10,614 5,257 1,659 7,352 711 (1,512) 13,304 2,814
--------- -------- --------- -------- --------- -------- ---------- --------
8,837 6,211 5,804 9,811 7,302 8,016 13,305 2,691
--------- -------- --------- -------- --------- -------- ---------- --------
(805) (129) (417) (29) (10,857) (761) -- --
(128) -- (2,073) (34) -- (303) -- --
--------- -------- --------- -------- --------- -------- ---------- --------
(933) (129) (2,490) (63) (10,857) (1,064) -- --
--------- -------- --------- -------- --------- -------- ---------- --------
31,845 103,946 32,776 87,969 82,132 104,208 112,762 52,408
933 129 2,489 63 10,857 1,064 -- --
(25,090) (20,969) (18,556) (18,508) (37,253) (65,151) (34,438) (6,309)
--------- -------- --------- -------- --------- -------- ---------- --------
7,688 83,106 16,709 69,524 55,736 40,121 78,324 46,099
--------- -------- --------- -------- --------- -------- ---------- --------
15,592 89,188 20,023 79,272 52,181 47,073 91,629 48,790
117,643 28,455 88,534 9,262 209,013 161,940 48,790 --
--------- -------- --------- -------- --------- -------- ---------- --------
$ 133,235 $117,643 $ 108,557 $ 88,534 $ 261,194 $209,013 $ 140,419 $ 48,790
========= ======== ========= ======== ========= ======== ========== ========
2,687 9,188 2,256 6,706 7,821 9,943 9,607 5,032
78 12 172 5 1,049 102 -- --
(2,108) (1,843) (1,277) (1,428) (3,533) (6,177) (2,991) (593)
--------- -------- --------- -------- --------- -------- ---------- --------
657 7,357 1,151 5,283 5,337 3,868 6,616 4,439
========= ======== ========= ======== ========= ======== ========== ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
AST
PUTNAM TWENTIETH TWENTIETH
AST JANUS VALUE CENTURY CENTURY
OVERSEAS GROWTH & STRATEGIC INTERNATIONAL
GROWTH INCOME BALANCED GROWTH
---------------- ---------------- ---------------- ----------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997(2) JUNE 30, 1997(2) JUNE 30, 1997(2) JUNE 30, 1997(2)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)................. $ 637 $ 212 $ 64 $ 34
Net realized gain (loss) on investments and
foreign currency transactions.............. 2,032 422 (166) 22
Net change in unrealized appreciation
(depreciation) on investments, foreign
currency transactions, and forward currency
contracts.................................. 8,055 2,568 751 1,053
-------- -------- -------- --------
Net Increase (Decrease) in Net Assets from
Operations.............................. 10,724 3,202 649 1,109
-------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income..................................... -- -- -- --
Distributions to shareholders from capital
gains...................................... -- -- -- --
-------- -------- -------- --------
Total Dividends and Distributions to
Shareholders............................ -- -- -- --
-------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................... 125,141 59,673 12,695 20,977
Net asset value of shares issued in
reinvestment of dividends and
distributions.............................. -- -- -- --
Cost of shares redeemed...................... (10,508) (6,479) (540) (3,411)
-------- -------- -------- --------
Increase in Net Assets from Capital Share
Transactions............................ 114,633 53,194 12,155 17,566
-------- -------- -------- --------
Total Increase in Net Assets............ 125,357 56,396 12,804 18,675
NET ASSETS
Beginning of Period.......................... -- -- -- --
-------- -------- -------- --------
End of Period................................ $125,357 $ 56,396 $ 12,804 $ 18,675
======== ======== ======== ========
SHARES ISSUED AND REDEEMED
Shares sold.................................. 11,719 5,541 1,254 1,930
Shares issued in reinvestment of dividends
and distributions.......................... -- -- -- --
Shares redeemed.............................. (930) (603) (53) (316)
-------- -------- ------- -------
Net Increase in Shares Outstanding......... 10,789 4,938 1,201 1,614
======== ======== ======== ========
<CAPTION>
-----------------
PORTFOLIO
- --------------------------------------------------------------------
T. ROWE
PRICE SMALL
COMPANY
VALUE
----------------
SIX MONTHS
ENDED
JUNE 30, 1997(2)
(UNAUDITED)
----------------
<S> <C>
FROM OPERATIONS
Net investment income (loss)................. $ 163
Net realized gain (loss) on investments and
foreign currency transactions.............. 160
Net change in unrealized appreciation
(depreciation) on investments, foreign
currency transactions, and forward currency
contracts.................................. 5,917
--------
Net Increase (Decrease) in Net Assets from
Operations.............................. 6,240
--------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income..................................... --
Distributions to shareholders from capital
gains...................................... --
--------
Total Dividends and Distributions to
Shareholders............................ --
--------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.................... 60,275
Net asset value of shares issued in
reinvestment of dividends and
distributions.............................. --
Cost of shares redeemed...................... (2,710)
--------
Increase in Net Assets from Capital Share
Transactions............................ 57,565
--------
Total Increase in Net Assets............ 63,805
NET ASSETS
Beginning of Period.......................... --
--------
End of Period................................ $ 63,805
========
SHARES ISSUED AND REDEEMED
Shares sold.................................. 5,861
Shares issued in reinvestment of dividends
and distributions.......................... --
Shares redeemed.............................. (255)
--------
Net Increase in Shares Outstanding......... 5,606
========
</TABLE>
- --------------------------------------------------------------------------------
(2) Commenced operations on January 2, 1997.
See Notes to Financial Statements.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 06/30/97* $ 19.22 $ 0.17 $ 2.90 $ 3.07 $ (0.30) $ (0.95) $ (1.25) $21.04
International
Equity 12/31/96 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69) 19.22
12/31/95 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
12/31/94 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
12/31/93 12.74 0.14 4.46 4.60 -- -- -- 17.34
12/31/92 13.90 (0.17) (0.99) (1.16) -- -- -- 12.74
Lord Abbett 06/30/97* $ 17.17 $ 0.13 $ 2.60 $ 2.73 $ (0.23) $ (0.41) $ (0.64) $19.26
Growth and
Income 12/31/96 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52) 17.17
12/31/95 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
12/31/94 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
12/31/93 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
12/31/92(2) 10.00 0.07 0.63 0.70 -- -- -- 10.70
JanCap Growth 06/30/97* $ 18.79 $ 0.03 $ 3.42 $ 3.45 $ (0.05) $ (0.81) $ (0.86) $21.38
12/31/96 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82) 18.79
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
12/31/93 10.53 0.03 1.22 1.25 -- -- -- 11.78
12/31/92(3) 10.00 (0.01) 0.54 0.53 -- -- -- 10.53
AST Money
Market 06/30/97* $ 1.00 $ 0.0248 $ 0.0002 $ 0.0250 $ (0.0248) $(0.0002) $ (0.0250) $ 1.00
12/31/96 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497) 1.00
12/31/95 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
12/31/94 1.00 0.0367 0.0002 0.0369 (0.0367) (0.0002) (0.0369) 1.00
12/31/93 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
12/31/92(4) 1.00 0.0032 -- 0.0032 (0.0032) -- (0.0032) 1.00
Federated
Utility
Income 06/30/97* $ 12.83 $ 0.21 $ 0.91 $ 1.12 $ (0.36) $ (0.51) $ (0.87) $13.08
12/31/96 11.94 0.36 0.97 1.33 (0.44) -- (0.44) 12.83
12/31/95 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
12/31/94 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
12/31/93(5) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam
Balanced 06/30/97* $ 13.19 $ 0.18 $ 1.16 $ 1.34 $ (0.31) $ (1.42) $ (1.73) $12.80
12/31/96 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68) 13.19
12/31/95 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
12/31/94 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
12/31/93(5) 10.00 0.08 0.49 0.57 -- -- -- 10.57
</TABLE>
- --------------------------------------------------------------------------------
* Unaudited.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(2) Commenced operations on May 1, 1992.
(3) Commenced operations on November 6, 1992.
(4) Commenced operations on November 10, 1992.
(5) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
16.82% $ 405,066 72% $ 0.0317 1.15%(1) 1.15%(1) 1.73%(1) 1.73%(1)
9.65% 346,211 124% 0.0151 1.16% 1.26% 0.88% 0.78%
10.00% 268,056 59% -- 1.17% 1.27% 0.88% 0.78%
2.64% 238,050 49% -- 1.22% 1.32% 0.55% 0.46%
36.11% 150,646 32% -- 1.52% 1.52% 0.28% 0.28%
(8.35%) 24,998 55% -- 2.50% 2.50% (1.62%) (1.62%)
16.26% $ 725,789 27% $ 0.0632 0.94%(1) 0.94%(1) 1.78%(1) 1.78%(1)
18.56% 530,497 43% 0.0655 0.97% 0.97% 1.92% 1.92%
28.91% 288,749 50% -- 0.99% 0.99% 2.50% 2.50%
2.22% 92,050 60% -- 1.06% 1.06% 2.45% 2.45%
13.69% 48,385 57% -- 1.22% 1.33% 2.05% 1.94%
7.00% 10,159 34% -- 0.99%(1) 1.75%(1) 2.49%(1) 1.73%(1)
18.82% $ 1,302,467 48% $ 0.0644 1.08%(1) 1.08%(1) 0.35%(1) 0.35%(1)
28.36% 892,324 79% 0.0569 1.10% 1.10% 0.25% 0.25%
37.98% 431,321 113% -- 1.12% 1.12% 0.51% 0.51%
(4.51%) 245,645 94% -- 1.18% 1.18% 0.62% 0.62%
11.87% 157,852 92% -- 1.22% 1.22% 0.35% 0.35%
5.30% 15,218 2% -- 1.33%(1) 2.21%(1) (0.90%)(1) (1.78%)(1)
2.50% $ 648,702 N/A N/A 0.60%(1) 0.64%(1) 4.99%(1) 4.95%(1)
5.08% 549,470 N/A N/A 0.60% 0.71% 4.87% 4.76%
5.05% 344,225 N/A -- 0.60% 0.72% 5.38% 5.26%
3.75% 288,588 N/A -- 0.64% 0.76% 3.90% 3.78%
2.55% 114,074 N/A -- 0.65% 0.84% 2.53% 2.34%
0.32% 4,294 N/A -- 0.65%(1) 1.15%(1) 2.43%(1) 1.93%(1)
9.15% $ 129,904 32% $ 0.0403 0.91%(1) 0.91%(1) 3.55%(1) 3.55%(1)
11.53% 123,138 81% 0.0446 0.93% 0.93% 3.14% 3.14%
26.13% 107,399 71% -- 0.93% 0.93% 4.58% 4.58%
(6.95%) 71,205 54% -- 0.99% 0.99% 5.11% 5.11%
7.90% 57,643 5% -- 1.18%(1) 1.18%(1) 5.09%(1) 5.09%(1)
11.08% $ 321,020 141% $ 0.0437 1.02%(1) 1.02%(1) 3.04%(1) 3.04%(1)
11.23% 286,479 276% 0.0516 0.94% 0.94% 2.66% 2.66%
22.60% 255,206 161% -- 0.94% 0.94% 3.28% 3.28%
0.09% 145,624 87% -- 0.99% 0.99% 3.08% 3.08%
5.70% 91,591 46% -- 1.13%(1) 1.13%(1) 2.53%(1) 2.53%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- --------------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High
Yield 06/30/97* $ 12.13 $ 0.39 $ 0.31 $ 0.70 $(0.54) $(0.06) $ (0.60) $ 12.23
12/31/96 11.14 0.56 0.90 1.46 (0.47) -- (0.47) 12.13
12/31/95 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
12/31/94(6) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price 06/30/97* $ 13.27 $ 0.16 $ 1.28 $ 1.44 $(0.26) $(0.24) $ (0.50) $ 14.21
Asset
Allocation 12/31/96 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29) 13.27
12/31/95 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
12/31/94(6) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total 06/30/97* $ 11.11 $ 0.24 $ 0.09 $ 0.33 $(0.45) $ -- $ (0.45) $ 10.99
Return Bond 12/31/96 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59) 11.11
12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
12/31/94(6) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity
Income 06/30/97* $ 13.99 $ 0.15 $ 1.74 $ 1.89 $(0.26) $(0.37) $ (0.63) $ 15.25
12/31/96 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57) 13.99
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
12/31/94(6) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders
Capital 06/30/97* $ 16.80 $(0.02) $(0.16) $(0.18) $ -- $ -- $ -- $ 16.62
Appreciation 12/31/96 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27) 16.80
12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
12/31/94(6) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 06/30/97* $ 12.07 $ 0.08 $ 1.25 $ 1.33 $(0.07) $(0.08) $ (0.15) $ 13.25
International
Equity 12/31/96 10.65 0.06 1.44 1.50 (0.08) -- (0.08) 12.07
12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
12/31/94(6) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price 06/30/97* $ 10.90 $ 0.13 $(0.42) $(0.29) $(0.16) $(0.26) $ (0.42) $ 10.19
International
Bond 12/31/96 10.60 0.23 0.38 0.61 (0.14) (0.17) (0.31) 10.90
12/31/95 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
12/31/94(7) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
</TABLE>
- --------------------------------------------------------------------------------
* Unaudited.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(6) Commenced operations on January 4, 1994.
(7) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.97% $ 311,881 14% N/A 1.00%(1) 1.00%(1) 9.86% (1) 9.86%(1)
13.58% 205,262 43% N/A 1.03% 1.03% 8.02% 8.02%
19.57% 83,692 30% -- 1.11% 1.11% 8.72% 8.72%
(3.10%) 21,308 41% -- 1.15%(1) 1.34%(1) 9.06% (1) 8.87%(1)
11.20% $ 166,602 5% $ 0.0349 1.14%(1) 1.14%(1) 3.08% (1) 3.08%(1)
13.14% 120,149 31% 0.0366 1.20% 1.20% 3.02% 3.02%
23.36% 59,399 18% -- 1.25% 1.29% 3.53% 3.49%
(0.60%) 23,463 32% -- 1.25%(1) 1.47%(1) 3.64% (1) 3.42%(1)
3.03% $ 462,623 159% N/A 0.88%(1) 0.88%(1) 5.73% (1) 5.73%(1)
3.42% 360,010 403% N/A 0.89% 0.89% 5.38% 5.38%
18.78% 225,335 124% -- 0.89% 0.89% 5.95% 5.95%
(2.50%) 46,493 139% -- 1.02%(1) 1.02%(1) 5.57% (1) 5.57%(1)
13.92% $ 475,969 38% $ 0.0600 0.96%(1) 0.96%(1) 2.69% (1) 2.69%(1)
17.09% 348,680 58% 0.0603 0.98% 0.98% 2.83% 2.83%
30.07% 176,716 89% -- 0.98% 0.98% 3.34% 3.34%
(2.50%) 65,201 63% -- 1.14%(1) 1.14%(1) 3.41% (1) 3.41%(1)
(1.13%) $ 240,594 31% $ 0.0523 1.14%(1) 1.14%(1) (0.35%)(1) (0.35%)(1)
20.05% 220,068 69% 0.0573 1.16% 1.16% (0.38%) (0.38%)
32.56% 90,460 68% -- 1.22% 1.22% (0.28%) (0.28%)
8.40% 28,559 198% -- 1.30%(1) 1.55%(1) 2.59% (1) 2.34%(1)
11.09% $ 515,359 8% $ 0.0232 1.26%(1) 1.26%(1) 1.41% (1) 1.41%(1)
14.17% 402,559 11% 0.0255 1.30% 1.30% 0.84% 0.84%
11.09% 195,667 17% -- 1.33% 1.33% 1.03% 1.03%
(3.80%) 108,751 16% -- 1.75%(1) 1.77%(1) 0.45% (1) 0.43%(1)
(2.56%) $ 125,263 90% N/A 1.10%(1) 1.10%(1) 4.76% (1) 4.76%(1)
5.98% 98,235 241% N/A 1.21% 1.21% 5.02% 5.02%
11.10% 45,602 325% -- 1.53% 1.53% 6.17% 6.17%
(3.20%) 15,218 163% -- 1.68%(1) 1.68%(1) 7.03% (1) 7.03%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
-------------------------------------- LESS DISTRIBUTIONS
NET ASSET NET ------------------------------------- NET ASSET
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ---------- -------- --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Berger
Capital
Growth 06/30/97* $ 14.39 $ 0.01 $ 0.88 $ 0.89 $(0.02) $(0.13) $ (0.15) $15.13
12/31/96 12.40 0.01 2.01 2.02 (0.03) -- (0.03) 14.39
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
12/31/94(8) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders
Passport 06/30/97* $ 11.63 $ 0.02 $ 0.81 $ 0.83 $(0.08) $(0.01) $ (0.09) $12.37
12/31/96 10.33 0.09 1.24 1.33 (0.03) -- (0.03) 11.63
12/31/95(9) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe
Price 06/30/97* $ 14.47 $ 0.07 $ 0.79 $ 0.86 $(0.07) $(0.32) $ (0.39) $14.94
Natural
Resources 12/31/96 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04) 14.47
12/31/95(9) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO
Limited 06/30/97* $ 10.81 $ 0.26 $ 0.08 $ 0.34 $(0.56) $ -- $ (0.56) $10.59
Maturity
Bond 12/31/96 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
12/31/95(9) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson
Stephens 06/30/97* $ 10.99 $(0.02) $ 1.73 $ 1.71 -- -- -- $12.70
Value +
Growth 12/31/96(10) 10.00 (0.01) 1.00 0.99 -- -- -- 10.99
AST Janus
Overseas
Growth 06/30/97(11) $ 10.00 $ 0.06 $ 1.56 $ 1.62 -- -- -- $11.62
AST Putnam
Value
Growth &
Income 06/30/97(11) $ 10.00 $ 0.04 $ 1.38 $ 1.42 -- -- -- $11.42
Twentieth
Century
Strategic
Balanced 06/30/97(11) $ 10.00 $ 0.05 $ 0.61 $ 0.66 -- -- -- $10.66
Twentieth
Century
International
Growth 06/30/97(11) $ 10.00 $ 0.02 $ 1.55 $ 1.57 -- -- -- $11.57
T. Rowe
Price
Small
Company
Value 06/30/97(11) $ 10.00 $ 0.03 $ 1.35 $ 1.38 -- -- -- $11.38
</TABLE>
- --------------------------------------------------------------------------------
* Unaudited.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
(1) Annualized.
(8) Commenced operations on October 20, 1994.
(9) Commenced operations on May 2, 1995.
(10) Commenced operations on May 2, 1996.
(11) Commenced operations on January 2, 1997 (unaudited).
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
RATIOS OF NET INVESTMENT
RATIOS OF EXPENSES INCOME (LOSS)
TO AVERAGE NET ASSETS TO AVERAGE NET ASSETS
------------------------------ ------------------------------
SUPPLEMENTAL DATA AFTER BEFORE AFTER BEFORE
------------------------------------------------- ADVISORY ADVISORY ADVISORY ADVISORY
NET ASSETS AT PORTFOLIO AVERAGE FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER COMMISSION AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE RATE PAID+ REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- -------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6.29% $ 152,523 158% $ 0.0605 0.99%(1) 0.99%(1) 0.20%(1) 0.20%(1)
16.34% 136,247 156% 0.0614 1.01% 1.01% 0.24% 0.24%
24.42% 45,979 84% -- 1.17% 1.17% 0.70% 0.70%
(0.30%) 3,030 5% -- 1.25%(1) 1.70%(1) 1.41%(1) 0.97%(1)
7.14% $ 133,235 29% $ 0.0108 1.32%(1) 1.32%(1) 0.39%(1) 0.39%(1)
12.91% 117,643 133% 0.0190 1.36% 1.36% 1.25% 1.25%
3.30% 28,455 4% -- 1.46%(1) 1.46%(1) 0.94%(1) 0.94%(1)
6.02% $ 108,557 28% $ 0.0210 1.17%(1) 1.17%(1) 1.07%(1) 1.07%(1)
30.74% 88,534 31% 0.0238 1.30% 1.30% 1.08% 1.08%
11.10% 9,262 2% -- 1.35%(1) 1.80%(1) 1.28%(1) 0.83%(1)
3.26% $ 261,194 21% N/A 0.89%(1) 0.89%(1) 5.77%(1) 5.77%(1)
3.90% 209,013 247% N/A 0.89% 0.89% 5.69% 5.69%
4.70% 161,940 205% -- 0.89%(1) 0.89%(1) 4.87%(1) 4.87%(1)
15.56% $ 140,419 91% $ 0.0565 1.24%(1) 1.24%(1) (0.40%)(1) (0.40%)(1)
9.90% 48,790 77% 0.0529 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
16.20% $ 125,357 22% $ 0.0207 1.29%(1) 1.29%(1) 2.53%(1) 2.53%(1)
14.20% $ 56,396 37% $ 0.0334 1.11%(1) 1.11%(1) 2.03%(1) 2.03%(1)
6.60% $ 12,804 6% $ 0.0289 1.25%(1) 1.42%(1) 2.32%(1) 2.15%(1)
15.70% $ 18,675 54% $ 0.0072 1.66%(1) 1.66%(1) 1.32%(1) 1.32%(1)
13.80% $ 63,805 2% $ 0.0460 1.20%(1) 1.20%(1) 1.20%(1) 1.20%(1)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
American Skandia Trust (the "Trust"), was organized under the laws of the
Commonwealth of Massachusetts on October 31, 1988, as a "Massachusetts Business
Trust". The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Trust operates as a
series company, issuing 23 classes of shares of beneficial interest during 1997:
AST Putnam International Equity Portfolio ("Putnam International"), Lord Abbett
Growth and Income Portfolio ("Lord Abbett"), JanCap Growth Portfolio ("JanCap"),
AST Money Market Portfolio ("Money Market"), Federated Utility Income Portfolio
("Federated"), AST Putnam Balanced Portfolio ("Putnam Balanced"), Federated High
Yield Portfolio ("High Yield"), T. Rowe Price Asset Allocation Portfolio ("Asset
Allocation"), PIMCO Total Return Bond Portfolio ("PIMCO"), INVESCO Equity Income
Portfolio ("INVESCO"), Founders Capital Appreciation Portfolio ("Founders"), T.
Rowe Price International Equity Portfolio ("T. Rowe"), T. Rowe Price
International Bond Portfolio ("International Bond"), Berger Capital Growth
Portfolio ("Berger"), Founders Passport Portfolio ("Passport"), T. Rowe Price
Natural Resources Portfolio ("Natural Resources"), PIMCO Limited Maturity Bond
Portfolio ("Limited Maturity"), Robertson Stephens Value + Growth Portfolio
("Robertson Stephens"), AST Janus Overseas Growth Portfolio ("Janus Overseas"),
AST Putnam Value Growth & Income Portfolio ("Putnam Value"), Twentieth Century
Strategic Balanced Portfolio ("TC Balanced"), Twentieth Century International
Growth Portfolio ("TC International"), and T. Rowe Price Small Company Value
Portfolio ("Small Company") (collectively "the Portfolios").
The following is a summary of the Trust's significant accounting policies:
Security Valuation
All Portfolios, other than Money Market: Securities are valued at the close of
regular trading on each business day the New York Stock Exchange ("NYSE") is
open. Securities are valued at the last sale price on the securities exchange or
securities market on which such securities primarily are traded. Securities not
listed on an exchange or securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by or at
the direction of the Board of Trustees.
Short-term obligations which mature in sixty days or less are valued at
amortized cost. Short-term obligations with more than sixty days remaining to
maturity are valued at current market value until the sixtieth day prior to
maturity, and thereafter are valued on an amortized cost basis based on the
value on such date.
Money Market: Securities are valued at amortized cost. The amortized cost method
values a security at its cost at the time of purchase and thereafter assumes a
constant amortization to maturity of any discount or premium.
Foreign Currency Translation and Foreign Currency Exchange Contracts
The Trust's investment valuations, other assets, and liabilities initially
expressed in foreign currencies are converted each business day into U.S.
dollars based upon current exchange rates determined prior to the close of the
NYSE. Purchases and sales of foreign investments and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Gains and losses attributable to changes
in foreign currency exchange rates are recorded for financial statement purposes
as net realized gains and losses on investments and foreign currency
transactions.
A foreign currency exchange contract (FCEC) is a commitment to purchase or sell
a specified amount of
<PAGE>
- --------------------------------------------------------------------------------
foreign currency at the settlement date at a specified rate. FCECs are used to
hedge against foreign exchange rate risk arising from a Portfolio's investment
or anticipated investment in securities denominated in foreign currencies. Risks
may arise upon entering into FCECs from the potential inability of
counterparties to meet the terms of their contracts. Also, when utilizing FCECs
a Portfolio may give up the opportunity to profit from favorable exchange rate
movements during the term of the contract. FCECs are marked-to-market daily at
the applicable exchange rates and any gains or losses are recorded as unrealized
until the contract settlement date.
Futures Contracts and Options
Certain Portfolios may enter into futures contracts for the delayed delivery of
securities, currency, or contracts based upon financial indices, at an agreed
upon price and date. Such contracts require an initial deposit, either in cash
or securities, equal to a certain percentage of the contract amount. Subsequent
payments are made or received by the Portfolios, depending on the fluctuations
in the value of the underlying instrument, and are recorded as unrealized gains
and losses.
Certain Portfolios may write covered call or put options for which premiums are
received in cash and are recorded as liabilities, adjusted to reflect the value
of the options written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. If a put option is
exercised, the premium reduces the cost basis of the security or currency
purchased.
For both futures and options, risks arise from possible illiquidity, the
potential inability of counterparties to meet the terms of their contracts, and
from movements in interest or exchange rates or securities values. Futures and
options are valued based on their quoted daily settlement prices.
Investment Transactions and Investment Income
Security transactions are accounted for on the trade date. Realized gains and
losses from security transactions are recognized on the specific identification
basis. Dividend income is recorded on the ex-dividend date. Corporate actions,
including dividends, on foreign securities are recorded on the ex-dividend date
or, if such information is not available, as soon as reliable information is
available from the Trust's sources. Interest income is recorded on the accrual
basis.
Dividends and Distributions to Shareholders
All Portfolios other than Money Market: Dividends and distributions arising from
net investment income and net realized capital gains, if any, are declared and
paid annually.
Money Market: Dividends from net investment income are declared daily and paid
monthly, and capital gains, if any, are declared and paid annually.
Distributions to shareholders are recorded on their ex-dividend date.
2. INVESTMENT MANAGEMENT AGREEMENTS,
INVESTMENT SUB-ADVISORY AGREEMENTS
AND TRANSACTIONS WITH AFFILIATES
The Portfolios have entered into Investment Management Agreements with American
Skandia Investment Services, Inc. (the "Investment Manager") which provide that
the Investment Manager will furnish each Portfolio with investment advice and
investment management and administrative services. The Investment Manager has
engaged the following firms as Sub-advisors for their respective Portfolios:
Putnam Investment Management, Inc. for Putnam International, Putnam Balanced,
and Putnam Value; Lord, Abbett & Co. for
<PAGE>
- --------------------------------------------------------------------------------
Lord Abbett; Janus Capital Corporation for JanCap and Janus Overseas; J. P.
Morgan Investment Management Inc. for Money Market; Federated Investment
Counseling for Federated and High Yield; T. Rowe Price Associates, Inc. for
Asset Allocation, Natural Resources, and Small Company; Pacific Investment
Management Co. for PIMCO and Limited Maturity; INVESCO Trust Co. for INVESCO;
Founders Asset Management, Inc. for Founders and Passport; Rowe Price-Fleming
International, Inc., a United Kingdom Corporation, for T. Rowe and International
Bond; Berger Associates, Inc. for Berger; Robertson, Stephens & Company
Investment Management, L.P. for Robertson Stephens; and American Century
Investment Management, Inc. for TC Balanced and TC International. The Investment
Manager receives a fee computed daily and paid monthly based on an annual rate
of 1.00%, .75%, .90%, .50%, .75%, .75%, .75%, .85%, .65%, .75%, .90%, 1.00%,
.80%, .75%, 1.00%, .90%, .65%, 1.00%, 1.00%, .75%, .85%, 1.00%, and .90% of the
average daily net assets of the Putnam International, Lord Abbett, JanCap, Money
Market, Federated, Putnam Balanced, High Yield, Asset Allocation, PIMCO,
INVESCO, Founders, T. Rowe, International Bond, Berger, Passport, Natural
Resources, Limited Maturity, Robertson Stephens, Janus Overseas, Putnam Value,
TC Balanced, TC International, and Small Company Portfolios, respectively. The
fees for Putnam International are at the rate of .85% for average daily net
assets in excess of $75 million, for Federated are at the rate of .60% for
average daily net assets in excess of $50 million, and for Putnam Balanced are
at the rate of .70% for average daily net assets in excess of $300 million. The
Investment Manager is currently voluntarily waiving .05% of its fee for Money
Market.
The Investment Manager pays each Sub-advisor a fee computed daily and payable
monthly based on an annual rate of .65%, .50%, .60%, .25%, .50%, .45%, .50%,
.50%, .30%, .50%, .65%, .75%, .40%, .55%, .60%, .60%, .30%, .60%, .65%, .45%,
.50%, .70%, and .60% of the average daily net assets of the Putnam
International, Lord Abbett, JanCap, Money Market, Federated, Putnam Balanced,
High Yield, Asset Allocation, PIMCO, INVESCO, Founders, T. Rowe, International
Bond, Berger, Passport, Natural Resources, Limited Maturity, Robertson Stephens,
Janus Overseas, Putnam Value, TC Balanced, TC International, and Small Company
Portfolios, respectively. The Sub-advisor for Money Market is currently
voluntarily waiving a portion of the fee payable to them by the Investment
Manager. The annual rates of the fees payable by the Investment Manager to the
Sub-advisors of all Portfolios, other than International Bond, are reduced for
Portfolio net assets in excess of specified levels.
The Investment Management Agreement with each Portfolio provides that the
Investment Manager will reimburse the Portfolio to prevent its expenses from
exceeding a specific percentage limit. During the six months ended June 30,
1997, the Investment Manager reimbursed Money Market and TC Balanced in the
amount of $133,483 and $4,638, respectively.
The Trust has entered into an agreement with American Skandia Life Assurance
Corporation ("ASLAC") pursuant to which it pays ASLAC a shareholder servicing
fee at an annual rate of .10% of each Portfolio's average daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or directors
of the Investment Manager. During the six months ended June 30, 1997, the Trust
made no direct payments to its officers or interested Trustees.
3. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and proceeds from securities sold, excluding
short-term obligations, during the six months ended June 30, 1997 were ($ in
thousands): $259,811 and $250,618 for Putnam International, $263,902 and
$152,407 for Lord Abbett, $781,821 and $473,482 for JanCap, $38,811 and $39,291
<PAGE>
- --------------------------------------------------------------------------------
for Federated, $218,628 and $225,958 for Putnam Balanced, $123,436 and $33,686
for High Yield, $30,492 and $6,073 for Asset Allocation, $679,417 and $723,648
for PIMCO, $233,997 and $145,324 for INVESCO, $79,083 and $60,828 for Founders,
$89,845 and $33,375 for T. Rowe, $98,436 and $84,444 for International Bond,
$203,661 and $200,420 for Berger, $47,750 and $31,586 for Passport, $35,366 and
$24,971 for Natural Resources, $81,962 and $40,823 for Limited Maturity,
$159,247 and $78,761 for Robertson Stephens, $106,081 and $11,185 for Janus
Overseas, $61,792 and $9,163 for Putnam Value, $11,545 and $1,811 for TC
Balanced, $20,220 and $3,426 for TC International, and $54,380 and $723 for
Small Company, respectively.
4. TAX MATTERS
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code pertaining to regulated investment companies and to distribute all of its
taxable income, as well as any net realized gains, to its shareholders.
Therefore, no federal income or excise tax provision has been made. Foreign
taxes have been provided for on dividend and interest income earned on foreign
investments in accordance with the applicable country's tax rates and, to the
extent unrecoverable, are recorded as a reduction of investment income.
Tax Cost of Investments
At June 30, 1997, the net unrealized appreciation or depreciation based on the
cost of investments for federal income tax purposes was as follows ($ in
thousands):
<TABLE>
<CAPTION>
TAX GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION (DEPRECIATION)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Putnam
International........ $ 346,051 $ 60,075 $ (2,495) $ 57,580
Lord Abbett........... 584,049 140,075 (1,308) 138,767
JanCap................ 981,656 321,357 (9,594) 311,763
Money Market.......... 668,239 -- -- --
Federated............. 112,475 17,219 (1,059) 16,160
Putnam Balanced....... 299,953 29,009 (1,894) 27,115
High Yield............ 298,963 13,025 (1,397) 11,628
Asset Allocation...... 141,617 26,042 (1,519) 24,523
PIMCO................. 535,843 5,349 (793) 4,556
INVESCO............... 398,516 77,555 (2,745) 74,810
Founders.............. 199,095 51,065 (7,967) 43,098
T. Rowe............... 402,936 98,130 (12,635) 85,495
International Bond.... 101,709 1,925 (2,708) (783)
Berger................ 140,082 15,045 (2,698) 12,347
Passport.............. 119,261 19,995 (4,090) 15,905
Natural Resources..... 99,447 13,998 (4,604) 9,394
Limited Maturity...... 261,130 1,395 (1,838) (443)
Robertson Stephens.... 124,351 17,738 (1,624) 16,114
Janus Overseas........ 123,400 9,463 (1,687) 7,776
Putnam Value.......... 54,324 3,025 (457) 2,568
TC Balanced........... 12,296 821 (70) 751
TC International...... 17,306 1,183 (145) 1,038
Small Company......... 62,678 6,441 (538) 5,903
</TABLE>
Capital Loss Carryforwards
At December 31, 1996, for federal income tax purposes, capital loss
carryforwards ($ in thousands) which may be applied against future net taxable
realized gains of each succeeding year until the earlier of utilization or
expiration in 2004 were: $3,901 for PIMCO, $521 for Founders, $1,177 for Limited
Maturity, and $8 for Robertson Stephens.
<PAGE>
- --------------------------------------------------------------------------------
Reporting of Distributions
The Trust distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits be reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Other financial statement reclassifications, due to permanent differences
between book and tax accounting, had no effect on the net assets or net asset
value per share.
5. WRITTEN OPTION TRANSACTIONS
Written option transactions entered into during the six months ended June 30,
1997 are summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
PIMCO LIMITED MATURITY
----------------------- -----------------------
NUMBER NUMBER
OF CONTRACTS PREMIUM OF CONTRACTS PREMIUM
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Balance at beginning of
period.................. 962 $ 669 143 $44
Written.................. 750 495 -- --
Expired.................. (1,362) (873) 143 44
Exercised................ -- -- --
Closing buys............. -- -- -- --
----- ------ ----- -----
Balance at end of
period.................. 350 $ 291 -- $--
===== ====== ===== =====
</TABLE>
At June 30, 1997, PIMCO and Limited Maturity had sufficient cash and/or
securities at least equal to the value of written options.
<PAGE>
<PAGE>
APPENDIX
Description of Certain Debt Securities Ratings
Moody's Investors Service, Inc. ("Moody's")
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large, or exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard & Poor's Corporation ("Standard & Poor's")
AAA -- Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a strong capacity to pay interest and repay
principal, and differs from the highest rated issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB -- Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB rating.
B -- Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, economic or financial conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC -- The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest
is being paid.
D -- Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by the
addition of a plus of minus sign to show relative standing within the major
rating categories.
c -- The letter c indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L -- The letter L indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that the deposit, combined with
other deposits being held in the same and right capacity, will be honored for
principal and accrued predefault interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
p -- The letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* -- Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r -- The r is attached to highlight derivative, hybrid, and certain
other obligations that Standard & Poor's believes may experience high volatility
or high variability in expected returns due to noncredit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities.
Description of Certain Commercial Paper Ratings
Moody's
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Standard & Poor's
A-1 -- This highest category indicates that the degree of safety
regarding time payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of the
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated B are regarded as having only speculative capacity
for timely payment.
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period.
<TABLE>
<CAPTION>
PART C. OTHER INFORMATION
<S> <C> <C> <C> <C>
ITEM 24. Financial Statements and Exhibits
(a) Financial statements contained in Part A:
(1) Financial Highlights for the period April 19, 1989
(commencement of operations) to June 30, 1997.
Financial Statements contained in Part B:
(2) Audited Financial Statements for the Trust for the year
ended December 31, 1996.
(a) Independent Auditors' Report;
(b) Schedules of Investments as of December 31, 1996;
(c) Statements of Assets and Liabilities as of December 31, 1996;
(d) Statements of Operations for the year ended December 31, 1996;
(e) Statements of Changes in Net Assets for the years ended December 31, 1995 and
December 31, 1996;
(f) Financial Highlights for the period April
19, 1989 (commencement of operations) to
December 31, 1996; and
(g) Notes to Financial Statements.
(3) Unaudited Financial Statements for the Trust for the
period ended June 30, 1997.
(a) Schedules of Investments as of June 30, 1997; (b)
Statements of Assets and Liabilities as of June 30,
1997; (c) Statements of Operations for the six month
period ended June 30, 1997; (d) Statements of Changes
in Net Assets for the year ended December 31, 1996
and the six
month period ended June 30, 1997;
(e) Financial Highlights for the period April 19, 1989 (commencement of operations) to
June 30, 1997; and
(f) Notes to Financial Statements.
(b) Exhibits
i 1. (a) Form of Declaration of Trust of Registrant.
iii (b) Amendment to Agreement and Declaration of Trust of Registrant.
iv (c) Amendment to Declaration of Trust of Registrant.
i 2. Form of By-laws of Registrant.
3. None.
ii 4. Specimen certificate for shares of beneficial interest of
Registrant.
iv 5. (a) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Lord Abbett Growth and Income Portfolio.
v (b) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the JanCap Growth Portfolio.
v (c) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST Money Market.
vi (d) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Federated Utility Income Portfolio.
vii (e) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Federated High Yield Portfolio.
vii (f) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the T. Rowe Price Asset Allocation Portfolio.
vii (g) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the T. Rowe Price International Equity Portfolio.
vii (h) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Founders Capital Appreciation Portfolio.
vii (i) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the INVESCO Equity Income Portfolio.
vii (j) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the PIMCO Total Return Portfolio.
viii (k) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Berger Capital Growth Portfolio.
ix (l) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for T. Rowe Price Natural Resources Portfolio.
ix (m) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for PIMCO Limited Maturity Bond Portfolio.
x (n) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the T. Rowe Price International Bond Portfolio.
x (o) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Robertson Stephens Value + Growth Portfolio.
xi (p) Investment Management Agreement between
Registrant and American Skandia Investment
Services, Incorporated for the AST Janus
Overseas Growth Portfolio.
xi (q) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the T. Rowe Price Small Company Value Portfolio.
xi (r) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Founders Passport Portfolio.
xi (s) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Twentieth Century International Growth Portfolio.
xi (t) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Twentieth Century Strategic Balanced Portfolio.
xi (u) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam Value Growth & Income Portfolio.
xi (v) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam International Equity Portfolio.
xi (w) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Putnam Balanced Portfolio.
* (x) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the Lord Abbett Small Cap Value Portfolio.
* (y) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Robertson Contrarian Portfolio.
* (z) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Cohen & Steers Real Estate Investment Portfolio.
* (aa) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Stein Roe Small Cap Blend Portfolio.
* (bb) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Bankers Trust Enhanced 500 Index Portfolio.
* (cc) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the Marsico Capital Growth Portfolio.
iv (dd) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Lord, Abbett & Co. for the Lord Abbett Growth and Income Portfolio.
v (ee) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Janus Capital Corporation for the JanCap Growth Portfolio.
v (ff) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
J.P. Morgan Investment Management, Inc. for the AST Money Market Portfolio.
vi (gg) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Federated Investment Counseling for the Federated Utility Income Portfolio.
vii (hh) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Federated Investment Counseling for the Federated High Yield Portfolio.
vii (ii) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
T. Rowe Price Associates, Inc. for the T. Rowe Price Asset Allocation Portfolio.
vii (jj) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Equity
Portfolio.
vii (kk) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Founders Asset Management, Inc. for the Founders Capital Appreciation Portfolio.
vii (ll) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Pacific Investment Management Company for the PIMCO Total Return Portfolio.
viii (mm) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Berger Associates, Inc.
ix (nn) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
T. Rowe Price Associates, Inc. for the T. Rowe Price Natural Resources Portfolio.
ix (oo) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Pacific Investment Management Company for the PIMCO Limited Maturity Bond Portfolio.
x (pp) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Rowe Price-Fleming International, Inc. for the T. Rowe Price International Bond
Portfolio.
xi (qq) Sub-advisory Agreement between American
Skandia Investment Services, Incorporated
and Janus Capital Corporation for the AST
Janus Overseas Growth Portfolio.
xi (rr) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
T. Rowe Price Associates, Inc. for the T. Rowe Price Small Company Value Portfolio.
xi (ss) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Founders Asset Management, Inc. for the Founders Passport Portfolio.
xi (tt) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the Twentieth Century International Growth
Portfolio.
xi (uu) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the Twentieth Century Strategic Balanced Portfolio.
xi (vv) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam Value Growth & Income Portfolio.
xi (ww) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam International Equity Portfolio.
xi (xx) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Putnam Investment Management, Inc. for the AST Putnam Balanced Portfolio.
(yy) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
INVESCO Trust Company for the INVESCO Equity Income Portfolio.
(zz) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Robertson, Stephens & Company Investment Management, L.P. for the Robertson Stephens
Value + Growth Portfolio.
* (aaa) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Lord, Abbett & Co. for the Lord Abbett Small Cap Value Portfolio.
* (bbb) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Robertson, Stephens & Company Investment Management, L.P. for the Robertson Stephens
Contrarian Portfolio.
* (ccc) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Cohen & Steers Capital Management, Inc. for the Cohen & Steers Real Estate Investment
Portfolio.
* (ddd) Sub-advisory Agreement between
American Skandia Investment Services,
Incorporated and Stein Roe & Farnham
Incorporated for the Stein Roe Small Cap
Blend Portfolio.
* (eee) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Bankers Trust Global Investment Management for the Bankers Trust Enhanced 500 Index
Portfolio.
* (fff) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Marsico Capital Management, LLC for the Marsico Capital Growth Portfolio.
iv 6. (a) Sales Agreement between Registrant and American Skandia Life Assurance
Corporation.
xi (b) Sales Agreement between Registrant and Kemper Investors Life Insurance Company.
7. None.
v 8. (a) Custodian Agreement between Registrant and Morgan Stanley Trust Company for the
Henderson International Growth Portfolio.
v (b) Amended Custodian Agreement between Registrant and Provident National Bank.
v (c) Amended Transfer Agency Agreement between Registrant and Provident Financial
Processing Corporation.
v 9. (a) Amended Administration Agreement between Registrant and Provident Financial Processing
Corporation.
xii (b) Service Agreement between American Skandia Investment Services, Incorporated and
Kemper Investors Life Insurance Company.
10. Consent of Counsel for the Registrant.
11. Independent Auditors' Consent.
12. None.
ii 13. Certificate re: initial $100,000 capital.
14. None.
15. None.
* 16. Calculation of Performance Information.
17. Financial Data Schedules.
18. None.
- --------------------------
</TABLE>
* To be filed by amendment.
i Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement, which Amendment was filed on October 7, 1988, and is incorporated
herein by reference.
ii Filed as an Exhibit to Pre-Effective Amendment No. 2 to Registration
Statement, which Amendment was filed on April 20, 1989, and is
incorporated herein by reference.
iii Filed as an Exhibit to Post-Effective Amendment No. 2 to Registration
Statement, which Amendment was filed on April 30, 1991, and is
incorporated herein by reference.
iv Filed as an Exhibit to Post-Effective Amendment No. 4 to Registration
Statement, which Amendment was filed on August 25, 1992, and is
incorporated herein by reference.
v Filed as an Exhibit to Post-Effective Amendment No. 5 to Registration
Statement, which Amendment was filed on October 30, 1992, and is
incorporated herein by reference.
vi Filed as an Exhibit to Post-Effective Amendment No. 7 to Registration
Statement, which was filed on April 20, 1993 and is incorporated herein
by reference.
vii Filed as an Exhibit to Post-Effective Amendment No. 10 to Registration
Statement, which Amendment was filed on December 9, 1993, and is
incorporated herein by reference.
viii Filed as an Exhibit to Post-Effective Amendment No. 13 to Registration
Statement, which Amendment was filed on October 12, 1994, and is
incorporated herein by reference.
ix Filed as an Exhibit to Post-Effective Amendment No. 16 to Registration
Statement, which Amendment was filed on April 21, 1995, and is
incorporated herein by reference.
x Filed as an Exhibit to Post-Effective Amendment No. 18 to Registration
Statement, which Amendment was filed on April 30, 1996, and is
incorporated herein by reference.
xi Filed as an Exhibit to Post-Effective Amendment No. 20 to Registration
Statement, which Amendment was filed on December 24, 1996, and is
incorporated herein by reference.
xii Filed as an Exhibit to Post-Effective Amendment No. 21 to Registration
Statement, which Amendment was filed on February 28, 1997, and is
incorporated herein by reference.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
See Registrant's Prospectus under "Organization and Management of the
Trust" and Registrant's Statement of Additional Information under "Management."
<TABLE>
<CAPTION>
ITEM 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of September 15, 1997
-------------- ------------------------
<S> <C>
Lord Abbett Growth and Income Portfolio 4
AST Money Market Portfolio 3
JanCap Growth Portfolio 3
AST Janus Overseas Growth Portfolio 4
Federated Utility Income Portfolio 4
Federated High Yield Portfolio 4
T. Rowe Price Asset Allocation Portfolio 4
T. Rowe Price International Equity Portfolio 4
T. Rowe Price Natural Resources Portfolio 4
T. Rowe Price International Bond Portfolio 4
T. Rowe Price Small Company Value Portfolio 4
Founders Capital Appreciation Portfolio 4
Founders Passport Portfolio 4
INVESCO Equity Income Portfolio 4
PIMCO Total Return Bond Portfolio 4
PIMCO Limited Maturity Bond Portfolio 4
Berger Capital Growth Portfolio 4
Robertson Stephens Value + Growth Portfolio 4
Twentieth Century International Growth Portfolio 4
Twentieth Century Strategic Balanced Portfolio 5
Twentieth Century Value Growth & Income Portfolio 4
AST Putnam International Equity Portfolio 3
AST Putnam Balanced Portfolio 4
</TABLE>
ITEM 27. Indemnification
Article VIII of the Registrant's Declaration of Trust provides as
follows:
The Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or trustees of
another organization in which the Trust has any interest as a shareholder,
creditor or otherwise) (hereinafter referred to as a "Covered Person") against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or any other proceeding, whether civil or criminal, before any
court or administrative legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which such Covered Person
may be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Covered Person except with respect to any matter as
to which such Covered Person shall have been finally adjudicated in any such
action, suit or other proceeding (a) not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or (b) to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties) shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such Covered Person repay amounts so paid to the
Trust if it is ultimately determined that indemnification of such expenses is
not authorized under this Article, provided, however, that either (1) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (providing that a majority of the disinterested Trustees then in the
office act on the matter), or independent legal counsel in a written opinion
shall have determined, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant or expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. Business and Other Connections of Investment Adviser
See Registrant's Prospectus under "Organization and Management of the
Trust."
ITEM 29. Principal Underwriter
Registrant's shares are presently offered exclusively as an investment
medium for life insurance companies writing both variable annuity and variable
life insurance policies. Pursuant to an exemptive order of the Commission,
Registrant may also sell its shares directly to qualified plans. If Registrant
does so, it intends to use American Skandia Marketing, Incorporated ("ASM,
Inc.") or another affiliated broker-dealer as underwriter, if so required by
applicable law. ASM, Inc. is registered as a broker-dealer with the Commission
and the National Association of Securities Dealers. It is an affiliate of
American Skandia Life Assurance Corporation, being a wholly-owned subsidiary of
American Skandia Investment Holding Corporation.
<TABLE>
<CAPTION>
The following individuals, all of whom have as their principal business
address, One Corporate Drive, Shelton, Connecticut 06484, are the current
officers and/or directors of ASM, Inc.:
<S> <C>
Jan R. Carendi Chief Executive Officer & Director
Gordon C. Boronow Director
Wade A. Dokken President, Chief Marketing Officer & Director
Thomas M. Mazzaferro Executive Vice President & Chief Financial Officer
Kimberly A. Bradshaw Vice President & National Accounts Manager
Daniel Darst Senior Vice President & National Marketing Director
Paul DeSimone Vice President, Corporate Controller & Director
Walter G. Kenyon Vice President & National Accounts Manager
Lawrence Kudlow Senior Vice President & Chief Economist
N. David Kuperstock Vice President, Product Development & Director
Daniel LaBonte Vice President & Associate Marketing Director
Brian O'Connor Vice President & National Sales Manager, Internal Wholesaling
Don Thomas Peck Senior Vice President, National Sales Manager & Director
Hayward Sawyer Senior Vice President, National Sales Manager & Director
Christian Thwaites Vice President, Qualified Plans
Bayard F. Tracy Senior Vice President, National Sales Manager & Director
M. Priscilla Pannell Corporate Secretary
Kristen E. Newall Assistant Corporate Secretary
</TABLE>
Of the above, the following individuals are also officers and/or directors
of Registrant: Jan R. Carendi (President, Principal Executive Officer &
Trustee); Gordon C. Boronow (Vice President & Trustee); and Thomas M. Mazzaferro
(Treasurer).
ITEM 30. Location of Accounts and Records
The accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company act of 1940 are maintained at the
offices of the Trust, One Corporate Drive, Shelton, Connecticut 06484, except
for those maintained by the Trust's Custodian.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the Undersigned, thereunto duly authorized, in the City of Shelton and State
of Connecticut, on the 6th day of October, 1997.
AMERICAN SKANDIA TRUST
By: /s/ Eric C. Freed
Eric C. Freed
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Jan R. Carendi* President (Principal 10/06/97
Jan R. Carendi Executive Officer)
and Trustee
/s/ Gordon Boronow* Vice President 10/06/97
Gordon C. Boronow and Trustee
/s/ Eric C. Freed Secretary 10/06/97
Eric C. Freed
/s/ Thomas M. Mazzaferro Treasurer 10/06/97
Thomas M. Mazzaferro
/s/ Richard G. Davy, Jr. Controller 10/06/97
Richard G. Davy, Jr.
/s/ David E. A. Carson* Trustee 10/06/97
David E. A. Carson
/s/ Julian A. Lerner* Trustee 10/06/97
Julian A. Lerner
/s/ Thomas M. O'Brien* Trustee 10/06/97
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 10/06/97
F. Don Schwartz
</TABLE>
*By: /s/ Eric C. Freed
Eric C. Freed
*Pursuant to Powers of Attorney previously filed with Post-Effective
Amendment No. 22 to the Registration Statement, as filed with the Commission on
April 30, 1997.
<PAGE>
Registration No. 33-24962
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
FILED WITH POST-EFFECTIVE AMENDMENT NO. 23
TO FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 AND
INVESTMENT COMPANY ACT OF 1940
AMERICAN SKANDIA TRUST
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits
Table of Contents
Exhibit Number Description
<S> <C>
5(yy) Sub-advisory Agreement
between American Skandia
Investment Services,
Incorporated and INVESCO
Trust Company for the
INVESCO Equity Income
Portfolio.
5(zz) Sub-Advisory Agreement between American Skandia
Investment Services, Incorporated and Robertson,
Stephens & Company Investment Management, L.P. for
the Robertson Stephens Value + Growth Portfolio.
10 Consent of Counsel for the Registrant
11 Independent Auditors' Consent
17 Financial Data Schedules
</TABLE>
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and INVESCO Trust Company (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust
organized with one or more series of shares, and is registered as an investment
company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment
Manager to act as investment manager for the INVESCO Equity Income Portfolio
(the "Portfolio") under the terms of a management agreement, dated January 3,
1994, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have
approved the engagement of the Sub-Advisor to provide investment advice and
other investment services set forth below, effective February 28, 1997,
contingent upon shareholder approval and execution of this Agreement.
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services. The Sub-Advisor will furnish the Investment Manager with
investment advisory services in connection with a continuous investment program
for the Portfolio which is to be managed in accordance with the investment
objective, investment policies and restrictions of the Portfolio as set forth in
the Prospectus and Statement of Additional Information of the Trust and in
accordance with the Trust's Declaration of Trust and By-Laws. Officers,
directors, and employees of Sub-Advisor will be available to consult with
Investment Manager and the Trust, their officers, employees and Trustees
concerning the business of the Trust. Investment Manager will promptly furnish
Sub-Advisor with any amendments to such documents. Such amendments will not be
effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which
is in turn subject to the supervision and control of the Trust's Board of
Trustees, the Sub-Advisor, will in its discretion determine and select the
securities to be purchased for and sold from the Portfolio from time to time and
will place orders with and give instructions to brokers, dealers and others for
all such transactions and cause such transactions to be executed. The Portfolio
will be maintained by a custodian bank (the "Custodian") and the Investment
Manager will authorize the Custodian to honor orders and instructions by
employees of the Sub-Advisor authorized by the Investment Manager to settle
transactions in respect of the Portfolio. No assets may be withdrawn from the
Portfolio other than for settlement of transactions on behalf of the Portfolio
except upon the written authorization of appropriate officers of the Trust who
shall have been certified as such by proper authorities of the Trust prior to
the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Portfolio,
and concerning the individual issuers whose securities are included in the
Portfolio or the activities in which they engage, or with respect to securities
which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement
of the Trust, including any amendments or supplements thereto, and any Proxy
Statement relating to the approval of this Agreement, as filed with the
Securities and Exchange Commission and represents and warrants that with respect
to disclosure about the Sub-Advisor or information relating directly or
indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement
contains, as of the date hereof, no untrue statement of any material fact and
does not omit any statement of material fact which was required to be stated
therein or necessary to make the statements contained therein not misleading.
The Sub-Advisor further represents and warrants that it is an investment advisor
registered under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"), and under the laws of all jurisdictions in which the conduct of its
business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in
rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will
comply with the requirements of the ICA and subchapters L and M (including,
respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of the
Internal Revenue Code, applicable to the Portfolio, and the regulations
promulgated thereunder. Sub-Advisor shall comply with (i) other applicable
provisions of state or federal law; (ii) the provision of the Declaration of
Trust and By-Laws of the Trust; (iii) policies and determinations of the Trust
and Investment Manager; (iv) the fundamental policies and investment
restrictions of the Trust, as set out in the Trust's registration statement
under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and
Statement of Additional Information of the Trust; and (vi) investment guidelines
or other instructions received in writing from Investment Manager. Sub-Advisor
shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisors to provide investment advice and other
services in relation to portfolios of the Trust for which Sub-Advisor does not
provide such services, or to prevent Investment Manager from providing such
services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished
the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof;
(b) The By-laws of the Trust in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of
the Sub-Advisor as Sub-Advisor to the Investment Manager and
approving the form of this agreement;
(d) The resolutions of the Trustees selecting the Investment
Manager as investment manager to the Trust and approving the
form of the Investment Manager's Management Agreement with the
Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as
currently in effect; and
(g) A list of companies the securities of which are not to be
bought or sold for the Portfolio because of non-public
information regarding such companies that is available to
Investment Manager or the Trust, or which, in the sole opinion
of the Investment Manager, it believes such non-public
information would be deemed to be available to Investment
Manager and/or the Trust.
(h) The current Prospectus, Statement of Additional Information
and Part C of the Trust's Registration Statement, and all
amendments and supplements thereto, will be furnished promptly
to the Sub-Advisor after filing with the SEC or the states and
the Sub-Advisor will be notified in writing or by telephone as
to the date on which such amendments or supplements are to
become effective.
The Investment Manager will furnish the Sub-Advisor from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials became available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has
furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange
Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have
authorized to give written and/or oral instructions to
Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (a) through (d) above will be provided within 30 days of
the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish
all necessary investment facilities, including salaries of personnel required
for it to execute its duties faithfully.
5. Execution of Portfolio Transactions. Sub-Advisor is responsible for decisions
to buy and sell securities for the Portfolio, broker-dealer selection, and
negotiation of its brokerage commission rates. Sub-Advisor shall determine the
securities to be purchased or sold by the Portfolio pursuant to its
determinations with or through such persons, brokers or dealers, in conformity
with the policy with respect to brokerage as set forth in the Trust's Prospectus
and Statement of Additional Information, or as the Board of Trustees may
determine from time to time. Generally, Sub-Advisor's primary consideration in
placing Portfolio securities transactions with broker-dealers for execution is
to obtain and maintain the availability of best execution at the best net price
and in the most effective manner possible. The Sub-Advisor may consider sale of
the shares of the Portfolio and/or contracts that permit allocations of contract
values to sub-accounts that purchase shares of the Portfolio, as well as
recommendations of the Investment Manager, subject to the requirements of best
net price and most favorable execution.
Consistent with this policy, the Sub-Advisor will take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Trust may determine, the Sub-Advisor shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker-dealer that provides research services to the
Sub-Advisor for the Portfolio's use an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Sub-Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the
Sub-Advisor's ongoing responsibilities with respect to the Portfolio. The
Sub-Advisor is further authorized to allocate the orders placed by it on behalf
of the Portfolio to such broker-dealers who also provide research or statistical
material, or other services to the Portfolio or the Sub-Advisor. Such allocation
shall be in such amounts and proportions as the Sub-Advisor shall determine and
the Sub-Advisor will report on said allocations to the Investment Manager
regularly as requested by the Investment Manager and, in any event, at least
once each calendar year if no specific request is made, indicating the brokers
to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager
monthly, quarterly and annual reports concerning transactions and performance of
the Portfolio, including information required in the Trust's Registration, in
such form as may be mutually agreed, to review the Portfolio and discuss the
management of it. The Sub-Advisor shall permit the financial statements, books
and records with respect to the Portfolio to be inspected and audited by the
Trust, the Investment Manager or their agents at all reasonable times during
normal business hours. The Sub-Advisor shall immediately notify and forward to
both Investment Manager and legal counsel for the Trust any legal process served
upon it on behalf of the Investment Manager or the Trust. The Sub-Advisor shall
promptly notify the Investment Manager of any changes in any information
required to be disclosed in the Trust's Registration Statement.
7. Compensation of Sub-Advisor. The amount of the compensation to the
Sub-Advisor is computed at an annual rate. The fee is payable monthly in
arrears, based on the average daily net assets of the Portfolio for each month,
at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and
pay the Sub-Advisor at the annual rate of: .50 of 1% of the portion of the net
assets of the Portfolio not in excess of $25 million; .45 of 1% of the portion
of the net assets over $25 million but not in excess of $75 million; .40 of 1%
of the portion 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.
In computing the fee to be paid to the Sub-Advisor, the net asset value
of the Portfolio shall be valued as set forth in the then current registration
statement of the Trust. If this agreement is terminated, the payment shall be
prorated to the date of termination, except as hereinafter set forth in this
Section 7.
From the date of this Agreement to the date on which the Agreement is
initially approved by the shareholders of the Portfolio as required by the ICA
and Section 12 hereof, the fee payable to the Sub-Advisor hereunder shall be
deposited by the Investment Manager in an escrow account maintained with an
escrow agent mutually acceptable to the parties hereto (the "Escrow Account"),
and paid to the Sub-Advisor only upon receipt of such shareholder approval. In
the event that the shareholders of the Portfolio do not approve this Agreement
as required by the ICA and Section 12 hereof, the Sub-Advisor shall not be
entitled to receive any of the amount maintained in the Escrow Account.
Investment Manager and Sub-Advisor shall not be considered as partners
or participants in a joint venture. Sub-Advisor will pay its own expenses for
the services to be provided pursuant to this Agreement and will not be obligated
to pay any expenses of Investment Manager or the Trust. Sub-Advisor will be
responsible for payment of all costs and expenses of obtaining initial
shareholder approval of this Agreement, including proxy solicitation costs and
expenses, and for payment of all costs and expenses associated with the
establishment, maintenance and termination of the Escrow Account. Except as
otherwise provided herein, Investment Manager and the Trust will not be
obligated to pay any expenses of Sub-Advisor.
8. Confidential Treatment. It is understood that any information or
recommendation supplied by the Sub-Advisor in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Trust or such persons the Investment Manager may
designate in connection with the Portfolio. It is also understood that any
information supplied to Sub-Advisor in connection with the performance of its
obligations hereunder, particularly, but not limited to, any list of securities
which, on a temporary basis, may not be bought or sold for the Portfolio, is to
be regarded as confidential and for use only by the Sub-Advisor in connection
with its obligation to provide investment advice and other services to the
Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby
acknowledges that it is registered as an investment advisor under the Advisers
Act, it will use its reasonable best efforts to maintain such registration, and
it will promptly notify the other if it ceases to be so registered, if its
registration is suspended for any reason, or if it is notified by any regulatory
organization or court of competent jurisdiction that it should show cause why
its registration should not be suspended or terminated.
10. Liability. The Sub-Advisor shall use its best efforts and good faith in the
performance of its services hereunder. However, so long as the Sub-Advisor has
acted in good faith and has used its best efforts, then in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations hereunder, neither the Sub-Advisor nor any of its directors,
officers or employees shall be liable to the Trust or its shareholders or to the
Investment Manager for any act or omission resulting in any loss suffered in any
portfolio of the Trust in connection with any service to be provided herein. The
Federal laws impose responsibilities under certain circumstances on persons who
act in good faith, and therefore, nothing herein shall in any way constitute a
waiver of limitation of any rights which the Trust or Investment Manager may
have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable
for any failure to recommend the purchase or sale of any security on behalf of
the Portfolio on the basis of any information which might, in Sub-Advisor's
opinion, constitute a violation of any federal or state laws, rules or
regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the
Sub-Advisor and any of its directors, officers, partners or employees, and
persons affiliated with it or with any such director, officer, partner or
employee may render investment management or advisory services to other
investors and institutions, and such investors and institutions may own,
purchase or sell, securities or other interests in property the same as or
similar to those which are selected for purchase, holding or sale for the
Portfolio, and the Sub-Advisor shall be in all respects free to take action with
respect to investments in securities or other interests in property the same as
or similar to those selected for purchase, holding or sale for the Portfolio.
Purchases and sales of individual securities on behalf of the Portfolio and
other portfolios of the Trust or accounts for other investors or institutions
will be made on a basis that is equitable to all portfolios of the Trust and
other accounts. Nothing in this agreement shall impose upon the Sub-Advisor any
obligation to purchase or sell or recommend for purchase or sale, for the
Portfolio any security which it, its directors, officers, partners, affiliates
or employees may purchase or sell for the Sub-Advisor or such director's,
officer's, partner's, affiliate's or employee's own accounts or for the account
of any other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall become effective upon the
date first written below and, subject to its approval by a vote of the majority
of the outstanding voting securities of the Portfolio in accordance with the
ICA, shall remain in full force and effect for one year from the date hereof,
and is renewable annually thereafter by specific approval of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Portfolio. Any such renewal shall be approved by the vote of a
majority of the Trustees who are not interested persons under the ICA, cast in
person at a meeting called for the purpose of voting on such renewal. This
Agreement may be terminated without penalty at any time by the Investment
Manager or Sub-Advisor upon 60 days written notice, and will automatically
terminate in the event of its assignment by either party to this Agreement, as
defined in the ICA, or (provided Sub-Advisor has received prior written notice
thereof) upon termination of the Management Agreement. This Agreement shall
automatically terminate if not approved by a vote of the majority of the
outstanding voting securities of the Portfolio as required by the ICA.
13. Notification. Sub-Advisor will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Advisor with
responsibility for making investment decisions in relation to the Portfolio or
who have been authorized to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated
by this agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different address for such party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor: INVESCO Trust Company
7800 East Union Avenue
Suite 1100
Denver, Colorado 80237
Attention: Glen A. Payne, Esq.
14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the ICA ("affiliated person") of Investment Manager and each person, if any
who, within the meaning of Section 15 of the Securities Act of 1933 (the "1933
Act"), controls ("controlling person") Investment Manager, against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses), to which Investment Manager or such affiliated person or
controlling person may become subject under the 1933 Act, the ICA, the Advisers
Act, under any other statute, at common law or otherwise, arising out of
Sub-Advisor's responsibilities as portfolio manager of the Portfolio (1) to the
extent of and as a result of the willful misconduct, bad faith, or gross
negligence by Sub-Advisor, any of Sub-Advisor's employees or representatives or
any affiliate of or any person acting on behalf of Sub-Advisor, or (2) as a
result of any untrue statement or alleged untrue statement of a material fact
contained in a prospectus or statement of additional information covering the
Portfolio or the Trust or any amendment thereof or any supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not misleading, if
such a statement or omission was made in reliance upon written information
furnished to Investment Manager, the Trust or any affiliated person of the
Investment Manager or the Trust or upon verbal information confirmed by the
Sub-Advisor in writing or (3) to the extent of, and as a result of, the failure
of the Sub-Advisor to execute, or cause to be executed, Portfolio transactions
according to the standards and requirements of the ICA; provided, however, that
in no case is Sub-Advisor's indemnity in favor of Investment Manager or any
affiliated person or controlling person of Investment Manager deemed to protect
such person against any liability to which any such person would otherwise be
subject by reason of willful misconduct, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless
Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the
ICA ("affiliated person") of Sub-Advisor and each person, if any who, within the
meaning of Section 15 of the 1933 Act, controls ("controlling person")
Sub-Advisor, against any and all losses, claims, damages, liabilities or
litigation (including reasonable legal and other expenses), to which Sub-Advisor
or such affiliated person or controlling person may become subject under the
1933 Act, the ICA, the Advisers Act, under any other statute, at common law or
otherwise, arising out of Investment Manager's responsibilities as investment
manager of the Portfolio (1) to the extent of and as a result of the willful
misconduct, bad faith, or gross negligence by Investment Manager, any of
Investment Manager's employees or representatives or any affiliate of or any
person acting on behalf of Investment Manager, or (2) as a result of any untrue
statement or alleged untrue statement of a material fact contained in a
prospectus or statement of additional information covering the Portfolio or the
Trust or any amendment thereof or any supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, if such a statement
or omission was made by the Trust other than in reliance upon written
information furnished by Sub-Advisor, or any affiliated person of the
Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor
in writing; provided, however, that in no case is Investment Manager's indemnity
in favor of Sub-Advisor or any affiliated person or controlling person of
Sub-Advisor deemed to protect such person against any liability to which any
such person would otherwise be subject by reason of willful misconduct, bad
faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and warrants that (i) the
appointment of the Sub-Advisor by the Investment Manager has been duly
authorized and (ii) it has acted and will continue to act in connection with the
transactions contemplated hereby, and the transactions contemplated hereby are,
in conformity with the ICA, the Trust's governing documents and other applicable
laws.
The Sub-Advisor represents and warrants that it is authorized to
perform the services contemplated to be performed hereunder.
16. Governing Law. This agreement is made under, and shall be governed by and
construed in accordance with, the laws of the State of Connecticut.
17. Severability. Each provision of this Agreement is intended to be severable.
If any provision of this Agreement is held to be illegal or made invalid by
court decision, statute, rule or otherwise, such illegality or invalidity will
not affect the validity or enforceability of the remainder of this Agreement.
The effective date of this agreement is February 28, 1997.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
Thomas Mazzaferro
President & Chief Operating Officer
Date: Date:
Attest: Attest:
16524-1
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Robertson, Stephens & Company Investment
Management, L.P. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust
organized with one or more series of shares, and is registered as an investment
company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment
Manager to act as investment manager for the Robertson Stephens Value + Growth
Portfolio (the "Portfolio") under the terms of a management agreement, dated May
1, 1996, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have
approved the engagement of the Sub-Advisor to provide investment advice and
other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services. The Sub-Advisor will furnish the Investment Manager with
investment advisory services in connection with a continuous investment program
for the Portfolio which is to be managed in accordance with the investment
objective, investment policies and restrictions of the Portfolio as set forth in
the Prospectus and Statement of Additional Information of the Trust and in
accordance with the Trust's Declaration of Trust and By-Laws. Officers,
directors, and employees of Sub-Advisor will be available to consult with
Investment Manager and the Trust, their officers, employees and Trustees
concerning the business of the Trust. Investment Manager will promptly furnish
Sub-Advisor with any amendments to such documents. Such amendments will not be
effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which
is in turn subject to the supervision and control of the Trust's Board of
Trustees, the Sub-Advisor, will in its discretion determine and select the
securities to be purchased for and sold from the Portfolio from time to time and
will place orders with and give instructions to brokers, dealers and others for
all such transactions and cause such transactions to be executed. The Portfolio
will be maintained by a custodian bank (the "Custodian") and the Investment
Manager will authorize the Custodian to honor orders and instructions by
employees of the Sub-Advisor authorized by the Investment Manager to settle
transactions in respect of the Portfolio. No assets may be withdrawn from the
Portfolio other than for settlement of transactions on behalf of the Portfolio
except upon the written authorization of appropriate officers of the Trust who
shall have been certified as such by proper authorities of the Trust prior to
the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Portfolio,
and concerning the individual issuers whose securities are included in the
Portfolio or the activities in which they engage, or with respect to securities
which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement
of the Trust, including any amendments or supplements thereto, and any Proxy
Statement relating to the approval of this Agreement, as filed with the
Securities and Exchange Commission and represents and warrants that with respect
to disclosure about the Sub-Advisor or information relating directly or
indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement
contains, as of the date hereof, no untrue statement of any material fact and
does not omit any statement of material fact which was required to be stated
therein or necessary to make the statements contained therein not misleading.
The Sub-Advisor further represents and warrants that it is an investment advisor
registered under the Investment Advisers Act of 1940, as amended, and under the
laws of all jurisdictions in which the conduct of its business hereunder
requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in
rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will
comply with the requirements of the ICA and subchapters L and M (including,
respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of the
Internal Revenue Code, applicable to the Portfolio, and the regulations
promulgated thereunder. Sub-Advisor shall comply with (i) other applicable
provisions of state or federal law; (ii) the provision of the Declaration of
Trust and By-Laws of the Trust; (iii) policies and determinations of the Trust
and Investment Manager; (iv) the fundamental policies and investment
restrictions of the Trust, as set out in the Trust's registration statement
under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and
Statement of Additional Information of the Trust; and (vi) investment guidelines
or other instructions received in writing from Investment Manager. Sub-Advisor
shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisors to provide investment advice and other
services in relation to portfolios of the Trust for which Sub-Advisor does not
provide such services, or to prevent Investment Manager from providing such
services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has furnished
the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof;
(b) The By-laws of the Trust in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of
the Sub-Advisor as Sub-Advisor to the Investment Manager and
approving the form of this agreement;
(d) The resolutions of the Trustees selecting the Investment
Manager as investment manager to the Trust and approving the
form of the Investment Manager's Management Agreement with the
Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as
currently in effect; and
(g) A list of companies the securities of which are not to be
bought or sold for the Portfolio because of non-public
information regarding such companies that is available to
Investment Manager or the Trust, or which, in the sole opinion
of the Investment Manager, it believes such non-public
information would be deemed to be available to Investment
Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials became available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has
furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange
Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have
authorized to give written and/or oral instructions to
Custodians of Trust assets for the Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (a) through (d) above will be provided within 30 days of
the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will furnish
all necessary investment facilities, including salaries of personnel required
for it to execute its duties faithfully.
5. Execution of Portfolio Transactions. Sub-Advisor is responsible for decisions
to buy and sell securities for the Portfolio, broker-dealer selection, and
negotiation of its brokerage commission rates. Sub-Advisor shall determine the
securities to be purchased or sold by the Portfolio pursuant to its
determinations with or through such persons, brokers or dealers, in conformity
with the policy with respect to brokerage as set forth in the Trust's Prospectus
and Statement of Additional Information, or as the Board of Trustees may
determine from time to time. Generally, Sub-Advisor's primary consideration in
placing Portfolio securities transactions with broker-dealers for execution is
to obtain and maintain the availability of best execution at the best net price
and in the most effective manner possible. The Sub-Advisor may consider sale of
the shares of the Portfolio, as well as recommendations of the Investment
Manager, subject to the requirements of best net price and most favorable
execution.
Consistent with this policy, the Sub-Advisor will take the following
into consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Trust may determine, the Sub-Advisor shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker-dealer that provides research services to the
Sub-Advisor for the Portfolio's use an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Sub-Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the
Sub-Advisor's ongoing responsibilities with respect to the Portfolio. The
Sub-Advisor is further authorized to allocate the orders placed by it on behalf
of the Portfolio to such broker-dealers who also provide research or statistical
material, or other services to the Portfolio or the Sub-Advisor. Such allocation
shall be in such amounts and proportions as the Sub-Advisor shall determine and
the Sub-Advisor will report on said allocations to the Investment Manager
regularly as requested by the Investment Manager and, in any event, at least
once each calendar year if no specific request is made, indicating the brokers
to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment Manager
monthly, quarterly and annual reports concerning transactions and performance of
the Portfolio, including information required in the Trust's Registration, in
such form as may be mutually agreed, to review the Portfolio and discuss the
management of it. The Sub-Advisor shall permit the financial statements, books
and records with respect to the Portfolio to be inspected and audited by the
Trust, the Investment Manager or their agents at all reasonable times during
normal business hours. The Sub-Advisor shall immediately notify and forward to
both Investment Manager and legal counsel for the Trust any legal process served
upon it on behalf of the Investment Manager or the Trust. The Sub-Advisor shall
promptly notify the Investment Manager of any changes in any information
required to be disclosed in the Trust's Registration Statement.
7. Compensation of Sub-Advisor. The amount of the compensation to the
Sub-Advisor is computed at an annual rate. The fee is payable monthly in
arrears, based on the average daily net assets of the Portfolio for each month,
at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and
pay the Sub-Advisor at the annual rate of: .60 of 1% of the portion of the net
assets of the Portfolio not in excess of $200 million; and .50 of 1% of the
portion of the net assets over $200 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value
of the Portfolio shall be valued as set forth in the then current registration
statement of the Trust. If this agreement is terminated, the payment shall be
prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners
or participants in a joint venture. Sub-Advisor will pay its own expenses for
the services to be provided pursuant to this Agreement and will not be obligated
to pay any expenses of Investment Manager or the Trust. Except as otherwise
provided herein, Investment Manager and the Trust will not be obligated to pay
any expenses of Sub-Advisor.
8. Confidential Treatment. It is understood that any information or
recommendation supplied by the Sub-Advisor in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Trust or such persons the Investment Manager may
designate in connection with the Portfolio. It is also understood that any
information supplied to Sub-Advisor in connection with the performance of its
obligations hereunder, particularly, but not limited to, any list of securities
which, on a temporary basis, may not be bought or sold for the Portfolio, is to
be regarded as confidential and for use only by the Sub-Advisor in connection
with its obligation to provide investment advice and other services to the
Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby
acknowledges that it is registered as an investment advisor under the Investment
Advisers Act of 1940, it will use its reasonable best efforts to maintain such
registration, and it will promptly notify the other if it ceases to be so
registered, if its registration is suspended for any reason, or if it is
notified by any regulatory organization or court of competent jurisdiction that
it should show cause why its registration should not be suspended or terminated.
10. Liability. The Sub-Advisor shall use its best efforts and good faith in the
performance of its services hereunder. However, so long as the Sub-Advisor has
acted in good faith and has used its best efforts, then in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations hereunder, it shall not be liable to the Trust or its shareholders
or to the Investment Manager for any act or omission resulting in any loss
suffered in any portfolio of the Trust in connection with any service to be
provided herein. The Federal laws impose responsibilities under certain
circumstances on persons who act in good faith, and therefore, nothing herein
shall in any way constitute a waiver of limitation of any rights which the Trust
or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable
for any failure to recommend the purchase or sale of any security on behalf of
the Portfolio on the basis of any information which might, in Sub-Advisor's
opinion, constitute a violation of any federal or state laws, rules or
regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the
Sub-Advisor and any of its partners or employees, and persons affiliated with it
or with any such partner or employee may render investment management or
advisory services to other investors and institutions, and such investors and
institutions may own, purchase or sell, securities or other interests in
property the same as or similar to those which are selected for purchase,
holding or sale for the Portfolio, and the Sub-Advisor shall be in all respects
free to take action with respect to investments in securities or other interests
in property the same as or similar to those selected for purchase, holding or
sale for the Portfolio. Purchases and sales of individual securities on behalf
of the Portfolio and other portfolios of the Trust or accounts for other
investors or institutions will be made on a basis that is equitable to all
portfolios of the Trust and other accounts. Nothing in this agreement shall
impose upon the Sub-Advisor any obligation to purchase or sell or recommend for
purchase or sale, for the Portfolio any security which it, its partners,
affiliates or employees may purchase or sell for the Sub-Advisor or such
partner's, affiliate's or employee's own accounts or for the account of any
other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force and
effect for one year from the date hereof, and is renewable annually thereafter
by specific approval of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Portfolio. Any such renewal
shall be approved by the vote of a majority of the Trustees who are not
interested persons under the ICA, cast in person at a meeting called for the
purpose of voting on such renewal. This agreement may be terminated without
penalty at any time by the Investment Manager or Sub-Advisor upon 60 days
written notice, and will automatically terminate in the event of its assignment
by either party to this Agreement, as defined in the ICA, or (provided
Sub-Advisor has received prior written notice thereof) upon termination of the
Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Advisor with
responsibility for making investment decisions in relation to the Portfolio or
who have been authorized to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated
by this agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different address for such party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor: Robertson, Stephens & Company
Investment Management, L.P.
555 California Street
San Francisco, California 94104
Attention: David Elliot
14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the 1940 Act ("affiliated person") of Investment Manager and each person, if
any who, within the meaning of Section 15 of the Securities Act of 1933 (the
"1933 Act"), controls ("controlling person") Investment Manager, against any and
all losses, claims, damages, liabilities or litigation (including reasonable
legal and other expenses), to which Investment Manager or such affiliated person
or controlling person may become subject under the 1933 Act, the 1940 Act, the
Investment Adviser's Act of 1940 ("Adviser's Act"), under any other statute, at
common law or otherwise, arising out of Sub-Advisor's responsibilities as
portfolio manager of the Portfolio (1) to the extent of and as a result of the
willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of
Sub-Advisor's employees or representatives or any affiliate of or any person
acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or
alleged untrue statement of a material fact contained in a prospectus or
statement of additional information covering the Portfolio or the Trust or any
amendment thereof or any supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statement therein not misleading, if such a statement or omission was
made in reliance upon written information furnished to Investment Manager, the
Trust or any affiliated person of the Investment Manager or the Trust or upon
verbal information confirmed by the Sub-Advisor in writing or (3) to the extent
of, and as a result of, the failure of the Sub-Advisor to execute, or cause to
be executed, Portfolio transactions according to the standards and requirements
of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity
in favor of Investment Manager or any affiliated person or controlling person of
Investment Manager deemed to protect such person against any liability to which
any such person would otherwise be subject by reason of willful misconduct, bad
faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless
Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the
1940 Act ("affiliated person") of Sub-Advisor and each person, if any who,
within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"),
controls ("controlling person") Sub-Advisor, against any and all losses, claims,
damages, liabilities or litigation (including reasonable legal and other
expenses), to which Sub-Advisor or such affiliated person or controlling person
may become subject under the 1933 Act, the 1940 Act, the Investment Adviser's
Act of 1940 ("Adviser's Act"), under any other statute, at common law or
otherwise, arising out of Investment Manager's responsibilities as investment
manager of the Portfolio (1) to the extent of and as a result of the willful
misconduct, bad faith, or gross negligence by Investment Manager, any of
Investment Manager's employees or representatives or any affiliate of or any
person acting on behalf of Investment Manager, or (2) as a result of any untrue
statement or alleged untrue statement of a material fact contained in a
prospectus or statement of additional information covering the Portfolio or the
Trust or any amendment thereof or any supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, if such a statement
or omission was made by the Trust other than in reliance upon written
information furnished by Sub-Advisor, or any affiliated person of the
Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor
in writing; provided, however, that in no case is Investment Manager's indemnity
in favor of Sub-Advisor or any affiliated person or controlling person of
Sub-Advisor deemed to protect such person against any liability to which any
such person would otherwise be subject by reason of willful misconduct, bad
faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and warrants that (i) the
appointment of the Sub-Advisor by the Investment Manager has been duly
authorized and (ii) it has acted and will continue to act in connection with the
transactions contemplated hereby, and the transactions contemplated hereby are,
in conformity with the Investment Company Act of 1940, the Trust's governing
documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to
perform the services contemplated to be performed hereunder.
16. Amendment. This agreement may be amended by mutual written consent of the
parties, subject to the provisions of the ICA.
17. Governing Law. This agreement is made under, and shall be governed by and
construed in accordance with, the laws of the State of Connecticut.
18. Counterparts. This agreement may be executed in one or more counterparts,
each of which shall be deemed an original.
The effective date of this agreement is October 1, 1997.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
Thomas Mazzaferro
President & Chief Operating Officer
Date: Date:
Attest: Attest:
EXHIBIT 10
CONSENT OF WERNER & KENNEDY
<PAGE>
WERNER & KENNEDY
1633 Broadway
New York, NY 10019
---------
EMAIL: [email protected]
TELEPHONE (212) 408-6900
FACSIMILE (212) 408-6950
WRITER'S DIRECT DIAL NUMBER
(212) 408-6900
October 3, 1997
American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Re: Post-Effective Amendment No. 23 under the Securities Act of 1933 and
Post-Effective Amendment No. 25 under the Investment Company Act of 1940
to the Registration Statement of American Skandia Trust filed on Form N-1A
Registration No.: 33-24962
Investment Company Act No.: 811-5186
Our File No.74874-00-100
___________________________________________
Dear Mesdames and Messrs.:
You have requested us, as counsel to American Skandia Trust (the
"Trust"), to furnish you with this opinion in connection with the
above-referenced registration statement (the "Registration Statement") filed by
the Trust under the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act").
We have made such examination of the statutes, authorities, and records
of the Trust and other documents as in our judgment are necessary to form a
basis for opinions hereinafter expressed. In our examination, we have assumed
the genuineness of all signatures on, and authenticity of, and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to our opinion, we have relied upon statements and certificates of
officers and representatives of the Trust and others.
Based upon the foregoing, we are of the opinion that the Trust is a
Massachusetts business trust organized with one or more series of shares and is
registered as an open-end management investment company under the 1940 Act, and
that the shares, when issued and sold in accordance with the laws of applicable
jurisdictions, and with the terms of the Prospectus and Statement of Additional
Information included as part of the Registration Statement, will be valid,
legally issued, fully paid, and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement on Form N-1A under the 1933 Act and the 1940 Act, and to
the reference to our name under the heading "Counsel and Auditors" included in
the Prospectus of the Registration Statement.
Very truly yours,
/s/ Werner & Kennedy
Werner & Kennedy
EXHIBIT 11
CONSENT OF DELOITTE & TOUCHE
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
American Skandia Trust:
We consent to the use in Post-Effective Amendment No. 23 to Registration
Statement No. 33-24962 of our report dated February 7, 1997 appearing in the
Statement of Additional Information which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlight s"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deliotte & Touche LLP
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 6, 1997
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