File No. 33-24962
Investment Company No. 811-5186
As filed with the Securities and Exchange Commission on December 28, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
Registration Statement under The Securities Act of 1933
Post-Effective Amendment No. 28
Registration Statement under The Investment Company Act of 1940
Amendment No. 30
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).
[X] on December 31, 1998 pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
_____ 75 days after filing pursuant to paragraph (a)(2).
_____ on _______ pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Shares of Beneficial Interest of the Various Series of American Skandia Trust
(Title of Securities Being Registered)
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Form N-1A
Item Number
<S> <C> <C> <C>
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. *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Additional
<S> <C> <C> <C>
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
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
* Not Applicable
<PAGE>
PROSPECTUS December 31, 1998
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
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American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing investment objectives of its
Portfolios. The Portfolios as of the date of this Prospectus and their
respective investment objectives are as follows:
AST Lord Abbett Growth and Income Portfolio seeks long-term growth of capital
and income while attempting to avoid excessive fluctuations in market value. AST
Lord Abbett Small Cap Value Portfolio seeks long-term capital appreciation. AST
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 Janus Small-Cap Growth Portfolio seeks capital
appreciation. AST Money Market Portfolio seeks high current income and
maintenance of high levels of liquidity. AST Federated High Yield Portfolio
seeks high current income by investing primarily in a diversified portfolio of
fixed income securities. AST 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. AST 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. AST T. Rowe Price Small Company Value
Portfolio seeks long-term capital appreciation by investing primarily in
small-capitalization stocks that appear to be undervalued. AST Founders Passport
Portfolio seeks capital appreciation. AST 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. AST PIMCO Total Return Bond Portfolio seeks to maximize
total return, consistent with preservation of capital. AST PIMCO Limited
Maturity Bond Portfolio seeks to maximize total return, consistent with
preservation of capital and prudent investment management. AST American Century
International Growth Portfolio seeks capital growth. AST American 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. AST Cohen & Steers Realty Portfolio seeks to
maximize total return through investment in real estate securities. AST Stein
Roe Venture Portfolio seeks long-term capital appreciation. AST Bankers Trust
Enhanced 500 Portfolio seeks to outperform the total return of the Standard &
Poor's 500 Composite Stock Price Index, an index emphasizing large
capitalization stocks. AST Marsico Capital Growth Portfolio seeks capital
growth. AST Neuberger Berman Mid-Cap Value Portfolio seeks capital growth. AST
Neuberger Berman Mid-Cap Growth Portfolio seeks capital appreciation. AST
Oppenheimer Large-Cap Growth Portfolio seeks capital appreciation. AST Kemper
Small-Cap Growth Portfolio seeks maximum appreciation of investors' capital from
a portfolio consisting primarily of growth stocks of smaller companies.
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 31, 1998
(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. The profit sharing plan
covering employees of American Skandia Life Assurance Corporation and its
affiliates (the "Skandia Qualified Plan"), which is a retirement plan qualified
under Section 401(a) of the Internal Revenue Code of 1986, as amended, may also
directly own shares of the Trust. 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 the Qualified Plan. Please read the Prospectus of the
variable annuity contracts and variable life insurance policies issued by
Participating Insurance Companies for information regarding contract fees and
expenses and any restrictions on purchases.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Caption Page
<S> <C>
Portfolio Annual Expenses.........................................................................................4
Financial Highlights..............................................................................................8
Investment Objectives and Policies...............................................................................16
AST Lord Abbett Growth and Income Portfolio.................................................................16
AST Lord Abbett Small Cap Value Portfolio...................................................................17
AST JanCap Growth Portfolio.................................................................................20
AST Janus Overseas Growth Portfolio.........................................................................22
AST Janus Small-Cap Growth Portfolio........................................................................24
AST Money Market Portfolio..................................................................................27
AST Federated High Yield Portfolio..........................................................................29
AST T. Rowe Price Asset Allocation Portfolio................................................................32
AST T. Rowe Price International Equity Portfolio............................................................35
AST T. Rowe Price Natural Resources Portfolio...............................................................37
AST T. Rowe Price International Bond Portfolio..............................................................39
AST T. Rowe Price Small Company Value Portfolio.............................................................43
AST Founders Passport Portfolio.............................................................................45
AST INVESCO Equity Income Portfolio.........................................................................50
AST PIMCO Total Return Bond Portfolio.......................................................................51
AST PIMCO Limited Maturity Bond Portfolio...................................................................58
AST American Century International Growth Portfolio.........................................................64
AST American Century Strategic Balanced Portfolio...........................................................68
AST Putnam Value Growth & Income Portfolio..................................................................73
AST Putnam International Equity Portfolio...................................................................74
AST Putnam Balanced Portfolio...............................................................................77
AST Cohen & Steers Realty Portfolio.........................................................................80
AST Stein Roe Venture Portfolio.............................................................................82
AST Bankers Trust Enhanced 500 Portfolio....................................................................85
AST Marsico Capital Growth Portfolio........................................................................88
AST Neuberger Berman Mid-Cap Value Portfolio................................................................90
AST Neuberger Berman Mid-Cap Growth Portfolio...............................................................94
AST Oppenheimer Large-Cap Growth Portfolio..................................................................99
AST Kemper Small-Cap Growth Portfolio......................................................................100
Certain Risk Factors and Investment Methods.....................................................................104
Regulatory Matters..............................................................................................111
Portfolio Turnover..............................................................................................111
Brokerage Allocation............................................................................................112
Investment Restrictions.........................................................................................112
Net Asset Values................................................................................................113
Purchase and Redemption of Shares...............................................................................113
Organization and Management of the Trust........................................................................113
Tax Matters.....................................................................................................126
Description of Shares of the Trust..............................................................................127
Performance.....................................................................................................127
Transfer and Shareholder Servicing Agent........................................................................128
Custodian.......................................................................................................128
Counsel and Auditors............................................................................................129
Other Information...............................................................................................129
</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, 1997. "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
contracts, 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.
Annual Fund Operating Expenses (as a percentage of average net assets)
<TABLE>
<CAPTION>
Total Total
Annual Annual
Management Management Other Other Expenses Expenses
Fee Fee Expenses Expenses after any without any
after any without any after any without any applicable applicable
Portfolio: voluntary voluntary applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
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<S> <C> <C> <C> <C> <C> <C>
AST Lord Abbett Growth and Income N/A 0.75% N/A 0.18% N/A 0.93%
AST Lord Abbett Small Cap Value(1) N/A 0.95% N/A 0.37% N/A 1.32%
AST JanCap Growth 0.88% 0.90% N/A 0.18% 1.06% 1.08%
AST Janus Overseas Growth N/A 1.00% N/A 0.35% N/A 1.35%
AST Janus Small-Cap Growth N/A 0.90% N/A 0.23% N/A 1.13%
AST Money Market 0.45% 0.50% 0.15% 0.19% 0.60% 0.69%
AST Federated High Yield N/A 0.75% N/A 0.23% N/A 0.98%
AST T. Rowe Price Asset Allocation N/A 0.85% N/A 0.28% N/A 1.13%
AST T. Rowe Price International EquityN/A 1.00% N/A 0.26% N/A 1.26%
AST T. Rowe Price Natural Resources N/A 0.90% N/A 0.26% N/A 1.16%
AST T. Rowe Price International Bond N/A 0.80% N/A 0.31% N/A 1.11%
AST T. Rowe Price Small Company Value N/A 0.90% N/A 0.26% N/A 1.16%
AST Founders Passport N/A 1.00% N/A 0.35% N/A 1.35%
AST INVESCO Equity Income N/A 0.75% N/A 0.20% N/A 0.95%
AST PIMCO Total Return Bond N/A 0.65% N/A 0.21% N/A 0.86%
AST PIMCO Limited Maturity Bond N/A 0.65% N/A 0.23% N/A 0.88%
AST American Century International Growth N/A 1.00% N/A 0.75% N/A 1.75%
AST American Century Strategic BalancedN/A 0.85% 0.40% 0.50% 1.25% 1.35%
AST Putnam Value Growth & Income N/A 0.75% N/A 0.48% N/A 1.23%
AST Putnam International Equity N/A 0.88% N/A 0.27% N/A 1.15%
AST Putnam Balanced N/A 0.74% N/A 0.29% N/A 1.03%
AST Cohen & Steers Realty(1) N/A 1.00% N/A 0.29% N/A 1.29%
AST Stein Roe Venture(1) N/A 0.95% 0.40% 1.24% 1.35% 2.19%
AST Bankers Trust Enhanced 500(1) N/A 0.60% 0.20% 0.29% 0.80% 0.89%
AST Marsico Capital Growth(2) N/A 0.90% N/A 0.21% N/A 1.11%
AST Neuberger Berman Mid-Cap Value(3) N/A 0.90% N/A 0.25% N/A 1.15%
AST Neuberger Berman Mid-Cap Growth(4)N/A 0.90% N/A 0.24% N/A 1.14%
AST Oppenheimer Large-Cap Growth(5) N/A 0.90% N/A 0.23% N/A 1.13%
AST Kemper Small-Cap Growth(6) N/A 0.95% 0.40% 0.60% 1.35% 1.55%
</TABLE>
(1) These Portfolios commenced operations in January 1998. "Other Expenses"
shown are based on estimated amounts for the fiscal year ending December 31,
1998. (2) This Portfolio commenced operations in December 1997. "Other Expenses"
shown are based on estimated amounts for the fiscal year ending December 31,
1998. (3) Prior to May 1, 1998, the Investment Manager had engaged Federated
Investment Counseling as Sub-advisor for the Portfolio, and the total Investment
Management fee was at the annual rate of .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. As of May 1, 1998, the Investment
Manager engaged Neuberger Berman Management Incorporated as Sub-advisor for the
Portfolio, and the Investment Management fee is payable at the annual rate of
0.90% 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 May 1, 1998, the Investment Manager had engaged
Berger Associates, Inc. as Sub-advisor for the Portfolio, and the total
Investment Management fee was at the annual rate of .75% of the average daily
net assets of the Portfolio. As of May 1, 1998, the Investment Manager engaged
Neuberger Berman Management Incorporated as Sub-advisor for the Portfolio, and
the Investment Management fee is payable at the annual rate of 0.90% 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) Prior to December 31, 1998, the Investment Manager had engaged
Robertson, Stephens & Company Investment Management, L.P. as Sub-advisor for the
Portfolio, and the total Investment Management fee was at the annual rate of
1.00% of the average daily net assets of the Portfolio. As of December 31, 1998,
the Investment Manager engaged OppenheimerFunds, Inc. as Sub-advisor for the
Portfolio, and the Investment Management fee is payable at the annual rate of
0.90% of the first $1 billion of the average daily net assets of the Portfolio,
plus .85% of the Portfolio's average daily net assets in excess of $1 billion.
The Management Fee in the above chart reflects the current Investment Management
fee payable to the Investment Manager. (6) This Portfolio had not commenced
operations as of the date of this Prospectus. "Other expenses" shown are based
on estimated amounts for the fiscal year ending December 31, 1999.
<PAGE>
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.
<TABLE>
<CAPTION>
You would pay the following expenses rounded to the nearest dollar on a
$1,000 investment, assuming a 5% hypothetical annual return at the end of each
time period shown below: After: Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs. ---------
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<S> <C> <C> <C> <C>
AST Lord Abbett Growth and Income 10 30 52 116
AST Lord Abbett Small Cap Value 13 42 N/A N/A
AST JanCap Growth 11 34 59 130
AST Janus Overseas Growth 14 43 74 162
AST Janus Small-Cap Growth 12 36 62 137
AST Money Market 6 19 33 75
AST Federated High Yield 10 31 54 120
AST T. Rowe Price Asset Allocation 12 36 62 137
AST T. Rowe Price International Equity 13 40 69 152
AST T. Rowe Price Natural Resources 12 37 64 141
AST T. Rowe Price International Bond 11 35 61 135
AST T. Rowe Price Small Company 12 37 64 141
AST Founders Passport 14 43 74 162
AST INVESCO Equity Income 10 31 53 117
AST PIMCO Total Return Bond 9 28 48 107
AST PIMCO Limited Maturity Bond 9 28 49 108
AST American Century International Growth 18 56 96 208
AST American Century Strategic Balanced 13 40 69 152
AST Putnam Value Growth & Income 13 40 69 150
AST Putnam International Equity 12 37 64 140
AST Putnam Balanced 11 33 57 126
AST Cohen & Steers Realty 13 41 N/A N/A
AST Stein Roe Venture 14 43 N/A N/A
AST Bankers Trust Enhanced 500 8 26 N/A N/A
AST Marsico Capital Growth 11 35 N/A N/A
AST Neuberger Berman Mid-Cap Value 12 37 64 140
AST Neuberger Berman Mid-Cap Growth 12 37 64 140
AST Oppenheimer Large-Cap Growth 12 36 62 137
AST Kemper Small-Cap Growth 14 43 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.
(This page has been intentionally left blank.)
<PAGE>
FINANCIAL HIGHLIGHTS (Selected Per Share Data for an Average Share Outstanding
and Ratios Throughout Each Period): The tables below contain 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, 1997 and the Independent Auditors' Report thereon,
and unaudited Financial Statements for the period ended June 30, 1998, 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 AST Kemper Small-Cap Growth Portfolio,
which had not been offered publicly prior to the date of this Prospectus.
<TABLE>
<CAPTION>
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INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
Net Asset Net
Net Asset
Value Investment Net Realized Total From From Net From Net Value
Period Beginning Income & Unrealized Investment Investment Realized Total End
Portfolio Ended of Period (Loss) Gain (Loss) Operations Income Gains Distributions of Period
--------- ----- --------- ------ ----------- ---------- ------ ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 06/30/98* $21.29 $0.23 $4.05 $4.28 $(0.67) $(1.96) $(2.63) $22.94
International Equity 12/31/97 19.22 0.36 2.96 3.32 (0.30) (0.95) (1.25) 21.29
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
AST Lord Abbett 06/30/98* $20.53 $0.13 $1.80 $1.93 $(0.25) $(1.08) $(1.33) $21.13
Growth and Income 12/31/97 17.17 0.24 3.76 4.00 (0.23) (0.41) (0.64) 20.53
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
AST JanCap Growth 06/30/98* $23.15 $0.04 $7.53 $7.57 $(0.08) $(1.21) $(1.29) $29.43
12/31/97 18.79 0.06 5.16 5.22 (0.05) (0.81) (0.86) 23.15
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 -- -- -- 10.52
AST Money Market 06/30/98* $1.00 $0.0214 $0.0001 $0.0215 $(0.0214) $(0.0001) $(0.0215) $1.00
12/31/97 1.00 0.0507 0.0002 0.0509 (0.0507) (0.0002) (0.0509) 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
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</TABLE>
(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.
* Unaudited.
<PAGE>
<TABLE>
<CAPTION>
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Ratios of Expenses Ratios of Net Investment Income
Supplemental Data to Average Net Assets ((Loss) to Average Net Assets
After Advisory Before Advisory After Advisory Before Advisory
Net Assets at Portfolio Fee Waiver Fee Waiver Fee Waiver Fee Waiver
Total End of Period Turnover and Expense and Expense and Expense and Expense
Return (in 000's) Rate Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21.53% $524,286 59% 1.11%(1) 1.11%(1) 1.59%(1) 1.59%(1)
18.15% 412,270 116% 1.15% 1.15% 1.04% 1.04%
9.65% 346,211 124% 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)
9.63% $1,107,523 35% 0.91%(1) 0.91%(1) 1.38%(1) 1.38%(1)
23.92% 936,986 41% 0.93% 0.93% 1.60% 1.60%
18.56% 530,497 43% 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)
33.83% $2,241,721 21% 1.03%(1) 1.05%(1) 0.30%(1) 0.28%(1)
28.66% 1,511,563 94% 1.07% 1.08% 0.24% 0.23%
28.36% 892,324 79% 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)
2.58% $827,751 N/A 0.60%(1) 0.68%(1) 5.10%(1) 5.02%(1)
5.18% 759,888 N/A 0.60% 0.69% 5.06% 4.98%
5.08% 549,470 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)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
Net Asset Net Net Asset
Value Investment Net RealizedTotal 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> <C>
AST Neuberger Berman 06/30/98* $15.15 $0.18 $(0.45) $(0.27) $(0.36) $(1.32) $(1.68) $13.20
Mid-Cap Value** 12/31/97 12.83 0.32 2.87 3.19 (0.36) (0.51) (0.87) 15.15
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(2) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam Balanced 06/30/98* $13.64 $0.17 $0.95 $1.12 $(0.35) $(0.81) $(1.16) $13.60
12/31/97 13.19 0.33 1.85 2.18 (0.31) (1.42) (1.73) 13.64
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(2) 10.00 0.08 0.49 0.57 -- -- -- 10.57
AST Federated High Yield06/30/98* $13.11 $0.40 $0.12 $0.52 $(0.76) $(0.04) $(0.80) $12.83
12/31/97 12.13 0.75 0.83 1.58 (0.54) (0.06) (0.60) 13.11
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(3) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
AST T. Rowe Price 06/30/98* $15.13 $0.19 $1.43 $1.62 $(0.33) $(0.06) $(0.39) $16.36
Asset Allocation 12/31/97 13.27 0.33 2.03 2.36 (0.26) (0.24) (0.50) 15.13
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(3) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
AST PIMCO Total 06/30/98* $11.72 $0.25 $0.21 $0.46 $(0.51) $(0.24) $(0.75) $11.43
Return Bond 12/31/97 11.11 0.48 0.58 1.06 (0.45) -- (0.45) 11.72
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(3) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
AST INVESCO Equity 06/30/98* $16.51 $0.15 $1.53 $1.68 $(0.32) $(0.81) $(1.13) $17.06
Income 12/31/97 13.99 0.31 2.84 3.15 (0.26) (0.37) (0.63) 16.51
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(3) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
AST Janus 06/30/98* $17.81 $(0.05) $0.75 $0.70 $-- $(0.85) $(0.85) $17.66
Small-Cap Growth***12/31/97 16.80 (0.05) 1.06 1.01 -- -- -- 17.81
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(3) 10.00 0.11 0.73 0.84 -- -- -- 10.84
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
(2) Commenced operations on May 4, 1993.
(3) Commenced operations on January 4, 1994.
* Unaudited.
** Prior to May 1, 1998, Federated Investment Counseling served as Sub-advisor
to the AST Neuberger Berman Mid-Cap Value Portfolio (formerly, the Federated
Utility Income Portfolio). Neuberger Berman Management, Incorporated has served
as Sub-advisor to the Portfolio since May 1, 1998.
*** Prior to January 1, 1998, Founders Asset Management LLC served as
Sub-advisor to the AST Janus Small-Cap Growth Portfolio (formerly, the Founders
Capital Appreciation Portfolio). Janus Capital Corporation has served as
Sub-advisor to the Portfolio since January 1, 1998.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Ratios of Expenses Ratios of Net Investment Income
Supplemental Data to Average Net Assets ((Loss) to Average Net Assets
After Advisory Before Advisory After Advisory Before Advisory
Net Assets at Portfolio Fee Waiver Fee Waiver Fee Waiver Fee Waiver
Total End of Period Turnover and Expense and Expense and Expense and Expense
Return (in 000's) Rate Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(2.03%) $215,366 143% 0.96%(1) 0.96%(1) 2.59%(1) 2.59%(1)
26.42% 201,143 91% 0.90% 0.90% 3.34% 3.34%
11.53% 123,138 73% 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)
8.62% $399,876 82% 1.00%(1) 1.00%(1) 2.59%(1) 2.59%(1)
18.28% 357,591 170% 1.03% 1.03% 2.81% 2.81%
11.23% 286,479 276% 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)
4.07% $561,769 21% 0.95%(1) 0.95%(1) 8.17%(1) 8.17%(1)
13.59% 434,420 28% 0.98% 0.98% 8.83% 8.83%
13.58% 205,262 43% 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)
10.84% $268,309 6% 1.10%(1) 1.10%(1) 2.81%(1) 2.81%(1)
18.40% 213,075 10% 1.13% 1.13% 2.95% 2.95%
13.14% 120,149 31% 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)
4.09% $697,088 130% 0.84%(1) 0.84%(1) 5.34%(1) 5.34%(1)
9.87% 572,100 320% 0.86% 0.86% 5.56% 5.56%
3.42% 360,010 403% 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)
10.49% $747,227 34% 0.93%(1) 0.93%(1) 2.12%(1) 2.12%(1)
23.33% 602,105 73% 0.95% 0.95% 2.54% 2.54%
17.09% 348,680 58% 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)
3.79% $269,622 59% 1.12%(1) 1.12%(1) (0.53%)(1) (0.53%)(1)
6.01% 278,258 77% 1.13% 1.13% (0.32%) (0.32%)
20.05% 220,068 69% 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)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ---------------------------------------------------------------------------------------------------------------------------
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> <C>
AST T. Rowe Price 06/30/98* $12.09 $0.08 $1.45 $1.53 $(0.14) $(0.23) $(0.37) $13.25
International Equity 12/31/97 12.07 0.09 0.08 0.17 (0.07) (0.08) (0.15) 12.09
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(3) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
AST T. Rowe Price 06/30/98* $10.11 $0.22 $0.01 $0.23 $(0.03) $(0.08) $(0.11) $10.23
International Bond 12/31/97 10.90 0.20 (0.57) (0.37) (0.16) (0.26) (0.42) 10.11
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(4) 10.00 0.27 (0.59) (0.32) -- -- -- 9.68
AST Neuberger Berman 06/30/98* $16.61 $(0.01) $2.98 $2.97 $(0.01) $(2.60) $(2.61) $16.97
Mid-Cap Growth** 12/31/97 14.39 0.01 2.36 2.37 (0.02) (0.13) (0.15) 16.61
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(5) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
AST Founders Passport06/30/98* $11.78 $0.03 $2.60 $2.63 $(0.03) $ -- $(0.03) $14.38
12/31/97 11.63 0.03 0.21 0.24 (0.08) (0.01) (0.09) 11.78
12/31/96 10.33 0.09 1.24 1.33 (0.03) -- (0.03) 11.63
12/31/95(6) 10.00 0.03 0.30 0.33 -- -- -- 10.33
AST T. Rowe Price 06/30/98* $14.57 $0.07 $0.29 $0.36 $(0.14) $(0.87) $(1.01) $13.92
Natural Resources 12/31/97 14.47 0.14 0.35 0.49 (0.07) (0.32) (0.39) 14.57
12/31/96 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04) 14.47
12/31/95(6) 10.00 0.04 1.07 1.11 -- -- -- 11.11
AST PIMCO Limited 06/30/98* $11.02 $0.30 $(0.05) $0.25 $(0.53) $ -- $(0.53) $10.74
Maturity Bond 12/31/97 10.81 0.55 0.22 0.77 (0.56) -- (0.56) 11.02
12/31/96 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
12/31/95(6) 10.00 0.05 0.42 0.47 -- -- -- 10.47
AST Oppenheimer 06/30/98* $12.62 $(0.05) $2.29 $2.24 $ -- $ -- $-- $14.86
Large-Cap Growth***12/31/97 10.99 (0.05) 1.68 1.63 -- -- -- 12.62
12/31/96(7) 10.00 (0.01) 1.00 0.99 -- -- -- 10.99
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
(3) Commenced operations on January 4, 1994.
(4) Commenced operations on May 3, 1994.
(5) Commenced operations on October 20, 1994.
(6) Commenced operations on May 2, 1995.
(7) Commenced operations on May 2, 1996.
* Unaudited.
** Prior to May 1, 1998, Berger Associates, Inc. served as Sub-advisor to the
AST Neuberger Berman Mid-Cap Growth Portfolio (formerly, the Berger Capital
Growth Portfolio). Neuberger Berman Management, Incorporated has served as
Sub-advisor to the Portfolio since May 1, 1998.
*** Prior to December 31, 1998, Robertson, Stephens & Company Investment
Management, L.P. served as Sub-advisor to the AST Oppenheimer Large-Cap Growth
Portfolio (formerly, the Robertson Stephens Value + Growth Portfolio).
OppenheimerFunds, Inc. has served as Sub-advisor to the Portfolio since December
31, 1998.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Ratios of Expenses Ratios of Net Investment Income
Supplemental Data to Average Net Assets ((Loss) to Average Net Assets
After Advisory Before Advisory After Advisory Before Advisory
Net Assets at Portfolio Fee Waiver Fee Waiver Fee Waiver Fee Waiver
Total End of Period Turnover and Expense and Expense and Expense and Expense
Return (in 000's) Rate Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12.84% $477,431 12% 1.25%(1) 1.25%(1) 1.25%(1) 1.25%(1)
1.36% 464,456 19% 1.26% 1.26% 0.71% 0.71%
14.17% 402,559 11% 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)
2.40% $141,074 48% 1.12%(1) 1.12%(1) 5.07%(1) 5.07%(1)
(3.42%) 130,408 173% 1.11% 1.11% 4.73% 4.73%
5.98% 98,235 241% 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)
18.63% $217,779 143% 1.02%(1) 1.02%(1) (0.10%)(1) (0.10%)(1)
16.68% 185,050 305% 0.99% 0.99% 0.07% 0.07%
16.34% 136,247 156% 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)
22.32% $134,062 26% 1.32%(1) 1.32%(1) 0.46%(1) 0.46%(1)
2.03% 117,938 73% 1.35% 1.35% 0.43% 0.43%
12.91% 117,643 133% 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)
2.54% $100,490 32% 1.16%(1) 1.16%(1) 0.83%(1) 0.83%(1)
3.39% 111,954 44% 1.16% 1.16% 0.98% 0.98%
30.74% 88,534 31% 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)
2.39% $300,682 128% 0.87%(1) 0.87%(1) 5.84%(1) 5.84%(1)
7.46% 288,642 54% 0.88% 0.88% 5.71% 5.71%
3.90% 209,013 247% 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)
17.75% $286,750 95% 1.21%(1) 1.21%(1) (0.65%)(1) (0.65%)(1)
14.83% 235,648 219% 1.23% 1.23% (0.59%) (0.59%)
9.90% 48,790 77% 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
Net Asset Net Net Asset
Value Investment Net RealizedTotal 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> <C>
AST Janus Overseas 06/30/98* $11.87 $0.06 $2.68 $2.74 $(0.05) $ -- $(0.05) $14.56
Growth 12/31/97(8) 10.00 0.02 1.85 1.87 -- -- -- 11.87
AST Putnam Value 06/30/98* $12.23 $0.05 $0.98 $1.03 $(0.07) $(0.18) $(0.25) $13.01
Growth & Income 12/31/97(8) 10.00 0.07 2.16 2.23 -- -- -- 12.23
AST American Century 06/30/98* $11.34 $0.07 $1.48 $1.55 $(0.08) $ -- $(0.08) $12.81
Strategic Balanced 12/31/97(8) 10.00 0.11 1.23 1.34 -- -- -- 11.34
AST American Century 06/30/98* $11.52 $0.08 $2.76 $2.84 $ -- $ -- -- $14.36
International Growth 12/31/97(8) 10.00 (0.03) 1.55 1.52 -- -- -- 11.52
AST T. Rowe Price Small06/30/98* $12.88 $0.03 $0.28 $0.31 $(0.05) $(0.06) $(0.11) $13.08
Company Value 12/31/97(8) 10.00 0.06 2.82 2.88 -- -- -- 12.88
AST Marsico Capital 06/30/98* $10.03 $-- $3.17 $3.17 $ -- $ -- $ -- $13.20
Growth 12/31/97(9) 10.00 0.01 0.02 0.03 -- -- -- 10.03
AST Cohen & Steers 06/30/98(10) $10.00 $0.11 $(0.64) $(0.53) $-- $-- $-- $9.47
Realty
AST Lord Abbett 06/30/98(10) $10.00 $(0.01) $0.86 $0.85 $-- $-- $-- $10.85
Small Cap Value
AST Bankers Trust06/30/98(10) $10.00 $0.05 $1.65 $1.70 $-- $-- $-- $11.70
Enhanced 500
AST Stein Roe Venture06/30/98(10) $10.00 $(0.01) $(0.81) $(0.82) $-- $-- $-- $9.18
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
(8) Commenced operations on January 2, 1997.
(9) Commenced operations on December 22, 1997.
(10) Commenced operations on January 2, 1998 (Unaudited).
* Unaudited.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Ratios of Expenses Ratios of Net Investment Income
Supplemental Data to Average Net Assets ((Loss) to Average Net Assets
After Advisory Before Advisory After Advisory Before Advisory
Net Assets at Portfolio Fee Waiver Fee Waiver Fee Waiver Fee Waiver
Total End of Period Turnover and Expense and Expense and Expense and Expense
Return (in 000's) Rate Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
23.15% $501,294 45% 1.25%(1) 1.25%(1) 1.01%(1) 1.01%(1)
18.70% 255,705 94% 1.35%(1) 1.35%(1) 0.36%(1) 0.36%(1)
8.43% $164,716 51% 1.05%(1) 1.05%(1) 1.01%(1) 1.01%(1)
22.30% 117,438 81% 1.23%(1) 1.23%(1) 1.24%(1) 1.24%(1)
13.74% $50,462 55% 1.18%(1) 1.18%(1) 1.78%(1) 1.78%(1)
13.40% 28,947 76% 1.25%(1) 1.35%(1) 2.02%(1) 1.92%(1)
24.85% $63,449 120% 1.72%(1) 1.72%(1) 1.26%(1) 1.26%(1)
15.10% 33,125 171% 1.75%(1) 1.75%(1) (0.58%)(1) (0.58%)(1)
2.38% $309,444 6% 1.11%(1) 1.11%(1) 0.72%(1) 0.72%(1)
28.80% 199,896 7% 1.16%(1) 1.16%(1) 1.20%(1) 1.20%(1)
31.62% $313,995 69% 1.11%(1) 1.11%(1) 0.31%(1) 0.31%(1)
0.30% 7,299 -- 1.00%(1) 1.00%(1) 3.62%(1) 3.62%(1)
(5.20%) $26,088 33% 1.27%(1) 1.27%(1) 4.04%(1) 4.04%(1)
8.50% $30,050 14% 1.32%(1) 1.32%(1) (0.33%)(1) (0.33%)(1)
17.00% $114,195 119% 0.80%(1) 0.93%(1) 1.23%(1) 1.10%(1)
(8.20%) $4,971 33% 1.35%(1) 2.13%(1) (0.46%)(1) (1.24%)(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.: AST Lord Abbett Growth and
Income Portfolio, AST Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: AST JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio,
AST Janus Small-Cap Growth Portfolio; (c) J.P. Morgan Investment Management
Inc.: AST Money Market Portfolio; (d) Federated Investment Counseling: AST
Federated High Yield Portfolio; (e) T. Rowe Price Associates, Inc.: AST T. Rowe
Price Asset Allocation Portfolio, AST T. Rowe Price Natural Resources Portfolio,
AST T. Rowe Price Small Company Value Portfolio; (f) Rowe Price-Fleming
International, Inc.: AST T. Rowe Price International Equity Portfolio, AST T.
Rowe Price International Bond Portfolio; (g) Founders Asset Management LLC: AST
Founders Passport Portfolio; (h) INVESCO Funds Group, Inc.: AST INVESCO Equity
Income Portfolio; (i) Pacific Investment Management Company: AST PIMCO Total
Return Bond Portfolio, AST PIMCO Limited Maturity Bond Portfolio; (j) American
Century Investment Management, Inc. (formerly, Investors Research Corporation):
AST American Century International Growth Portfolio, AST American Century
Strategic Balanced Portfolio; (k) Putnam Investment Management, Inc.: AST Putnam
Value Growth & Income Portfolio, AST Putnam International Equity Portfolio, AST
Putnam Balanced Portfolio; (l) Cohen & Steers Capital Management, Inc.: AST
Cohen & Steers Realty Portfolio; (m) Stein Roe & Farnham Incorporated: AST Stein
Roe Venture Portfolio; (n) Bankers Trust Company: AST Bankers Trust Enhanced 500
Portfolio; (o) Marsico Capital Management, LLC: AST Marsico Capital Growth
Portfolio; (p) Neuberger Berman Management Incorporated: AST Neuberger Berman
Mid-Cap Value Portfolio, AST Neuberger Berman Mid-Cap Growth Portfolio; (q)
OppenheimerFunds, Inc.: AST Oppenheimer Large-Cap Growth Portfolio; (r) Scudder
Kemper Investments, Inc.: AST Kemper Small-Cap 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.
AST 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.
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."
Securities Lending. The Portfolio may lend its portfolio securities. For a
discussion of the limits on and risks of lending securities, see this Prospectus
under "Certain Risk Factors and Investment Methods."
AST 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, except that the Portfolio may
invest up to 10% of gross assets in those other investment companies described
in this Prospectus under "Certain Risk Factors and Investment Methods." 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.
AST JanCap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Portfolio's investments, therefore, will be incidental to
the Portfolio's objective. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in
common stocks. Common stock investments will be in industries and companies that
the Sub-advisor believes are experiencing favorable demand for their products
and services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Portfolio's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Portfolio may also invest to a lesser degree in preferred
stocks, convertible securities, warrants, and debt securities when the Portfolio
perceives an opportunity for capital growth from such securities or so that the
Portfolio may receive a return on its idle cash. The Portfolio may also invest
in money market funds managed by the Sub-advisor as a means of receiving a
return on 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
other investment companies (including money market funds), 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."
Securities Lending. The Portfolio may lend its portfolio securities. For a
discussion of the limits on and risks of lending securities, see this Prospectus
under "Certain Risk Factors and Investment Methods."
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 and 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. 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.
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 Janus Small-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is capital
appreciation. The Portfolio pursues its objective by normally investing at least
65% of its total assets in securities issued by small-sized companies.
Investment Policies:
The Portfolio invests primarily in common stocks with an emphasis on
securities of small-sized companies. Small-sized companies are those that have
market capitalizations of less than $1.5 billion or annual gross revenues of
less than $500 billion. Companies whose capitalization or revenues fall outside
these ranges after the Portfolio's initial purchase continue to be considered
small-sized for the purposes of this policy. The Portfolio may also invest in
stocks of larger companies with potential for capital appreciation.
The Portfolio will invest substantially all of its assets in common
stocks 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, it seeks to identify individual companies with earnings growth potential
that may not be recognized by the market at large. Although themes may emerge in
the Portfolio, securities are generally selected without regard to any defined
industry sector or other similarly defined selection procedure. Realization of
income is not a significant investment consideration.
Because the Portfolio invests primarily in common stocks, the
fundamental risk of investing in the Portfolio is 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 or economic
conditions. Historically, common stocks have provided greater long-term returns
and have entailed greater short-term risks than other investments. Smaller or
newer issuers, such as those in which the Portfolio invests, 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 is designed for long-term investors who seek capital
appreciation and who can tolerate the greater risks associated with investments
in foreign and domestic common stocks. The Portfolio is not designed as a
short-term trading vehicle and should not be relied upon for short-term
financial needs.
The Sub-advisor tries to reduce the risk of the Portfolio through
diversification of the Portfolio's assets, so that the effect of any single
holding on its overall portfolio value is reduced. In addition, the Portfolio
will not invest 25% or more of its total assets in any particular industry
(excluding U.S. government securities). As described below, the Portfolio may
use futures, options and other derivative instruments to protect its portfolio
from movements in securities prices and interest rates. The Portfolio may use a
variety of currency hedging techniques, including forward currency contracts, to
manage exchange rate risk.
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 may include significant changes in a company's allocation of
its existing capital, a restructuring of assets, 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.
The Portfolio may invest to a lesser degree in types of securities
other than common stocks, including preferred stocks, warrants, convertible
securities and debt securities. The Portfolio may invest up to 25% of its assets
in mortgage- and asset-backed securities. The Portfolio may invest up to 10% of
its assets in zero coupon, pay-in-kind and step coupon securities, which are
securities that do not, or may not under certain circumstances, make regular
interest payments. The Portfolio may invest in indexed/structured securities,
which typically are short- to intermediate-term debt securities whose value at
maturity or interest rate is linked to currencies, interest rates, equity
securities, indices, commodity prices or other financial indicators. Such
securities may offer growth potential because of anticipated changes in interest
rates, credit standing, currency relationships or other factors. For more
information on certain of the other types of securities in which the Portfolio
may invest, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When the Sub-advisor believes that market conditions are not favorable
for profitable investing or when it is otherwise unable to locate investment
opportunities with favorable risk/reward characteristics, 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. The assets that remain after the Sub-advisor
has committed available assets to desirable investment opportunities are kept in
cash or similar investments, such as high-grade commercial paper, certificates
of deposit, repurchase agreements or other short-term debt obligations,
including money market funds managed by the Sub-advisor. When the Portfolio is
hedged or its cash position increases, it might not participate in market
advances or declines to the extent that it would if it was not hedged or it
remained more fully invested in common stocks.
Investing in Smaller Companies. The Portfolio may invest in companies
that have relatively small revenues, have a small share of the market for their
products or services, or have limited geographic or product markets. Smaller or
newer companies may lack depth of management, they may be unable to generate
funds necessary for growth or potential development internally or to generate
such funds through external financing on favorable terms, or they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. In addition, such companies may be
or become subject to intense competition from larger competitors. Securities of
small companies held by the Portfolio may have more limited trading markets than
the markets for securities of larger or more established issuers, and may be
subject to wider price fluctuations.
The Portfolio measures the size of a company in part through its market
capitalization. Market capitalization is the most commonly used measure of the
size and value of a company. It is computed by multiplying the current market
price of a share of the company's stock by the total number of its shares
outstanding.
Foreign Securities. The Portfolio may invest without limit in foreign
equity and debt securities. The Portfolio may invest directly in foreign
securities denominated in foreign currencies and not publicly traded in the
United States. Other ways of investing in foreign securities include depositary
receipts or shares, and passive foreign investment companies. Generally, the
same criteria are used to select foreign securities as domestic securities. The
Sub-advisor seeks companies that meet its selection criteria regardless of
country of organization or place of principal business activity. Foreign
securities are generally 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 securities.
Investments in foreign securities, including those of foreign
governments, may involve greater risks than investing in comparable domestic
securities. The Portfolio may invest in emerging market or developing countries.
Emerging market countries involve greater risks than other foreign countries
such as immature economic structures, national policies restricting investments
by foreigners, and different legal systems. As long as the Portfolio holds a
foreign security, its value will be affected by the value of the local currency
relative to the U.S. dollar. When the Portfolio sells a foreign currency
denominated security, its value may be worth less in U.S. dollars even though
the security increases in value in its home country. U.S. dollar denominated
securities of foreign issuers (e.g., depositary receipts) are subject to many of
the same risks as other foreign securities, including currency risk, because
their values depend on the performance of a foreign security denominated in its
home currency. The risks of foreign investing, including currency risks and the
risks of investing in developing countries, are described in more detail in 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, 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's investments whenever the Sub-advisor believes such changes are
desirable. 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."
Illiquid Investments. The Portfolio may invest up to 15% of its net
assets in illiquid investments. If illiquid securities exceed 15% of net assets
after the time of purchase, the Portfolio will take steps to reduce in an
orderly fashion its holdings of illiquid securities. An illiquid investment is a
security or other position that cannot be disposed of quickly in the normal
course of business because of the absence of a readily available market for the
security, because of the terms of the security or because of legal restrictions.
The Sub-advisor will follow guidelines established by the Trust's Board of
Trustees in making liquidity determinations for certain types of securities,
including Rule 144A securities and privately placed commercial paper. Rule 144A
securities are securities that are not registered for sale to the general public
under the Securities Act of 1933, but that may be resold to certain
institutional investors.
Borrowing and Lending. The Portfolio may borrow money and lend securities
in accordance with the restrictions described below under "Certain Risk Factors
and Investment Methods."
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
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. For a more detailed discussion of these
instruments and their risks, 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."
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.
High-Yield/High-Risk Securities. The Portfolio may invest up to 35% of
its assets in high-yield/high-risk securities. High-yield/high-risk securities
(or "junk" bonds) are debt securities rated below investment grade by the
primary rating agencies such as Standard & Poor's Ratings Services ("Standard &
Poor's") and Moody's Investors Service, Inc. ("Moody's").
Investments in high-yield securities are considered to be more
speculative than higher quality investments. The value of lower quality
securities generally is more dependent on the ability of the company to meet
interest and principal payments (i.e., credit risk) than is the case for higher
quality securities. In addition, issuers of high-yield securities are more
vulnerable to real or perceived economic changes (for instance, an economic
downturn or prolonged period of rising interest rates), and political changes.
For an additional discussion of high-yield securities and their risks, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." Please refer to the SAI for a description of bond rating categories.
When-Issued, Delayed Delivery and Forward Commitment Transactions. The
Portfolio may purchase securities on a when-issued, delayed delivery or forward
commitment basis. These transactions typically involve the purchase of a
security with payment and delivery at some time in the future (i.e., beyond the
normal settlement period). The Portfolio earns no interest on such securities,
but bears the risk of fluctuations in their market value, between the purchase
and settlement dates.
Short Sales. The Fund may engage in "short sales against the box." This
technique involves selling either a security that the Portfolio owns, or a
security that the Portfolio has the right to obtain without additional cost, for
delivery at a specified date in the future. The Portfolio may enter into a short
sale against the box to hedge against anticipated declines in the market price
of portfolio securities. If the value of the securities sold short increases
prior to the scheduled delivery date, the Portfolio loses the opportunity to
participate in the gain.
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, 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. It is the current policy of the Portfolio not to invest more than
10% of its net assets in asset-backed securities. 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."
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 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."
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.
<PAGE>
AST 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. Non-U.S. dollar denominated 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."
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."
AST 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."
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."
AST 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."
AST 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."
<PAGE>
AST 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."
Securities Lending. The Portfolio may lend its portfolio securities. For a
discussion of the limits on and risks of lending securities, see this Prospectus
under "Certain Risk Factors and Investment Methods."
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."
AST 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 portion 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. In
addition, foreign securities may trade in the U.S. markets. 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, Romania, 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 Portfolio also may engage in "proxy hedging," i.e.,
entering into forward contracts to sell a different currency than the one in
which the underlying investments are denominated with the expectation that the
value of the hedged currency will correlate with the value of the underlying
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 or a proxy currency in excess of the value of the Portfolio's
securities or other assets denominated in the currency being hedged. 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 rated below investment grade as a
result of a reduction in rating after purchase or are unrated. For a description
of securities ratings, see the Appendix to the Trust's SAI. For a discussion of
the special risks involved in 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."
Securities Lending. The Portfolio may lend its portfolio securities. For a
discussion of the limits on and risks of lending securities, 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."
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"). Mortgage-related securities, which are interests in
pools of mortgage loans made to home buyers, pose the risk that borrowers may
prepay their mortgages faster then expected, which may adversely affect the
instruments' average life and yield.
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."
<PAGE>
AST 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 100% 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.
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."
AST PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to
maximize total return, consistent with preservation of capital. The Sub-advisor
will seek to employ prudent investment management techniques, especially in
light of the broad range of investment instruments in which the Portfolio may
invest.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Portfolio will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities, including convertible
securities and commercial paper; mortgage and other asset-backed securities;
inflation-indexed bonds issued by both governments and corporations; structured
notes, including hybrid or "indexed" securities, and loan participations;
variable and floating rate debt securities; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase agreements and reverse
repurchase agreements; obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies or supranational
entities; and foreign currency exchange-related securities, including foreign
currency warrants.
The Portfolio will invest in a diversified portfolio of fixed-income
securities of varying maturities. The average portfolio duration of the
Portfolio normally will vary within a three- to six-year time frame based on the
Sub-advisor's forecast for interest rates. The Portfolio may invest up to 10% of
its assets in fixed income securities that are rated below investment grade but
rated B or higher by Moody's Investors Services, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") (or, if unrated, determined by the Sub-advisor to be
of comparable quality). The Portfolio will maintain an overall dollar-weighted
average quality of at least A (as rated by Moody's or S&P). In the event that
ratings services assign different ratings to the same security, the Sub-advisor
will determine which rating it believes best reflects the security's quality and
risk at that time, which may be the higher of the several assigned ratings.
Securities rated B are judged to be predominantly speculative with respect to
their capacity to pay interest and repay principal in accordance with the terms
of the obligations. The Sub-advisor will seek to reduce the risks associated
with investing in such securities by limiting the Portfolio's holdings in such
securities and by the depth of its own credit analysis. For a discussion of the
risks involved in lower-rated high-yield bonds, see this Prospectus and the
Trust's SAI under "Certain Risk Factors and Investment Methods." See the
Appendix to the Trust's SAI for a description of Moody's and S&P's ratings
applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may engage in foreign currency transactions. Foreign
currency exchange transactions may be entered into the purpose of hedging
against foreign currency exchange risk arising from the Portfolio's investment
or anticipated investment in securities denominated in foreign currencies.
The Portfolio may enter into swap agreements for the purposes of
attempting to obtain a particular investment return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
provided that desired return. In addition, the Portfolio may purchase and sell
securities on a when-issued and delayed delivery basis and enter into forward
commitments to purchase securities; lend its securities to brokers, dealers and
other financial institutions to earn income; and borrow money for investment
purposes.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return obtained by a portfolio investing primarily in fixed
income securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to the composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the potential for total return, with, however, greater
attendant market risk and price volatility than for a portfolio with a shorter
duration. The market value of securities denominated in currencies other than
U.S. dollars also may be affected by movements in foreign currency exchange
rates.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as the Student Loan Marketing Association, are supported only by the credit of
the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investment in corporate debt
securities that are below investment grade (rated below Baa (Moody's) or BBB
(S&P)) are described as "speculative" both by Moody's and S&P. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be unattractive or limited due
to insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. For a description of these securities and the special risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods" and the Trust's SAI under "Investment Objectives
and Policies."
Repurchase Agreements. For the purpose of achieving income, the
Portfolio may enter into repurchase agreements, subject to guidelines
promulgated by the Board of Trustees of the Trust. The Portfolio will not invest
more than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value
of any increase or decrease in the value of the Portfolio and may cause the
Portfolio to liquidate portfolio positions when it would not be advantageous to
do so. The Portfolio will maintain a segregated account consisting of cash or
other liquid assets to cover its obligations under reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls will be subject
to the Portfolio's limitations on borrowing as discussed in the Trust's SAI
under "Investment Restrictions." Apart from transactions involving reverse
repurchase agreements and dollar rolls, the Portfolio will not borrow money,
except for temporary administrative purposes. For an additional discussion of
the risks of borrowing and of reverse repurchase agreements and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
When-Issued, Delayed-Delivery, and Forward Commitment Transactions. The
Portfolio may purchase or sell securities on a when-issued, delayed delivery, or
forward commitment basis. These transactions involve a commitment by the
Portfolio to purchase or sell securities for a predetermined price or yield,
with payment and delivery taking place more than seven days in the future, or
after a period longer than the customary settlement period for that type of
security. When such purchases are outstanding, the Portfolio will set aside and
maintain until the settlement date, in a segregated account, cash or other
liquid assets in an amount sufficient to meet the purchase price. Typically, no
income accrues on securities the Portfolio has committed to purchase prior to
the time delivery of the securities is made, although the Portfolio may earn
income on securities it has deposited in a segregated account. When purchasing a
security on a when-issued, delayed delivery, or forward commitment basis, the
Portfolio assumes the rights and risks of ownership of the security, including
the risk of price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because the Portfolio is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the Portfolio's other investments. If the
Portfolio remains substantially fully invested at a time when when-issued,
delayed delivery, or forward commitment purchases are outstanding, the purchases
may result in a form of leverage. When the Portfolio has sold a security on a
when-issued, delayed delivery, or forward commitment basis, the Portfolio does
not participate in future gains or losses with respect to the security. If the
other party to a transaction fails to deliver or pay for the securities, the
Portfolio could miss a favorable price or yield opportunity or could suffer a
loss. The Portfolio may dispose of or renegotiate a transaction after it is
entered into, and may sell when-issued or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Portfolio may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment basis.
Short Sales. The Portfolio may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale "against the box") is a transaction in which the Portfolio sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Portfolio engages in
short sales, it must (except in the case of short sales against the box)
maintain asset coverage in the form of cash or other liquid assets in a
segregated account. A short sale is "against the box" to the extent that the
Portfolio contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in fixed income
securities of non-U.S. issuers. The Portfolio will concentrate its foreign
investments to securities of issuers based in developed countries. The Portfolio
may invest up to 10% of its assets in securities of issuers based in countries
with emerging securities markets. The Sub-advisor has broad discretion to
identify and invest in countries that it considers to qualify as emerging
securities markets. Investing in the securities of issuers in any foreign
country involves special risks and considerations not typically associated with
investing in U.S. companies. For a discussion of the risks involved in investing
in foreign securities, in general, and the special risks of investing in
developing countries, as well as the risks of currency fluctuations, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Portfolio will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
Foreign Currency Transactions. The Portfolio may buy and sell foreign
currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Options on Securities, Securities Indexes and Currencies. The Portfolio
may purchase and write call and put options on securities, securities indexes
and on foreign currencies, and enter into futures contracts and use options on
futures contracts as further described below. The Portfolio may also enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency, exchange rates or securities prices
or as part of its overall investment strategy.
The Portfolio may purchase options on securities to protect holdings in
an underlying or related security against a substantial decline in market value.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. The
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. The Portfolio may write a call or put option
only if it is "covered" by the Portfolio holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Portfolio's obligation as writer of the option. Prior to exercise or expiration,
an option may be closed out by an offsetting purchase or sale of an option of
the same series.
The Portfolio may also invest in foreign-denominated securities and may
buy or sell put and call options on foreign currencies. Currency options traded
on U.S. or other exchanges may be subject to position limits which may limit the
ability of the Portfolio to reduce foreign currency risk using such options. For
a discussion of options and the risks involved therein, as well as the risks
involved in investing in foreign currency, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for the purposes of attempting to obtain
a particular desired return at a lower cost to the Portfolio than if the
Portfolio had invested directly in an instrument that yielded the desired
return. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. Commonly used swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate or "cap"; interest floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of a swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement ("net amount"). The Portfolio's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Portfolio) and any
accrued unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash or other liquid assets to
avoid any potential leveraging of the Portfolio. The Portfolio will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Portfolio's total assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the Portfolio's
ability to predict correctly whether certain types of investment are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they have terms of longer than seven days, swap agreements
may be considered illiquid. Moreover, the Portfolio bears the risk of loss of
the amount expected to be received under a swap agreement in the event of a
default or bankruptcy of a swap agreement counterparty. The Sub-advisor will
cause the Portfolio to enter into swap agreements only with counterparties that
would be eligible for consideration as repurchase agreement counterparties under
the Portfolio's repurchase agreement guidelines. Certain restrictions imposed on
the Portfolio by the Internal Revenue Code may limit the Portfolio's ability to
use swap agreements. The swaps market is relatively new and is largely
unregulated. It is possible that developments in the swaps market, including
potential governmental regulation, could adversely affect the Portfolio's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon that are traded on a U.S.
or foreign exchange or board of trade. The Portfolio will only enter into
futures contracts or futures options which are standardized and traded on a U.S.
or foreign exchange or board of trade, or similar entity, or quoted on an
automated quotation system. The Portfolio will use financial futures contracts
and related options only for "bona fide" hedging purposes, as such term is
defined in the applicable regulations of the CFTC, or, with respect to positions
in financial futures and related options that do not qualify as "bona fide
hedging" positions, will enter such non-hedging positions only to the extent
that aggregate initial margin deposit plus premiums paid by it for the open
futures options position, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total assets. For an
additional discussion of futures contracts and related options, and the risks
involved therein, see this Prospectus and the Trust's SAI under "Certain Risk
Factors and Investment Methods."
Hybrid Instruments. The Portfolio may invest up to 5% of its assets in
hybrid instruments. A hybrid instrument can combine the characteristics of
securities, futures, and options. Hybrids can be used as an efficient means of
pursuing a variety of investment goals, including currency hedging, duration
management, and increased total return. For an additional discussion of hybrid
instruments and certain risks involved therein, see the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities. Certain illiquid securities may require pricing at fair
value as determined in good faith under the supervision of the Board of
Trustees. The term "illiquid securities" for this purpose means securities that
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities.
Illiquid securities are considered to include, among other things, written
over-the-counter options, securities or other liquid assets being used as cover
for such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not subject
to prepayment or provide for withdrawal penalties upon prepayment (other than
overnight deposits), securities that are subject to legal or contractual
restrictions on resale and other securities whose disposition is restricted
under the federal securities laws (other than securities issued pursuant to Rule
144A under the Securities Act of 1933 that the Sub-advisor has determined to be
liquid under procedures approved by the Board of Trustees). Illiquid securities
may include privately placed securities, which are sold directly to a small
number of investors, usually institutions. Unlike public offerings, such
securities are not registered under the federal securities laws. Although
certain of these securities may be readily sold, for example, under Rule 144A,
others may be illiquid, and their sale may involve substantial delays and
additional costs.
Portfolio Turnover. The Portfolio may have higher portfolio turnover than
other mutual funds with similar investment objectives. For a discussion of
portfolio turnover and its effects, see this Prospectus and the Trust's SAI
under "Portfolio Turnover."
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AST 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 generally will vary within a one- to three-year time frame based on
the Sub-advisor's forecast for interest rates. The Portfolio may invest up to
10% of its assets in corporate debt securities that are rated below investment
grade but rated B or higher by Moody's or S&P (or, if unrated, determined by the
Sub-advisor to be of comparable quality). The Portfolio may also invest up to
20% of its assets in securities denominated in foreign currencies. The Portfolio
will make use of use of average portfolio credit quality standards to assist
institutional investors whose own investment guidelines limit its investments
accordingly. In determining the Portfolio's overall dollar-weighted average
quality, unrated securities are treated as if rated, based on the Sub-advisor's
view of their comparability to rated securities. In the event that ratings
services assign different ratings to the same security, the Sub-advisor will
determine which rating it believes best reflects the security's quality and risk
at that time, which may be the higher of the several assigned ratings. The
Portfolio's investments may range in quality from securities rated in the lowest
category in which the Portfolio is permitted to invest to securities rated in
the highest category (as rated by Moody's or S&P or, if unrated, determined by
the Sub-advisor to be of comparable quality). The percentage of a the
Portfolio's assets invested in securities in a particular rating category will
vary. See the Appendix to the Trust's SAI for a description of Moody's and S&P
ratings applicable to fixed income securities.
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may invest in securities denominated in foreign currencies,
and also may engage in foreign currency exchange transactions by means of buying
or selling foreign currencies on a spot basis, entering into foreign currency
forward contracts, and buying and selling foreign currency options, foreign
currency futures, and options on foreign currency futures. Foreign currency
exchange transactions may be entered into for the purpose of hedging against
foreign currency exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. The
Portfolio also may enter into foreign currency forward contracts and buy or sell
foreign currencies or foreign currency options for purposes of increasing
exposure to a particular foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may enter into swap agreements for purposes of attempting
to obtain a particular investment return at a lower cost to the Portfolio than
if the Portfolio had invested directly in an instrument that provided that
desired return. In addition, the Portfolio may purchase and sell securities on a
when-issued or delayed-delivery basis, sell securities short, and enter into
forward commitments to purchase securities; lend their securities to brokers,
dealers and other financial institutions to earn income; and borrow money for
investment purposes.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in market value of fixed income securities
(and therefore their capital appreciation or depreciation) is largely a function
of changes in the current level of interest rates. When interest rates are
falling, a portfolio with a shorter duration generally will not generate as high
a level of total return as a portfolio with a longer duration. Conversely, when
interest rates are rising, a portfolio with a shorter duration will generally
outperform longer duration portfolios. When interest rates are flat, shorter
duration portfolios generally will not generate as high a level of total return
as longer duration portfolios (assuming that long-term interest rates are higher
than short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the anticipated potential for total return, with,
however, greater attendant market risk and price volatility than for a portfolio
with a shorter duration. The market value of securities denominated in
currencies other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
Unless otherwise indicated, all limitations applicable to Portfolio
investments (as stated in this Prospectus and in the Trust's SAI) apply only at
the time a transaction is entered into. Any subsequent change in a rating
assigned by any rating service to a security (or, if unrated, deemed to be of
comparable quality), or change in the percentage of Portfolio assets invested in
certain securities or other instruments, or change in the average duration of
the Portfolio's investment portfolio, resulting from market fluctuations or
other changes in the Portfolio's total assets will not require the Portfolio to
dispose of an investment until the Sub-advisor determines that it is practicable
to sell or close out the investment without undue market consequences to the
Portfolio.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Investments in corporate debt
securities that are below investment grade (rated below Baa (Moody's) or BBB
(S&P)) are described as "speculative" both by Moody's and S&P. For a description
of the special risks involved with lower-rated high-yield bonds, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods." For a description of securities ratings, see the Appendix to the
Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Typically, convertible securities are callable by the issuing
company, which may, in effect, force conversion before the holder would
otherwise choose.
The convertible securities in which the Portfolio may invest consist of
bonds, notes, debentures and preferred stocks which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The Portfolio may be required to permit the issuer of a
convertible security to redeem the security, convert it into the underlying
common stock, or sell it to a third party. Thus, the Portfolio may not be able
to control whether the issuer of a convertible security chooses to convert that
security. If the issuer chooses to do so, this action could have an adverse
effect on the Portfolio's ability to achieve its investment objective.
While some countries or companies may be regarded as favorable
investments, pure fixed income opportunities may be unattractive or limited due
to insufficient supply, legal or technical restrictions. In such cases, the
Portfolio may consider equity securities or convertible bonds to gain exposure
to such investments.
Loan Participation and Assignments. The Portfolio may invest in fixed-
and floating-rate loans arranged through private negotiations between an issuer
of debt instruments and one or more financial institutions ("lenders").
Generally, the Portfolio's investments in loans are expected to take the form of
loan participations and assignments of portions of loans from third parties.
Large loans to corporation or governments may be shared or syndicated
among several lenders, usually banks. The Portfolio may participate in such
syndicates, or can buy part of a loan, becoming a direct lender. Participations
and assignments involve special types of risk, including limited marketability
and the risks of being a lender. See "Illiquid Securities" below for a
discussion of the limits on the Portfolio's investments in loan participations
and assignments with limited marketability. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of the lender in addition to the borrower. In
assignments, the Portfolio's rights against the borrower may be more limited
than those held by the original lender.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money-market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide the
Portfolio with a certain degree of protection against rises in interest rates,
the Portfolio will participate in any declines in interest rates as well.
The Portfolio may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality. The Portfolio
will not invest more than 5% of its net assets in any combination of inverse
floater, interest only, or principal only securities.
Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income
securities whose principal value is periodically adjusted according to the rate
of inflation. The interest rate on these bonds is generally fixed at issuance at
a rate lower than typical bonds. Over the life of an inflation-indexed bond,
however, interest will be paid based on a principal value which is adjusted for
inflation. For example, if the Portfolio purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment
would be $15.15 ($1,010 times 1.5%).
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Portfolio may also invest in
other inflation related bonds which may or may not provide a similar guarantee.
If a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response
to changes in real interest rates (which are nominal interest rates adjusted for
inflation). If inflation were to rise at a faster rate than nominal interest
rates, real interest rates would decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates would rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop, although
one is expected. There also can be no assurance that the U.S. Treasury will
issue any particular amount of inflation-indexed bonds. Certain foreign
governments, such as the United Kingdom, Canada and Australia, have a longer
history of issuing inflation-indexed bonds, and there may be a more liquid
market in certain of these countries for these securities.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage- or asset-backed securities. The value of
some mortgage- or asset-backed securities in which the Portfolio invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Portfolio, the ability of the Portfolio to successfully
utilize these instruments may depend in part upon the ability of the Sub-advisor
to forecast interest rates and other economic factors correctly.
Mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, such as CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be structured
in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. In addition, the Portfolio may invest in
other asset-backed securities that have been offered to investors. For an
additional discussion of mortgage-related and other asset-backed securities and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods" and the Trust's SAI under
"Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, for the purpose of achieving income, the Portfolio may
enter into repurchase agreements, which entail the purchase of a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time (normally
one day). The Portfolio will not invest more than 15% of its net assets (taken
at current market value) in repurchase agreements maturing in more than seven
days. For a discussion of repurchase agreements and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. A
reverse repurchase agreement involves the sale of a security by the Portfolio
and its agreement to repurchase the instrument at a specified time and price,
and for some purposes may be considered a borrowing. The Portfolio may also
enter into dollar rolls, in which the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. In the
case of dollar rolls involving mortgage-backed securities, the mortgage-backed
securities that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio foregoes principal and interest paid during the roll
period on the securities sold in a dollar roll, but the Portfolio is compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the receipt of
fee income equivalent to a lower forward price.
These practices will tend to exaggerate the effect on net asset value
of any increase or decrease in the value of the Portfolio's portfolio and may
cause the Portfolio to liquidate portfolio positions when it would not be
advantageous to do so. The Portfolio will maintain a segregated account
consisting of cash or other liquid assets to cover its obligations under reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls will be subject to the Portfolio's limitations on borrowings as discussed
in the Trust's SAI under "Investment Restrictions." Apart from transactions
involving reverse repurchase agreements and dollar rolls, the Portfolio will not
borrow money, except for temporary administrative purposes. For an additional
discussion of the risks of borrowing, and of reverse repurchase agreements and
the risks involved therein, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
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."
AST American 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. The Portfolio will not invest more than
5% of its assets in securities of companies that do not have a record of at
least three years continuous operation.
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 Sub-advisor believes that the rate of
portfolio turnover is irrelevant when it 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. Repurchase agreements maturing in more than seven
days will be subject to the Portfolio's 15% limitation on illiquid securities
described below. 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.
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."
AST American 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
will not invest more than 5% of its assets in securities of companies that do
not 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 may 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 Sub-advisor believes that the rate of
portfolio turnover is irrelevant when it 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. Repurchase agreements maturing in more than seven days will be subject
to the Portfolio's 15% limitation on illiquid securities described below. 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."
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.
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."
<PAGE>
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."
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."
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."
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."
<PAGE>
AST Cohen & Steers Realty Portfolio:
Investment Objective: The investment objective of 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 or losses by selling
properties that have appreciated or depreciated 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."
AST Stein Roe Venture Portfolio:
Investment Objective: The investment objective of 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: (1) tend to be more sensitive to interest rate and economic
changes; (2) may be obligations of issuers who are less creditworthy than
issuers of higher quality convertible securities; and (3) 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.
AST Bankers Trust Enhanced 500 Portfolio:
Investment Objective: The investment objective of the Portfolio is to outperform
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500(R)") 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. In addition, the Sub-advisor may determine
based on the quantitative criteria that certain S&P 500 stocks should not be
held by the Portfolio in any amount. 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 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.
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. "Standard & Poor's(R)", "S&P 500(R)", "Standard &
Poor's 500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by the Investment Manager and Sub-advisor.
The Portfolio is not sponsored, endorsed, sold or promoted by Standard
&Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the shareholders of the
Portfolio 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's only relationship to the
Investment Manager or the Sub-advisor is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 which is determined, composed and
calculated by S&P without regard to the Investment Manager, Sub-advisor, or
Portfolio. S&P has no obligation to take the needs of the Investment Manager,
Sub-advisor or the shareholders of the Portfolio into consideration in
determining, composing or calculating the S&P 500. S&P is not responsible for
and has not participated in the determination of the prices and amount of the
Portfolio or the timing of the issuance or sale of the Portfolio, or in the
determination or calculation of the Portfolio's net asset value. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Portfolio.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 or any data included therein and shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to the results to be obtained by the Portfolio, shareholders 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 expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P 500 or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages.
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 primarily for growth. The Portfolio is intended
to be a long-term investment vehicle and is not designed 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 consider 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 Portfolio
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.
Other Equity Securities. As part of one of the strategies used to
outperform the S&P 500, the Portfolio may invest in the equity securities of
companies that are not included in the S&P 500. These equity securities may
include securities of companies that are the subject of publicly announced
acquisitions or other major corporate transactions. Securities of some of these
companies may perform much like fixed income investments because the market
anticipates that the transaction will likely be consummated, resulting in a cash
payment for the securities. In such cases, the Portfolio may enter into
securities index futures contracts and/or related options as described in this
Prospectus in order to maintain its exposure to the equity markets when
investing in these companies. While this strategy is intended to generate
additional gains for the Portfolio without materially increasing the risk to
which the Portfolio is subject, there can be no assurance that the strategy will
achieve its intended results. The Portfolio will not invest more than 15% of its
total assets in equity securities of companies not included in the S&P 500.
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 hedging 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, at all times, margin deposits for futures contracts and premiums on
related options do not exceed 5% of the Portfolio's assets and provided that the
percentage of the Portfolio's assets being used to cover its obligations under
futures and options does not exceed 50%. 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 Portfolio 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.
AST 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. The Sub-advisor expects that the majority of the Portfolio's assets
will be invested in the common stocks of larger, more established companies. 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.
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. 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. 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."
Debt Securities. Debt securities that the Portfolio may purchase
include corporate bonds and debentures, government securities, mortgage- and
asset-backed securities, zero-coupon bonds, index/structured notes, high-grade
commercial paper, certificates of deposit and repurchase agreements. The
Portfolio will not invest more than 5% of its total assets in bonds rated below
investment grade. The Portfolio will not invest more than 25% of its total
assets in mortgage- and asset-backed securities. For a discussion of mortgage-
and asset-backed securities and their risks, see this Prospectus and the Trust's
SAI under "Certain Risk Factors and Investment Methods."
Zero coupon, Pay-in-kind, and Step Coupon Securities. The
Portfolio may invest up to 10% of its total assets in zero coupon, pay-in-kind
and step coupon securities in the aggregate. Zero coupon bonds are debt
securities that do not pay periodic interest, but are issued at a discount from
their face value. The discount approximates the total amount of interest the
security will accrue from the date of issuance to maturity. Pay-in-kind bonds
normally give the issuer the option to pay cash at a coupon payment date or give
the holder of the security a similar bond with the same coupon rate and a face
value equal to the amount of the coupon payment that would have been made. Step
coupon bonds begin to pay coupon interest, or pay an increased rate of interest,
at some time after they are issued. The discount at which step coupon bonds
trade depends on the time remaining until cash payments begin, prevailing
interest rates, the liquidity of the security and the perceived credit quality
of the issuer. The market value of zero coupon, pay-in-kind and step coupon
bonds generally will fluctuate more in response to changes in interest rates
than will conventional interest-paying securities with comparable maturities.
Index/structured Securities. The Portfolio may invest without
limit in index/structured securities, which are debt securities, typically with
short to intermediate terms, whose value at maturity or interest rate is linked
to currencies, interest rates, equity securities, indices, commodity prices or
other financial indicators. Such securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the reference index or
instrument appreciates). Index/structured securities may have return
characteristics similar to direct investments in the underlying instruments, but
may be more volatile than the underlying instruments. The Portfolio bears the
market risk of an investment in the underlying instruments, as well as the
credit risk of the issuer of the index/structured security.
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."
AST Neuberger Berman Mid-Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Investment Policies:
The Portfolio seeks capital growth through an investment approach that
is designed to increase capital with reasonable risk. The Portfolio invests
principally in common stocks of medium to large capitalization established
companies, using the value-oriented investment approach. A value-oriented
portfolio manager buys stocks that are selling at a price that is lower than
what the manager believes they are worth. These include stocks that are
currently under-researched or are temporarily out of favor on Wall Street.
Portfolio managers identify value stocks in several ways. One of the
most common identifiers is a low price-to-earnings ratio -- that is, stocks
selling at multiples of earnings per share that are lower than that of the
market as a whole. Other criteria are high dividend yield, a strong balance
sheet and financial position, a recent company restructuring with the potential
to realize hidden values, strong management, and low price-to-book value (net
value of the company's assets). The Sub-advisor looks for securities believed to
be undervalued based on strong fundamentals, including a low price-to-earnings
ratio, consistent cash flow, and the company's track record through all parts of
the market cycle.
The Sub-advisor believes that, over time, securities that are
undervalued are more likely to appreciate in price and be subject to less risk
of price decline than securities whose market prices have already reached their
perceived economic value. This approach also contemplates selling portfolio
securities when they are considered to have reached their potential.
The Sub-advisor considers additional factors when selecting securities
for the Portfolio, including ownership by a company's management of the
company's stock and the dominance of a company in its particular field.
In addition to investing in the stocks of medium capitalization
companies ("mid-cap companies") and large capitalization companies ("large-cap
companies"), investments may be made in smaller, less well-known companies
("small-cap companies"). Investments in small- and mid-cap company stocks may
present greater opportunities for capital appreciation than investments in
stocks of large-cap companies. However, small- and mid-cap company stocks may
have higher risk and volatility. These stocks generally are not as broadly
traded as large-cap company stocks and their prices may fluctuate more widely
and abruptly. Any such movements in stocks held by the Portfolio would be
reflected in the Portfolio's net asset value. Small- and mid-cap company stocks
are also less researched than large-cap company stocks and are often overlooked
in the market.
An investment in the Portfolio involves certain risks, depending upon
the types of investments it makes. Although the Portfolio ordinarily invests
primarily in common stocks, when market conditions warrant it may invest in
preferred stocks, securities convertible into or exchangeable for common stocks,
U.S. Government and agency securities, debt securities, or money market
instruments, or may retain assets in cash or cash equivalents. The Portfolio may
not necessarily buy any or all of the types of securities or use any or all of
the techniques that are described below. As discussed in more detail below,
special risk factors apply to certain investments that may be made by the
Portfolio, including investments in foreign securities, options contracts, zero
coupon bonds, and debt securities rated below investment grade. Up to 15% of the
Portfolio's net assets, measured at the time of investment, may be invested in
corporate debt securities that are below investment grade or in comparable
unrated securities. The use of hedging or other techniques is discretionary and
no representation is made that the risk of the Portfolio will be reduced by the
techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not
purchase securities with the intention of profiting from short-term trading, the
Portfolio may sell portfolio securities when the Sub-advisor believes that such
action is advisable. Therefore, 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."
Cash Investments. For temporary defensive purposes, the Portfolio may
invest up to 100% of its assets in cash or cash equivalents, U.S. Government and
agency securities, commercial paper and certain other money market instruments,
as well as repurchase agreements collateralized by the foregoing. To the extent
that the Portfolio is invested in these temporary defensive instruments, it will
not be pursuing its investment objective.
Fixed Income Securities. The Portfolio may invest in fixed income or
debt securities, the value of which are likely to decline in times of rising
interest rates and rise in times of falling interest rates. In general, the
longer the maturity of a fixed income security, the more pronounced is the
effect of a change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating
from at least one nationally recognized statistical rating organization
("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit
Rating Co. in one of the two highest rating categories (the highest category in
the case of commercial paper) or, if not rated by any NRSRO, such as U.S.
Government and Agency securities, have been determined by the Sub-advisor to be
of comparable quality. Investment grade debt securities are those receiving
ratings from at least one NRSRO in one of the four highest rating categories or,
if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities. Securities rated by Moody's in its fourth highest category (Baa) may
have speculative characteristics; a change in economic factors could lead to a
weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated below the
fourth highest category by all NRSROs that have rated them, and comparable
unrated securities, are considered to be below investment grade. The Portfolio
may invest up to 15% of its net assets, measured at the time of investment, in
debt securities that are below investment grade or comparable unrated
securities. Securities rated below investment grade ("junk bonds") are judged to
be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
While such securities may be considered predominantly speculative, as debt
securities, they generally have priority over equity securities of the same
issuer and are generally better secured.
Debt securities in the lowest rating categories may involve a
substantial risk of default or may be in default. Changes in economic conditions
or developments regarding the individual issuer are more likely to cause price
volatility and weaken the capacity of the issuer of such securities to make
principal and interest payments than is the case for higher-grade debt
securities. An economic downturn affecting the issuer may result in an increased
incidence of default. In the case of lower-rated 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 that pay interest periodically and in cash. The Sub-advisor will
invest in such securities only when it concludes that the anticipated return to
the Portfolio on such an investment warrants exposure to the additional level of
risk.
For an additional discussion of the risks involved in lower-rated
bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods." For an additional description of the ratings services'
securities ratings, see the Appendix the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock,
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Many convertible securities are
rated below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest
currently; instead, they are sold at a discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are
obligations of the U.S. Treasury backed by the full faith and credit of the
United States. U.S. Government agency securities are issued or guaranteed by
U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored
enterprises, such as the Government National Mortgage Association (commonly
known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage
Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation,
Student Loan Marketing Association (commonly known as "Sallie Mae"), and
Tennessee Valley Authority. Agency securities may be backed by the full faith
and credit of the United States, the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government and agency securities include U.S.
Government and agency mortgage-backed securities. The market prices of U.S.
Government and agency securities are not guaranteed by the government and
generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Portfolio may not purchase
portfolio securities if its outstanding borrowings, including reverse repurchase
agreements, exceed 5% of its total assets. In addition, the Portfolio is subject
to the fundamental restriction on borrowing described in the Trust's SAI under
"Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines
established by the Board of Trustees of the Trust, the Portfolio may invest up
to 15% of its net assets in illiquid securities, which are securities that
cannot be expected to be sold within seven days at approximately the price at
which they are valued. These may include unregistered or other restricted
securities and repurchase agreements maturing in greater than seven days.
Illiquid securities may also include Rule 144A securities (restricted securities
that may be traded freely among qualified institutional buyers pursuant to an
exemption from the registration requirements of the securities laws); these
securities are considered illiquid unless the Sub-advisor, acting pursuant to
the guidelines established by the Board of Trustees, determines they are liquid.
Generally, foreign securities freely tradable in their principal market are not
considered restricted or illiquid. Illiquid securities may be difficult for a
Portfolio to value or dispose of due to the absence of an active trading market.
The sale of some illiquid securities by the Portfolio may be subject to legal
restrictions which could be costly to the Portfolio.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Foreign securities are those of issuers organized and doing
business principally outside the U.S., including non-U.S. governments, their
agencies, and instrumentalities. The Portfolio may invest in foreign securities
denominated in or indexed to foreign currencies, which may also be affected by
the fluctuation of the foreign currencies relative to the U.S. dollar,
irrespective of the performance of the underlying investment. The Sub-advisor
considers these factors in making investments for the Portfolio. The Portfolio
may invest in U.S. dollar-denominated and non-U.S. dollar-denominated corporate
and government debt securities of foreign issuers. In addition, the Portfolio
may enter into forward foreign currency contracts or futures contracts
(agreements to exchange one currency for another at a future date) and related
options to manage currency risks and to facilitate transactions in foreign
securities.
The Portfolio may only invest up to 10% of the value of its total
assets, measured at the time of investment, in foreign securities. The 10%
limitation does not apply with respect to foreign securities that are
denominated in U.S. dollars.
The Portfolio may invest in ADRs, EDRs, GDRs, and IDRs. ADRs (sponsored or
unsponsored) are receipts typically issued by a U.S. bank or trust company
evidencing its ownership of the underlying foreign securities. Most ADRs are
denominated in U.S. dollars and are traded on a U.S. stock exchange. Issuers of
the securities underlying unsponsored ADRs are not contractually obligated to
disclose material information in the U.S. and, therefore, there may not be a
correlation between such information and the market value of the unsponsored
ADR. EDRs and IDRs are receipts typically issued by a European bank or trust
company evidencing its ownership of the underlying foreign securities. GDRs are
receipts issued by either a U.S. or non-U.S. banking institution evidencing its
ownership of the underlying foreign securities and are often denominated in U.S.
dollars.
Investments in foreign securities could be affected by factors
generally not thought to be present in the U.S. Such factors include, but are
not limited to, varying custody, brokerage and settlement practices; difficulty
in pricing some foreign securities; and potentially adverse local, political,
economic, social, or diplomatic developments, the investment significance of
which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies
and governments include changes in currency exchange rates and currency exchange
control regulations or other foreign or U.S. laws or restrictions applicable to
such investments or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain portfolio securities
irrespective of the performance of the underlying investment. Investments in
depositary receipts (whether or not denominated in U.S. dollars) may be subject
to exchange controls and changes in rates of exchange with the U.S. dollar
because the underlying security is usually denominated in foreign currency. All
of the foregoing risks may be intensified in emerging industrialized and less
developed countries.
For an additional discussion of foreign securities and the risks
involved therein, including the risks of currency fluctuations, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Portfolio may enter into forward
contracts in order to protect against adverse changes in foreign currency
exchange rates, to facilitate transactions in foreign securities and to
repatriate dividend or interest income received in foreign currencies. The
Portfolio may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase. The Portfolio may also enter into contracts to sell foreign currencies
to protect against a decline in value of its foreign currency denominated
portfolio securities due to a decline in the value of foreign currencies against
the U.S. dollar.
If the Portfolio enters into a forward contract to sell foreign
currency, it may be required to place cash, fixed income or equity securities in
a segregated account in an amount equal to the value of the Portfolio's total
assets committed to the consummation of the forward contract. Although these
contracts can protect the Portfolio from adverse exchange rates, they involve
risk of loss if the Sub-advisor fails to predict foreign currency values
correctly. For an additional discussion of forward contracts and their risks,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Covered Call Options. The Portfolio may try to reduce the risk of
securities price changes (hedge) or generate income by writing (selling) covered
call options against securities held in its portfolio having a market value not
exceeding 10% of its net assets and may purchase call options in related closing
transactions. When the Portfolio writes a covered call option against a
security, the Portfolio is obligated to sell that security to the purchaser of
the option at a fixed price at any time during a specified period if the
purchaser decides to exercise the option. The maximum price the seller may
realize on the security during the option period is the fixed price. The seller
continues to bear the risk of a decline in the security's price, although this
risk is reduced, at least in part, by the premium received for writing the
option.
The writing of options is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions including transactional expense, price
volatility and a high degree of leverage. The writing of options could result in
significant increases in the Portfolio's turnover rate. The writing of options
also could result in the inability of the Portfolio to purchase or sell a
security at a time that would otherwise be favorable for it to do so, or the
need for the Portfolio to sell a security at a disadvantageous time, due to its
need to maintain "cover" or to segregate securities in connection with its use
of options. Options are considered derivatives. For an additional discussion of
options and their risks, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
When-Issued Securities. In a when-issued transaction, the Portfolio
commits to purchase securities in order to secure an advantageous price and
yield at the time of the commitment and pays for the securities when they are
delivered at a future date (generally within two months). If the seller fails to
complete the sale, the Portfolio may lose the opportunity to obtain a favorable
price and yield. When issued securities may decline or increase in value during
the period from the Portfolio's investment commitment to the settlement of the
purchase, which may magnify fluctuation in the Portfolio's net asset value.
Repurchase Agreements. Subject to guidelines established by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements. In
a repurchase agreement, the Portfolio buys a security from a Federal Reserve
member bank, or a securities dealer and simultaneously agrees to sell it back at
a higher price, at a specified date, usually less than a week later. The
underlying securities must fall within the Portfolio's investment policies and
limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors
the creditworthiness of repurchase agreement sellers. For an additional
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."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Portfolio sells securities to a bank or a securities dealer and at the same time
agrees to repurchase the same securities at a higher price on a specific date.
During the period before the repurchase, the Portfolio continues to receive
principal and interest payments on the securities. The Portfolio is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop"), as well as by the interest
earned on the cash proceeds of the initial sale. Reverse repurchase agreements
may increase fluctuations in the Portfolio's net asset value and may be viewed
as a form of leverage. The Sub-advisor monitors the creditworthiness of parties
to reverse repurchase agreements. For an additional discussion of reverse
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."
Short Sales Against-the-Box. The Portfolio may make short sales
against-the-box. To effect a short sale, the Portfolio will borrow a security
from a brokerage firm to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed at a later date. A short sale is
"against-the-box" when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of additional consideration, to obtain an equal
amount of securities sold short. Short sales against-the-box allow the Portfolio
to hedge against price fluctuations by locking in a sale price for securities it
does not wish to sell immediately.
AST Neuberger Berman Mid-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation.
Investment Policies:
The Portfolio invests in a diversified portfolio of common stocks
believed to have the maximum potential for long-term above-average capital
appreciation. Under normal conditions, the Portfolio primarily invests in the
common stocks of medium capitalization companies ("mid-cap companies").
Companies with equity market capitalizations from $300 million to $10 billion at
the time of investment are considered mid-cap companies. The Trust may revise
this definition based on market conditions. Although the Portfolio will invest
primarily in the common stocks of mid-cap companies, investments may be made in
the securities of larger, widely traded companies ("large-cap companies") as
well as smaller, less well-known companies ("small-cap companies"). At times,
markets may favor the relative safety of larger capitalization securities and
the greater growth potential of smaller capitalization securities over medium
capitalization securities. The Portfolio does not seek to invest in securities
that pay dividends or interest, and any such income is incidental.
Investments in small- and mid-cap company stocks may present greater
opportunities for capital appreciation than investments in stocks of large-cap
companies. However, small- and mid-cap company stocks may have higher risk and
volatility. These stocks generally are not as broadly traded as large-cap
company stocks and their prices may fluctuate more widely and abruptly. Any such
movements in stocks held by the Portfolio would be reflected in the Portfolio's
net asset value. Small- and mid-cap company stocks are also less researched than
large-cap company stocks and are often overlooked in the market.
The Portfolio is normally managed using a growth-oriented investment
approach. A growth approach seeks stocks of companies that the Sub-advisor
projects will grow at above-average rates and faster than others expect. The
Portfolio's growth investment program involves greater risks and share price
volatility than programs that invest in more undervalued securities. When the
Sub-advisor believes that particular securities have greater potential for
long-term capital appreciation, the Portfolio may purchase such securities at
prices with higher multiples to measures of economic value (such as earnings or
cash flow) than an investor focusing primarily on current fundamental value.
These multiples, however, tend to be reasonable relative to the Sub-advisor's
expectation of the company's earnings growth rate.
In selecting equity securities for the Portfolio, the Sub-advisor will
consider, among other factors, an issuer's financial strength, competitive
position, projected future earnings, management strength and experience,
reasonable valuations, and other investment criteria. The Portfolio diversifies
its investments among companies and industries.
An investment in the Portfolio involves certain risks, depending upon
the types of investments it makes. Although equity securities are normally the
Portfolio's primary investment, when market conditions warrant it may invest in
preferred stocks, securities convertible into or exchangeable for common stocks,
U.S. Government and Agency Securities, investment grade and non-investment grade
debt securities, or money market instruments, or may retain assets in cash or
cash equivalents. The Portfolio may not necessarily buy any or all of the types
of securities or use any or all of the investment techniques that are described
below. As discussed in more detail below, special risk factors apply to certain
investments that may be made by the Portfolio, including investments in foreign
securities, options and futures contracts, zero coupon bonds and debt securities
rated below investment grade. As part of its strategy to achieve long-term
capital appreciation, the Portfolio may invest up to 20% of its net assets in
securities of issuers organized and doing business principally outside the
United States. Up to 10% of the Portfolio's net assets, measured at the time of
investment, may be invested in corporate debt securities that are below
investment grade, but rated at least C by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Rating Group ("S&P"), or comparable unrated
securities. The use of hedging or other techniques is discretionary and no
representation is made that the risk of the Portfolio will be reduced by the
techniques discussed below.
Short-Term Trading; Portfolio Turnover. While the Sub-advisor does not
purchase securities with the intention of profiting from short-term trading, the
Portfolio may sell portfolio securities when the Sub-advisor believes that such
action is advisable. Therefore, 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."
Cash Investments. For temporary defensive purposes, the Portfolio may
invest up to 100% of its assets in cash or cash equivalents, U.S. Government and
agency securities, commercial paper and certain other money market instruments,
as well as repurchase agreements collateralized by the foregoing. To the extent
that the Portfolio is invested in these temporary defensive instruments, it will
not be pursuing its investment objective.
Fixed Income Securities. The Portfolio may invest in fixed income or
debt securities, the value of which are likely to decline in times of rising
interest rates and rise in times of falling interest rates. In general, the
longer the maturity of a fixed income security, the more pronounced is the
effect of a change in interest rates on the value of the security.
High quality debt securities are securities that have received a rating
from at least one nationally recognized statistical rating organization
("NRSRO"), such as Standard & Poor's Rating Group ("S&P"), Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Services, or Duff & Phelps Credit
Rating Co. in one of the two highest rating categories (the highest category in
the case of commercial paper) or, if not rated by any NRSRO, such as U.S.
Government and Agency securities, have been determined by the Sub-advisor to be
of comparable quality. Investment grade debt securities are those receiving
ratings from at least one NRSRO in one of the four highest rating categories or,
if unrated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities. Securities rated by Moody's in its fourth highest category (Baa) may
have speculative characteristics; a change in economic factors could lead to a
weakened capacity of the issuer to repay.
Lower-Rated Fixed Income Securities. Debt securities rated below the
fourth highest category by all NRSROs that have rated them, and comparable
unrated securities, are considered to be below investment grade. The Portfolio
may invest up to 10% of its net assets, measured at the time of investment, in
debt securities that are below investment grade or comparable unrated
securities, but may not invest in securities rated below C by Moody's or S&P at
the time of investment. Securities rated below investment grade ("junk bonds")
are judged to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. While such securities may be considered predominantly speculative,
as debt securities, they generally have priority over equity securities of the
same issuer and are generally better secured.
Debt securities in the lowest rating categories may involve a
substantial risk of default or may be in default. Changes in economic conditions
or developments regarding the individual issuer are more likely to cause price
volatility and weaken the capacity of the issuer of such securities to make
principal and interest payments than is the case for higher-grade debt
securities. An economic downturn affecting the issuer may result in an increased
incidence of default. In the case of lower-rated 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 that pay interest periodically and in cash. The Sub-advisor will
invest in such securities only when it concludes that the anticipated return to
the Portfolio on such an investment warrants exposure to the additional level of
risk.
If the quality of any fixed income securities held by the Portfolio
deteriorates so that they no longer are rated at least C by Moody's or S&P, or,
if unrated, are determined by the Sub-advisor to no longer be of comparable
quality, the Portfolio will engage in an orderly disposition of the securities
to the extent necessary to ensure that the Portfolio's holdings of such
securities will not exceed 5% of its net assets.
For an additional discussion of the risks involved in lower-rated
bonds, see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods." For an additional description of the ratings services'
securities ratings, see the Appendix the Trust's SAI.
Convertible Securities. The Portfolio may invest in convertible
securities. A convertible security is a bond, debenture, note, preferred stock,
or other security that may be converted into or exchanged for a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Many convertible securities are
rated below investment grade, or are unrated.
Zero Coupon Securities. Zero coupon securities do not pay interest
currently; instead, they are sold at a discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not pay
current income, their prices can be very volatile when interest rates change.
U.S. Government and Agency Securities. U.S. Government securities are
obligations of the U.S. Treasury backed by the full faith and credit of the
United States. U.S. Government agency securities are issued or guaranteed by
U.S. Government agencies, instrumentalities, or other U.S. Government-sponsored
enterprises, such as the Government National Mortgage Association (commonly
known as "Ginnie Mae"), Fannie Mae, formerly Federal National Mortgage
Association, Freddie Mac, formerly Federal Home Loan Mortgage Corporation,
Student Loan Marketing Association (commonly known as "Sallie Mae"), and
Tennessee Valley Authority. Agency securities may be backed by the full faith
and credit of the United States, the issuer's ability to borrow from the U.S.
Treasury, subject to the Treasury's discretion in certain cases, or only by the
credit of the issuer. U.S. Government and agency securities include U.S.
Government and agency mortgage-backed securities. The market prices of U.S.
Government and agency securities are not guaranteed by the government and
generally fluctuate inversely with changing interest rates.
Borrowings. As a non-fundamental policy, the Portfolio may not purchase
portfolio securities if its outstanding borrowings, including reverse repurchase
agreements, exceed 5% of its total assets. In addition, the Portfolio is subject
to the fundamental restriction on borrowing described in the Trust's SAI under
"Investment Restrictions."
Illiquid, Restricted and Rule 144A Securities. Subject to guidelines
established by the Board of Trustees of the Trust, the Portfolio may invest up
to 15% of its net assets in illiquid securities, which are securities that
cannot be expected to be sold within seven days at approximately the price at
which they are valued. These may include unregistered or other restricted
securities and repurchase agreements maturing in greater than seven days.
Illiquid securities may also include Rule 144A securities (restricted securities
that may be traded freely among qualified institutional buyers pursuant to an
exemption from the registration requirements of the securities laws); these
securities are considered illiquid unless the Sub-advisor, acting pursuant to
the guidelines established by the Board of Trustees, determines they are liquid.
Generally, foreign securities freely tradable in their principal market are not
considered restricted or illiquid. Illiquid securities may be difficult for a
Portfolio to value or dispose of due to the absence of an active trading market.
The sale of some illiquid securities by the Portfolio may be subject to legal
restrictions which could be costly to the Portfolio.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Foreign securities are those of issuers organized and doing
business principally outside the U.S., including non-U.S. governments, their
agencies, and instrumentalities. The Portfolio may invest in foreign securities
denominated in or indexed to foreign currencies, which may also be affected by
the fluctuation of the foreign currencies relative to the U.S. dollar,
irrespective of the performance of the underlying investment. The Sub-advisor
considers these factors in making investments for the Portfolio. The Portfolio
may invest in U.S. dollar-denominated and non-U.S. dollar-denominated corporate
and government debt securities of foreign issuers. In addition, the Portfolio
may enter into forward foreign currency contracts or futures contracts
(agreements to exchange one currency for another at a future date) and related
options to manage currency risks and to facilitate transactions in foreign
securities.
The Portfolio may only invest up to 20% of the value of its total
assets, measured at the time of investment, in foreign securities. The 20%
limitation does not apply with respect to foreign securities that are
denominated in U.S. dollars.
The Portfolio may invest in ADRs, EDRs, GDRs, and IDRs. ADRs (sponsored or
unsponsored) are receipts typically issued by a U.S. bank or trust company
evidencing its ownership of the underlying foreign securities. Most ADRs are
denominated in U.S. dollars and are traded on a U.S. stock exchange. Issuers of
the securities underlying unsponsored ADRs are not contractually obligated to
disclose material information in the U.S. and, therefore, there may not be a
correlation between such information and the market value of the unsponsored
ADR. EDRs and IDRs are receipts typically issued by a European bank or trust
company evidencing its ownership of the underlying foreign securities. GDRs are
receipts issued by either a U.S. or non-U.S. banking institution evidencing its
ownership of the underlying foreign securities and are often denominated in U.S.
dollars.
Investments in foreign securities could be affected by factors
generally not thought to be present in the U.S. Such factors include, but are
not limited to, varying custody, brokerage and settlement practices; difficulty
in pricing some foreign securities; and potentially adverse local, political,
economic, social, or diplomatic developments, the investment significance of
which may be difficult to discern.
In addition, the risks of investing in securities of foreign companies
and governments include changes in currency exchange rates and currency exchange
control regulations or other foreign or U.S. laws or restrictions applicable to
such investments or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain portfolio securities
irrespective of the performance of the underlying investment. Investments in
depositary receipts (whether or not denominated in U.S. dollars) may be subject
to exchange controls and changes in rates of exchange with the U.S. dollar
because the underlying security is usually denominated in foreign currency. All
of the foregoing risks may be intensified in emerging industrialized and less
developed countries.
For an additional discussion of foreign securities and the risks
involved therein, including the risks of currency fluctuations, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Foreign Currency Transactions. The Portfolio may enter into forward
contracts in order to protect against adverse changes in foreign currency
exchange rates, to facilitate transactions in foreign securities and to
repatriate dividend or interest income received in foreign currencies. The
Portfolio may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase. The Portfolio may also enter into contracts to sell foreign currencies
to protect against a decline in value of its foreign currency denominated
portfolio securities due to a decline in the value of foreign currencies against
the U.S. dollar.
If the Portfolio enters into a forward contract to sell foreign
currency, it may be required to place cash, fixed income or equity securities in
a segregated account in an amount equal to the value of the Portfolio's total
assets committed to the consummation of the forward contract. Although these
contracts can protect the Portfolio from adverse exchange rates, they involve
risk of loss if the Sub-advisor fails to predict foreign currency values
correctly. For an additional discussion of forward contracts and their risks,
see this Prospectus and the Trust's SAI under "Certain Risk Factors and
Investment Methods."
Put and Call Options, Futures Contracts, Options on Futures Contracts.
The Portfolio may try to reduce the risk of securities price or exchange rate
changes (hedge) or generate income by writing (selling) covered call options
against securities held in its portfolio, may purchase call options in related
closing transactions, and may also purchase put options on portfolio securities
or foreign currencies. When the Portfolio writes a covered call option against a
security, the Portfolio is obligated to sell that security to the purchaser of
the option at a fixed price at any time during a specified period if the
purchaser decides to exercise the option. The maximum price the seller may
realize on the security during the option period is the fixed price. The seller
continues to bear the risk of a decline in the security's price, although this
risk is reduced, at least in part, by the premium received for writing the
option.
The Portfolio may enter into futures contracts on debt securities,
interest rates, and securities indices, and may purchase and sell options on
such contracts on both the U.S. and foreign exchanges for hedging and
non-hedging purposes.
The Portfolio may purchase and write put and call options on foreign
currencies to protect against declines in the dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired. The Portfolio may also use options on foreign currencies to
cross-hedge. In addition, the Portfolio may purchase call or put options on
currencies for non-hedging purposes when the Sub-advisor expects that a currency
will appreciate or depreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not held by
the Portfolio. Options on foreign currencies may be traded on U.S. or foreign
exchanges or over-the-counter. Options on foreign currencies that are traded in
the over-the-counter market may be considered to be illiquid securities and
subject to the Portfolio's restrictions on illiquid securities.
The Portfolio may write call and put options on any securities in which
it may invest or options on any securities index based on securities in which
the Portfolio may invest. The Portfolio will not write a call option on a
security or currency unless it owns the underlying security or currency or has
the right to obtain it at no additional cost.
The use of futures contracts and the writing and purchasing of options
are highly specialized activities that involve investment techniques and risks
different from those associated with ordinary securities transactions, including
transactional expense, price volatility and a high degree of leverage. The
writing of options could result in significant increases in the Portfolio's
turnover rate. The use of futures and the writing of options also could result
in the inability of the Portfolio to purchase or sell a security at a time that
would otherwise be favorable for it to do so, or the need for the Portfolio to
sell a security at a disadvantageous time, due to its need to maintain "cover"
or to segregate securities in connection with these techniques. When the
Portfolio uses these techniques, the Portfolio will place cash, fixed income or
equity securities in a segregated account or will "cover" its position to the
extent required by SEC staff policy. Futures and options contracts are
considered derivatives.
For an additional discussion of options and their risks, see this
Prospectus and the Trust's SAI under "Certain Risk Factors and Investment
Methods."
Forward Commitments and When-Issued Securities. In a when-issued or
forward commitment transaction, the Portfolio commits to purchase securities in
order to secure an advantageous price and yield at the time of the commitment
and pays for the securities when they are delivered at a future date (generally
within two months). If the seller fails to complete the sale, the Portfolio may
lose the opportunity to obtain a favorable price and yield. When issued
securities or securities subject to a forward commitment may decline or increase
in value during the period from the Portfolio's investment commitment to the
settlement of the purchase, which may magnify fluctuation in the Portfolio's net
asset value.
Repurchase Agreements. Subject to guidelines established by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The Portfolio may enter into repurchase agreements on up to 25% of its net
assets. In a repurchase agreement, the Portfolio buys a security from a Federal
Reserve member bank, or a securities dealer and simultaneously agrees to sell it
back at a higher price, at a specified date, usually less than a week later. The
underlying securities must fall within the Portfolio's investment policies and
limitations. Under the repurchase agreement guidelines, the Sub-advisor monitors
the creditworthiness of repurchase agreement sellers. For an additional
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."
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Portfolio sells securities to a bank or a securities dealer and at the same time
agrees to repurchase the same securities at a higher price on a specific date.
During the period before the repurchase, the Portfolio continues to receive
principal and interest payments on the securities. The Portfolio is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop"), as well as by the interest
earned on the cash proceeds of the initial sale. Reverse repurchase agreements
may increase fluctuations in the Portfolio's net asset value and may be viewed
as a form of leverage. The Sub-advisor monitors the creditworthiness of parties
to reverse repurchase agreements. For an additional discussion of reverse
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."
AST Oppenheimer Large-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. The Portfolio does not invest to seek current income.
Investment Policies:
The Fund seeks its investment objective by emphasizing investment in
common stocks issued by established large-capitalization "growth companies"
that, in the opinion of the Sub-advisor, have above average earnings prospects
but are selling at below-normal valuations. The Portfolio normally will invest
at least 65% of its total assets in securities of issuers with market
capitalizations of more than $3 billion, and will maintain a median market
capitalization of more than $5 billion.
"Growth companies" may be developing new products or services, or
expanding into new markets for their products. While they may have what the
Sub-advisor believes to be favorable prospects for the long-term, they normally
retain a large part of their earnings for research, development and investment
in capital assets. Therefore, they tend not to emphasize the payment of
dividends. Investment opportunities may be sought among securities of smaller,
less well-known companies, although the Portfolio's emphasis is on large-cap
issuers.
All investments carry risks to some degree. The risks of the
Portfolio's various investments collectively form the risk profile of the
Portfolio. Because of the types of securities the Portfolio invests in and the
investment techniques it uses, the Portfolio is designed for investors who are
investing for the long term. It is not intended for investors seeking assured
income or preservation of capital. While the Sub-advisor tries to reduce risks
by diversifying its investments, by carefully researching securities before they
are purchased, and in some cases by using hedging techniques, changes in overall
market prices can occur at any time, and there is no assurance that the
Portfolio will achieve its investment objective.
Because the Portfolio invests a substantial portion (or all) of its
assets in stocks, the value of the Portfolio's portfolio will be affected by
changes in the stock markets. At times, the stock markets can be volatile and
stock prices can change substantially. Not all stock prices change uniformly or
at the same time, and not all stock markets move in the same direction at the
same time. In addition, other factors specific to a company or an industry can
affect a particular stock's price (for example, poor earnings reports by an
issuer, loss of major customers, major litigation against an issuer, or changes
in government regulations affecting an industry). Not all of these factors can
be predicted. The Portfolio attempts to limit market risks by diversifying its
investments, that is, by not holding a substantial amount of the stock of any
one company and by not investing too great a percentage of the Portfolio's
assets in any one company.
While the Sub-advisor will invest the Portfolio's assets primarily in
equity securities, it also may invest in other types of securities and employ
special investment techniques, including using futures contracts for hedging
purposes to try to manage investment risks. These securities and techniques and
their risks are described below. The Portfolio may invest in foreign securities,
which involve special risks.
Foreign Securities. The Portfolio may purchase equity securities issued
or guaranteed by foreign companies or foreign governments or their agencies. The
Portfolio may buy securities of companies or governments in any country,
developed or underdeveloped. The Portfolio is not subject to any definite limit
on investments in foreign securities. Foreign securities involve special risks,
which are discussed in this Prospectus under "Certain Risk Factors and
Investment Methods."
Cash Investments. For liquidity purposes, the Portfolio may invest a
portion of its assets in cash, cash equivalents and U.S. Government securities.
It is expected that the emphasis of this portion of the Portfolio will usually
be on short-term debt securities (i.e., those maturing in one year or less from
the date of purchase). Short-term debt securities may include U.S. Treasury and
agency obligations; commercial paper (short-term, unsecured, negotiable
promissory notes of a domestic or foreign company); other short-term debt
obligations of corporate issuers; and certificates of deposit and bankers'
acceptances (time drafts drawn on commercial banks usually in connection with
international transactions) of domestic and foreign banks and savings and loan
associations. The issuers of foreign money market instruments purchased by the
Portfolio must have at least $1 billion (U.S.) of assets.
Hedging. The Portfolio may purchase and sell futures contracts that
relate to broadly-based securities indices (these are sometimes referred to as
"hedging instruments"). While the Portfolio currently does not use hedging
instruments extensively, it may use them.
The Portfolio may buy and sell futures contracts for a number of
purposes. It may do so to try to manage its exposure to a decline in the prices
of its portfolio securities, or to establish a position in the securities market
as a temporary substitute for purchasing individual securities. Selling futures
hedges the Portfolio's investments against price fluctuations. Buying futures
tends to increase the Portfolio's exposure to the securities market.
Hedging instruments can be volatile investments and may involve special
risks. For an additional discussion of futures contracts, other hedging
instruments and their risks, see this Prospectus and the Trust's SAI under
"Certain Risk Factors and Investment Methods."
Derivative Investments. In addition to the hedging instruments
discussed above, the Portfolio may invest in specially designed derivative
investments. These derivatives may be used in some cases for hedging purposes
and in other cases to enhance total return. For an additional discussion of
derivative securities and their risks, see this Prospectus under "Certain Risk
Factors and Investment Methods."
Illiquid Securities. The Portfolio currently intends to invest no more
than 5% of its net assets in illiquid securities. For an additional discussion
of illiquid securities, see this Prospectus under "Certain Risk Factors and
Investment Methods and the Trust's Statement under "Investment Objectives and
Policies."
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. Repurchase agreements are used generally for cash purposes.
Repurchase agreements must be fully collateralized. There is no limit on the
amount of the Portfolio's assets that may be subject to repurchase agreements
maturing in seven days or less, but repurchase agreements having a maturity of
more than seven days will be subject to the Portfolio's restriction on investing
in illiquid securities as discussed above. For an additional discussion of
repurchase agreements, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Securities Lending. The Portfolio may lend its portfolio securities. For a
discussion of the limits on and risks of lending securities, see this Prospectus
under "Certain Risk Factors and Investment Methods."
AST Kemper Small-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
maximum appreciation of investors' capital from a portfolio primarily of growth
stocks of smaller companies.
Investment Policies:
The Portfolio seeks maximum appreciation of investors' capital. Current
income will not be a significant factor. The Portfolio is designed as a
long-term investment involving substantial financial risk commensurate with
potential substantial gains. Because many of the securities in the Portfolio may
be considered speculative in nature by traditional investment standards,
substantially greater than average market volatility and investment risk may be
involved.
The Portfolio's investment portfolio will normally consist primarily of
common stocks and securities convertible into or exchangeable for common stocks,
including warrants and rights. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic or financial market movements. An
investment in common stock entails greater risk of becoming valueless than does
an investment in fixed-income securities.
The Portfolio seeks attractive areas for investment opportunity arising
from such factors as technological advances, new marketing methods, and changes
in the economy and population. Currently, the Sub-advisor believes that such
investment opportunities may be found among the following: (a) companies engaged
in high technology fields such as electronics, medical technology and computer
software and specialty retailing; (b) companies having a significantly improved
earnings outlook as the result of a changed economic environment, acquisitions,
mergers, new management, changed corporate strategy or product innovation; (c)
companies supplying new or rapidly growing services to consumers and businesses
in such fields as automation, data processing, communications, and marketing and
finance; and (d) companies having innovative concepts or ideas.
In addition to investing in common stocks, the Portfolio may also
invest to a limited degree in preferred stocks and debt securities when they are
believed by the Sub-advisor to offer opportunities for capital growth. The
Portfolio may also write and purchase options, engage in financial futures
transactions, purchase foreign securities, and engage in related foreign
currency transactions, as described in more detail directly below and in this
Prospectus under "Certain Risk Factors and Investment Methods." When a defensive
position is deemed advisable in light of prevailing market conditions, the
Portfolio may, without limit, invest in high grade debt securities and
securities of the U.S. Government and its agencies or instrumentalities or
retain cash or cash equivalents, including repurchase agreements. While the
Portfolio is in a defensive position, the opportunity for the Portfolio to
achieve its investment objective of capital appreciation will be limited.
In the selection of investments, long-term capital appreciation will
take precedence over short range market fluctuations. The Portfolio does not
intend to engage actively in trading for short-term profits, although it may
occasionally make investments for short-term capital appreciation when such
action is believed to be desirable and consistent with sound investment
procedure. Furthermore, the Portfolio may dispose of investments at any time it
may be deemed advisable because of a subsequent change in the circumstances of a
particular company or industry or in general market or economic conditions. The
rate of portfolio turnover is not a limiting factor when changes in investment
are deemed appropriate. In addition, market conditions, cash requirements for
redemption and repurchase of Portfolio shares or other factors could affect the
portfolio turnover rate. For more information on portfolio turnover, see this
Prospectus under "Portfolio Turnover."
Small-Cap Companies. At least 65% of the Portfolio's total assets
normally will be invested in the equity securities of smaller companies, i.e.,
those having a market capitalization of $1.5 billion or less at the time of
investment, many of which would be in the early stages of their life cycle.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation and to
involve greater risk of depreciation than securities of larger companies.
Because the securities of small-cap companies are not as broadly traded as those
of companies with larger market capitalizations, they are often subject to wider
and more abrupt fluctuations in market price. Investors should therefore expect
that the value of the shares of the Portfolio may be more volatile than the
shares of a portfolio that invests in larger capitalization stocks.
Smaller companies often have limited product lines, markets or
financial resources, and they may be dependent upon one or a few key people for
management. Additional reasons for the greater price volatility of these
securities are the less certain growth prospects of smaller firms, a lower
degree of liquidity in the markets for such stocks compared to larger
capitalization stocks or the market averages in general, and the greater
sensitivity of small companies to changing economic conditions. In addition to
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stock prices rise, or rise in price as large company
stock prices decline.
Growth Stocks. The Portfolio intends to invest primarily in growth
stocks. Growth stocks are stocks of companies whose earnings per share are
expected by the Sub-advisor to grow faster than the market average. Growth
stocks tend to trade at higher price to earnings (P/E) ratios than the general
market, but the Sub-advisor believes that the potential of the stocks in which
the Portfolio invests for above average earnings more than justifies their
price. Growth stocks may be contrasted with value stocks, which are considered
"bargain stocks" because they are perceived as undervalued, i.e., attractively
priced in relation to their earnings potential (low P/E ratios).
In managing the Portfolio, the Sub-advisor emphasizes stock selection
and fundamental research. The Sub-advisor considers a number of quantitative and
qualitative factors in considering whether to invest in a growth stock,
including high return on equity and earnings growth rate, low level of debt,
strong balance sheet, good management and industry leadership. Other factors
considered by the Sub-advisor in making its investments in growth stocks are
patterns of increasing growth in sales and earnings, the development of new or
improved products or services, favorable outlooks for growth in the industry,
the probability of increased operating efficiencies, emphasis on research and
development, cyclical conditions, or other signs that a company is expected to
show greater than average capital appreciation and earnings growth.
Foreign Securities. The Portfolio may invest in securities of foreign
issuers in the form of American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"). Foreign
securities in which the Portfolio may invest include any type of security
consistent with its investment objective and policies. The prices of foreign
securities may be more volatile than those of domestic securities.
For an additional discussion of depositary receipts, see this
Prospectus under "Certain Risk Factors and Investment Methods." ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, including changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Portfolio
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs.
Illiquid Securities. The Portfolio may purchase illiquid securities if,
as a result of any purchase, no more than 15% of Portfolio's net assets will be
invested in such securities. For more information on illiquid securities and
their risks, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Options and Financial Futures Transactions. The Portfolio may deal in
options on securities and securities indices, which options may be listed for
trading on a national securities exchange or traded over-the-counter. The
ability to engage in options transactions enables a Portfolio to pursue its
investment objective and also to hedge against currency and market risks but is
not intended for speculation. In connection with its foreign securities
investments, the Portfolio may also purchase and sell foreign currency options.
The Portfolio may write (sell) call and put options on up to 25% of net assets
and may purchase put and call options provided that no more than 5% of its net
assets may be invested in premiums on such options.
Over-the-counter traded options ("OTC options") differ from exchange
traded options in several respects. In writing OTC options, the Portfolio
receives the premium in advance from the dealer. OTC options are available for a
greater variety of securities or other assets, and for a wider range of
expiration dates and exercise prices, than exchange traded options.
The Portfolio, as part of its option transactions, may use index
options. Through the writing or purchase of index options the Portfolio can
achieve many of the same objectives as through the use of options on individual
securities. However, because 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 securities, cannot cover its potential settlement
obligations by acquiring and holding the underlying securities.
For an additional discussion of options on securities and securities
indices and their risks, see this Prospectus and the Trust's SAI under "Certain
Risk Factors and Investment Methods."
The Portfolio may engage in financial futures transactions. Financial
futures contracts are commodity contracts that obligate the holder to take or
make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. In connection with its foreign securities
investments, the Portfolio may also engage in foreign currency financial futures
transactions. The Portfolio will not enter into any futures contracts or options
on futures contracts if the aggregate of the contract value of the outstanding
futures contracts of the Portfolio and futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of the total assets of the
Portfolio.
The Portfolio may engage in financial futures transactions as an
attempt to hedge against currency and market risks. For example, when the
near-term market view is bearish but the portfolio composition is judged
satisfactory for the longer term, exposure to temporary declines in the market
may be reduced by entering into futures contracts to sell securities or the cash
value of an index. Conversely, where the near-term view is bullish, but the
Portfolio is believed to be well positioned for the longer term with a high cash
position, the Portfolio can hedge against market increases by entering into
futures contracts to buy securities or the cash value of an index. In either
case, the use of futures contracts would tend to minimize portfolio turnover and
facilitate the Portfolio's pursuit of its investment objective. Also, if the
Portfolio owned long-term bonds and interest rates were expected to rise, it
could sell financial futures contracts. If interest rates did increase, the
value of the bonds held by the Portfolio would decline, but this decline would
be offset in whole or in part by an increase in the value of the Portfolio's
futures contracts. If, on the other hand, long-term interest rates were expected
to decline, the Portfolio could hold short-term debt securities and benefit from
the income earned by holding such securities, while at the same time the
Portfolio could purchase futures contracts on long-term bonds or the cash value
of a securities index. Thus, the Portfolio could take advantage of the
anticipated rise in the value of long-term bonds without actually buying them.
The futures contracts and short-term debt securities could then be liquidated
and the cash proceeds used to buy long-term bonds.
Futures contracts entail risks, which are discussed in more detail in
this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods." In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures market could result. Price
distortions also could result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because margin requirements in the futures market
are less onerous than margin requirements in the cash market, increased
participation by speculators in the futures market could cause temporary price
distortions. Due to the possibility of these price distortions and because of
the imperfect correlation between movements in the prices of securities or other
assets and movements in the prices of futures contracts, a correct forecast of
market trends by the Sub-advisor still may not result in a successful hedging
transaction.
The Portfolio may engage in futures transactions only on commodities
exchanges or boards of trade. The Portfolio will not engage in transactions in
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities that the Portfolio owns or intends to
purchase.
Derivatives. In addition to options and financial futures, the
Portfolio may invest in a broad array of financial instruments and securities
the value of which is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, interest rate or currency ("derivatives").
Derivatives are most often used in an effort to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). There is no
guarantee that these results can be achieved through the use of derivatives. The
types of derivatives used by the Portfolio and the techniques employed by the
Portfolio's Sub-advisor may change over time as new derivatives and strategies
are developed or regulatory changes occur.
Repurchase Agreements. The Portfolio may invest in repurchase
agreements. The Sub-advisor will evaluate the creditworthiness of all entities
with which the Portfolio intends to engage in repurchase agreements pursuant to
procedures adopted by the Board of Trustees of the Trust. Maturity of the
securities subject to repurchase may exceed one year. Repurchase agreements
maturing in more than seven days will be considered illiquid for purposes of the
Portfolio's limitation on illiquid securities. For more information on
repurchase agreements, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowings. The Portfolio is authorized to borrow money for purposes of
liquidity, such as to provide for redemptions and distributions. The Portfolio
will borrow only when the Sub-advisor believes that borrowing will benefit the
Portfolio after taking into account considerations such as the costs of the
borrowing. For more information on borrowing and its risks, see this Prospectus
under "Certain Risk Factors and Investment Methods."
Section 4(2) Paper. The Portfolio may invest in commercial paper issued
by major corporations under the Securities Act of 1933 in reliance on the
exemption from registration afforded by Section 3(a)(3) thereof. Such commercial
paper may be issued only to finance current transactions and must mature in nine
months or less. Such commercial paper is traded primarily by institutional
investors through investment dealers, and individual investor participation in
the commercial paper market is very limited. The Portfolio also may invest in
commercial paper issued in reliance on the so-called "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to institutional
investors, such as the Portfolio, who agree that they are purchasing the paper
for investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Section 4(2) paper will be considered illiquid, and subject
to the Portfolio's limitation on investing in illiquid securities, unless the
Sub-advisor determines such Section 4(2) paper to be liquid under guidelines
established by the Board of Trustees of the Trust.
Collateralized Obligations. The Portfolio may invest up to 5% of its
total assets in asset-backed and mortgage-backed securities, including interest
only ("IO") and principal only ("PO") securities. The Portfolio may also invest
up to 5% of its total assets in instruments known as "inverse floaters," the
yield on which floats inversely against a specified index rate. For additional
information concerning asset-backed and mortgage pass-through securities and
inverse floaters, 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 -- AST Kemper Small-Cap Growth Portfolio."
Convertible Securities. The Portfolio may invest in convertible
securities, which may offer higher income than the common stocks into which they
are convertible. Prior to their conversion, convertible securities may have
characteristics similar to both nonconvertible debt securities and equity
securities. While convertible securities generally offer lower yields than
nonconvertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
generally entail less credit risk than the issuer's common stock.
Investment Company Securities. Securities of other investment companies
may be acquired by the Portfolio. For an additional discussion of investments in
other investment companies, see this Prospectus under "Certain Risk Factors and
Investment Methods.
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.
<PAGE>
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.
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-Backed 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.
The expected introduction of a single currency, the euro, on January 1,
1999 for participating nations in the European Economic and Monetary Union
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the legal treatment of certain outstanding financial contracts that
refer to existing currencies rather than the euro; the establishment of exchange
rates for existing currencies and the euro; and the creation of suitable
clearing and settlement payment systems for the new currency. Although the Trust
is taking steps intended to achieve readiness for the planned introduction of
the euro, these or other external factors could cause market disruptions before
or after the introduction of the euro, and could adversely affect the value of
securities held by the Portfolios.
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.
<PAGE>
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 Portfolio Securities:
Each Portfolio may lend securities with a value of up to 33 1/3% of its
total assets to broker-dealers, institutional investors, or others for the
purpose of realizing additional income. Voting rights on loaned securities
typically pass to the borrower, although a Portfolio is able to terminate a
securities loan, usually within three business days, in order to vote on
significant matters or for other reasons. All securities loans will be
collateralized by cash or securities issued or guaranteed by the U.S. Government
or its agencies at least equal in value to the market value of the loaned
securities. Nonetheless, lending securities involves certain risks, including
the risk that the Portfolio will be delayed or prevented from recovering the
collateral if the borrower fails to return a loaned security. For an additional
discussion of the Portfolios' limitations on lending, see "Fundamental
Investment Restrictions" in the Trust's SAI.
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. In
addition, certain of the Sub-advisors may use money market funds that they
advise 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.
Year 2000 Risks:
Many services provided to the Trust and its Portfolios by the
Investment Manager, the Sub-advisors, and the Trust's other service providers
(collectively, the "Service Providers") rely on the functioning of their
respective computer systems. Many computer systems cannot distinguish the year
2000 from the year 1900, with resulting potential difficulty in performing
various systems functions (the "Year 2000 Issue"). The Year 2000 Issue could
potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Trust
operations.
The Service Providers recognize the importance of the Year 2000 Issue
and have advised the Trust that they are taking appropriate steps necessary in
preparation for the year 2000. At this time, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on the Portfolios,
nor can there be any assurance that the Year 2000 Issue will not have an adverse
effect on the Portfolios' investments or on global markets or economies
generally. In addition, it has been reported that foreign institutions have made
less progress in addressing the Year 2000 Issue than major U.S. entities, which
could adversely effect the Portfolio's foreign investments.
The Investment Manager and the Trust have been informed that all of the
Service Providers anticipate that their systems will be adapted in time for the
year 2000. The Investment Manager will continue to monitor the Year 2000 Issue
in an effort to confirm appropriate preparation by the Service Providers.
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 the Skandia
Qualified Plan (see page 2 of this Prospectus) or other plans qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended, arising from
the fact that the interests of the various 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 Participating Insurance Companies and/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%.
AST JanCap Growth Portfolio (not to exceed 200% under normal market
conditions).
AST Janus Overseas Growth Portfolio (not to exceed 200% under normal
market conditions).
AST Janus Small-Cap Growth Portfolio (not to exceed 200% under normal
market conditions).
AST T. Rowe Price International Bond Portfolio (not to exceed 350%).
AST Founders Passport Portfolio (not to exceed 150% under normal market
conditions).
AST PIMCO Total Return Bond Portfolio (not to exceed 350% under normal
market conditions).
AST PIMCO Limited Maturity Bond Portfolio (not to exceed 350% under
normal market conditions).
AST American Century International Growth Portfolio (not to exceed 250%
under normal market conditions).
AST American Century Strategic Balanced Portfolio (not to exceed 250%
under normal market conditions).
AST Putnam International Equity Portfolio (not to exceed 150% under
normal market conditions).
AST Putnam Balanced Portfolio (not to exceed 200% under normal market
conditions).
AST Cohen & Steers Realty Portfolio (not to exceed 150% under normal
market conditions).
AST Neuberger Berman Mid-Cap Value Portfolio (not to exceed 150% under
normal market conditions).
AST Neuberger Berman Mid-Cap Growth Portfolio (not to exceed 200% under
normal market conditions).
AST Kemper Small-Cap Growth Portfolio (not to exceed 250% 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. However, in certain circumstances where
market quotations are not readily available, assets are valued by methods
specified in the procedures that are believed to accurately reflect the assets'
fair value. In addition, the AST Money Market Portfolio values all securities by
the amortized cost method. With respect to all Portfolios, short-term
investments that will mature in 60 days or less are valued at amortized cost,
which is intended to approximate market value. 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 the Skandia Qualified
Plan and other qualified plans. While it is not anticipated, should any conflict
arise between the holders of variable annuity contracts and variable life
insurance policies of 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. As of December 3, 1998, 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. Mazzaferro, 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 AST
Lord Abbett Growth and Income Portfolio and the AST Lord Abbett Small Cap Value
Portfolio. Lord Abbett has been an investment manager for over 65 years. As of
June 30, 1998, Lord Abbett managed approximately $27 billion in a family of
mutual funds and other advisory accounts.
The portfolio manager responsible for management of the AST 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 AST 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 AST JanCap Growth Portfolio,
the AST Janus Overseas Growth Portfolio, and the AST Janus Small-Cap Growth
Portfolio. Janus serves as 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, 1998, Janus managed assets
worth over $89 billion. Kansas City Southern Industries, Inc. ("KCSI") owns
approximately 83% of the outstanding voting stock of Janus Capital, most of
which it acquired in 1984. KCSI is a publicly traded holding company whose
primary subsidiaries are engaged in transportation, information processing and
financial services. Thomas H. Bailey, President and Chairman of the Board of
Janus, owns approximately 12% of its voting stock and, by agreement with KCSI,
selects a majority of Janus' Board.
The portfolio manager responsible for management of the AST 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.
The AST Janus Small-Cap Growth Portfolio is managed by a management
team consisting of James P. Craig, William Bales and Jonathan Coleman. The
management team has managed the Portfolio since Janus became the Portfolio's
sub-advisor in January 1999. James P. Craig, III is Chief Investment Officer of
Janus Capital. He joined Janus in May 1983. William H. Bales has been a research
analyst with Janus since 1993, focusing primarily on the transportation,
consumer products and restaurant industries. He joined Janus in September 1991.
Jonathan D. Coleman has been a research analyst with Janus since July 1994,
focusing primarily on the railroad, computer, healthcare and financial services
industries. Prior to joining Janus, Mr. Coleman was a Fulbright Fellow from
August 1993 until June 1994.
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
$300 billion as of June 30, 1998. 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, 1998,
these short-term assets under J.P. Morgan's management totaled over $35 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 AST 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, 1998, was over $156 billion.
Mark E. Durbiano and Constantine J. Kartsonas are primarily responsible
for the day-to-day management of the AST 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 an
affiliate of Federated Investment since January 1996. From 1988 to 1995, Mr.
Durbiano was a Vice President of an affiliate of Federated Investment. Mr.
Kartsonas, who has co-managed the Portfolio since August 1998, joined Federated
Investors in 1994 as an Investment Analyst and has been an Assistant Vice
President of Federated Investment since March 1997. From 1990 to 1993, he served
as an Operations Analyst at Lehman Brothers.
T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100 East Pratt
Street, Baltimore, Maryland 21202, serves as Sub-advisor for the AST T. Rowe
Price Asset Allocation Portfolio, the AST T. Rowe Price Natural Resources
Portfolio, and the AST 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,
1998, the firm and its affiliates managed approximately $140 billion for
approximately 6 million individual and institutional accounts.
The AST 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, has been managing investments since 1991
and has been Chairman of the Portfolio's Investment Advisory Committee since the
Portfolio's inception.
The AST 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 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 and has been Chairman of the
Portfolio's Investment Advisory Committee since March 1997.
The AST 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 AST T. Rowe
Price International Equity Portfolio and the AST 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 $33 billion under management as of June 30, 1998 in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. 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 AST T. Rowe Price International Equity Portfolio
consists of Martin G. Wade, Mark C.J. Bickford-Smith, Robert W. Smith, John R.
Ford, James B.M. Seddon, 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. Mark C.J.
Bickford-Smith joined Price-Fleming in 1995 has 14 years experience with the
Fleming Group in research and financial analysis. Robert W. Smith joined
Price-Fleming in 1996, and had been with T. Rowe Price since 1992. He has 12
years experience in financial analysis. John R. Ford joined Price-Fleming in
1982 and has 17 years of experience with Fleming Group in research and portfolio
management. James B.M. Seddon joined Price-Fleming in 1987 and has 12 years of
experience in investment management. David J.L. Warren joined Price-Fleming in
1984 and has 17 years experience in equity research, fixed income research and
portfolio management.
The advisory group for the AST T. Rowe Price International Bond
Portfolio consists of Peter Askew, Christopher Rothery and Michael Conelius.
Peter Askew joined Price-Fleming in 1988 and has 22 years of experience managing
multi-currency fixed-income portfolios. Christopher Rothery joined Price-Fleming
in 1994 and has 9 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 LLC ("Founders"), Founders Financial Center,
2930 East Third Avenue, Denver, Colorado 80206, serves as Sub-advisor for the
AST Founders Passport Portfolio. Founders and its predecessor companies have
acted as investment advisors since 1938. Founders 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 $7.5 billion as of
June 30, 1998. Founders is a 90%-owned subsidiary of Mellon Bank, N.A., with the
remaining 10% held by certain Founders executives and portfolio managers. Mellon
Bank is a wholly owned subsidiary of Mellon Bank Corporation, a publicly owned
multibank holding company which provides a comprehensive range of financial
products and services in domestic and selected international markets.
Michael W. Gerding, a Vice President of Investments of Founders, has
been responsible for management of the AST 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.
INVESCO Funds Group, Inc. ("INVESCO"), 7800 East Union Avenue, P.O. Box
173706, Denver, Colorado 80217-3706, serves as Sub-advisor for the AST INVESCO
Equity Income Portfolio. INVESCO was established in 1932. AMVESCAP PLC, the
parent of INVESCO, is one of the largest independent investment management
businesses in the world and managed approximately $261 billion of assets as of
June 30, 1998.
The portfolio managers responsible for management of the Portfolio are
Charles P. Mayer, Portfolio Co-Manager, and Donovan J. (Jerry) Paul, Portfolio
Co-Manager. Mr. Mayer has served as Co-Manager of the Portfolio since April,
1993. Mr. Mayer began his investment career in 1969 and is now a senior vice
president of INVESCO. From 1993 to 1994, he was vice president of INVESCO, and
from 1984 to 1993, he was a portfolio manager with Westinghouse Pension. Mr.
Paul has served as Co-Manager of the Portfolio since May 1994. Mr. Paul entered
the investment management industry in 1976, and has been a senior vice president
of INVESCO since 1994. From 1993 to 1994, he was president of Quixote Investment
Management, Inc.
Pacific Investment Management Company ("PIMCO"), 840 Newport Center
Drive, Suite 360, Newport Beach, California 92660 serves as Sub-advisor for the
AST PIMCO Total Return Bond Portfolio and the AST PIMCO Limited Maturity Bond
Portfolio. PIMCO is an investment counseling firm founded in 1971 and, as of
June 30, 1998, had approximately $138 billion of assets under management. PIMCO
is a subsidiary general partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A
majority interest in PIMCO Advisors is held by PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Corporation, a California
corporation, and an indirect wholly owned subsidiary of Pacific Life Insurance
Company, and PIMCO Partners, LLC, a California limited liability company
controlled by the managing directors of PIMCO.
The portfolio manager responsible for management of the AST PIMCO Total
Return Bond Portfolio and the AST 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.
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 AST American
Century International Growth Portfolio and the AST American 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, 1998, American Century and its
affiliates managed assets totaling approximately $74 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 AST American 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). 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 the
day-to-day management of the equity portion of the AST American Century
Strategic Balanced Portfolio are John Schniedwind, Kurt Borgwardt, Jeffrey R.
Tyler and William Martin. Mr. Schniedwind is Senior Vice President and Group
Leader -- Quantitative Equity for American Century, and has been with American
Century since 1982. Mr. Borgwardt is Vice President, Portfolio Manager and
Director of Quantitative Equity Research for American Century, and has been with
American Century since 1990. Mr. Tyler, Senior Vice President and Portfolio
Manager, joined American Century in 1988. William Martin, Vice President and
Senior Portfolio Manager, joined American Century in 1989. 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 and David Schroeder. 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.
<PAGE>
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, 1998, Putnam Management and its
affiliates managed nearly $278 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 AST Cohen &
Steers Realty 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, 1998, Cohen & Steers managed
approximately $5.16 billion in assets.
Robert H. Steers, Chairman, and Martin Cohen, President formed Cohen &
Steers in 1986 and have been responsible for the day-to-day management of the
AST Cohen & Steers Realty Portfolio since its inception. Mr. Cohen and Mr.
Steers may be deemed "controlling persons" of Cohen & Steers on the basis of
their ownership of Cohen & Steers' stock.
Stein Roe & Farnham Incorporated ("Stein Roe"), One South Wacker Drive,
Chicago, Illinois 60606 serves as Sub-advisor to the AST Stein Roe Venture
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. As of June 30, 1998, Stein Roe managed approximately $29.1
billion in assets.
William M. Garrison and Steven M. Salopek have been co-portfolio managers
of the Portfolio since October 1998. Mr. Garrison is a vice president of Stein
Roe, which he joined in 1989. He has been an equity research analyst with Stein
Roe since 1993. Mr. Salopek is also a vice president of Stein Roe, which he
joined in 1996 as an analyst. From 1990 to 1996, Mr. Salopek was an analyst with
Banc One Investment Advisors.
Bankers Trust Company ("Bankers Trust") is the Sub-advisor to the AST
Bankers Trust Enhanced 500 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, 1998 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 $337.8 billion in assets under management
globally.
Frank Salerno, Managing Director of Bankers Trust, has been responsible
for the day-to-day management of the Portfolio since its inception. 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 AST Marsico Capital
Growth Portfolio. Thomas F. Marsico, who has managed the Portfolio since its
inception, has primary responsibility for management of the Portfolio. 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. As of June 30, 1998, Marsico
Capital managed over $1.7 billion in assets.
Mr. Marsico is President and Chief Executive Officer, and currently has
sole voting control, of Marsico Capital. On November 5, 1998, Mr. Marsico and
related entities entered into a transaction agreement with NationsBank, N.A., a
national bank subsidiary of BankAmerica Corporation. Upon completion of the
transaction that is the subject of the transaction agreement, which is expected
to occur in the first quarter of 1999, NationsBank, N.A. will acquire 50% of the
voting control of Marsico Capital. BankAmerica Corporation, including its
subsidiaries, is the second largest banking organization in the United States.
Neuberger Berman Management Incorporated ("NB Management"), 605 Third
Avenue, New York, NY 10158, serves as sub-advisor for the AST Neuberger Berman
Mid-Cap Value Portfolio and the AST Neuberger Berman Mid-Cap Growth Portfolio.
NB Management and its predecessor firms have specialized in the management of
mutual funds since 1950. All of the voting stock of NB Management is owned by
individuals who are principals of Neuberger Berman, LLC ("Neuberger Berman").
Neuberger Berman is a member firm of the NYSE and other principal exchanges,
acts as the Portfolios' principal broker in the purchase and sale of portfolio
securities and the sale of covered call options, and provides NB Management with
certain assistance in the management of the Portfolios without added cost to the
Portfolios. Neuberger Berman and its affiliates, including NB Management, manage
securities accounts, including mutual funds, that had approximately $59 billion
of assets as of June 30, 1998.
The portfolio managers responsible for the day-to-day management of AST
Neuberger Berman Mid-Cap Value Portfolio are Michael M. Kassen, Robert I.
Gendelman and S. Basu Mullick. Mr. Kassen and Mr. Gendelman have been managing
the Portfolio since NB Management became the Portfolio's Sub-Advisor in May
1998, and Mr. Mullick has been managing the Portfolio since October 1998. Mr.
Kassen has been a Vice President of NB Management and a principal of Neuberger
Berman since December 1992, and was an employee of NB Management from 1990 to
December 1992. Mr. Gendelman is a principal of Neuberger Berman and has been
with NB Management since 1994, where he is currently a Vice President. He was a
portfolio manager for another mutual fund manager from 1992 to 1993. Mr. Mullick
has been a Vice President of NB Management since October 1998. From 1993 to
1998, Mr. Mullick was a portfolio manager for a prominent investment adviser.
Jennifer K. Silver and Brooke A. Cobb have been primarily responsible for
the day-to-day management of the AST Neuberger Berman Mid-Cap Growth Portfolio
since N B Management became the Portfolio's Sub-advisor in May 1998. Ms. Silver
is Director of the Neuberger Berman Growth Equity Group, and both she and Mr.
Cobb are Vice Presidents of NB Management. Ms. Silver is a principal of
Neuberger Berman. Previously, Ms. Silver was a portfolio manager for several
large mutual funds managed by a prominent investment adviser. Previously, Mr.
Cobb was the chief investment officer for an investment advisory firm managing
individual accounts from 1995 to 1997 and, from 1992 to 1995, a portfolio
manager of a large mutual fund managed by a prominent adviser.
OppenheimerFunds, Inc. ("Oppenheimer"), Two World Trade Center, New
York, New York 10048-0203, serves as Sub-advisor for the AST Oppenheimer
Large-Cap Growth Portfolio. The Sub-advisor has operated as an investment
adviser since 1959. The Sub-advisor (including subsidiaries) currently manages
investment companies with assets of more than $90 billion as of June 30, 1998,
and with more than 4 million shareholder accounts. The Sub-advisor is owned by
Oppenheimer Acquisition Corp., a holding company that is owned in part by senior
officers of the Sub-advisor and controlled by Massachusetts Mutual Life
Insurance Company.
Robert C. Doll, Jr. has been the portfolio manager responsible for
management of the Portfolio since Oppenheimer became the Portfolio's Sub-advisor
in December 1998. Mr. Doll is Executive Vice President, Chief Investment Officer
and Director of Equity Investments of the Sub-advisor, and has been with the
Sub-advisor since January 1993.
<PAGE>
Scudder Kemper Investments, Inc. ("Scudder Kemper"), 345 Park Avenue,
New York, New York, serves as Sub-advisor of the AST Kemper Small-Cap Growth
Portfolio. Scudder Kemper is one of the largest investment managers in the
country with more than $200 billion under management as of June 30, 1998 and has
been engaged in the management of investment funds for more than seventy years.
Zurich Insurance Company, a leading provider of insurance and financial
services, owns approximately 70% of Scudder Kemper, with the balance owned by
Scudder Kemper's officers and employees.
David H. Burshtan is the lead portfolio manager for the Portfolio, and
Kurt R. Stalzer is the other portfolio manager. Both have managed the Portfolio
since its inception. Mr. Burshtan joined Scudder Kemper in 1995, where he is a
senior vice president and has been a lead portfolio manager since January 1996.
From 1993 to 1995, Mr. Burshtan was employed as a senior securities analyst, and
prior thereto as a senior portfolio manager for an unaffiliated investment
management company. Mr. Stalzer joined Scudder Kemper is January 1997, where he
is a managing director and has been a portfolio manager since joining Scudder
Kemper. From 1992 to January 1997, Mr. Stalzer was a senior portfolio manager
for an unaffiliated investment management company.
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 and disposition 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:
AST Lord Abbett Growth and Income Portfolio: An annual rate of .75% of
the average daily net assets of the Portfolio. The Investment Manager has
voluntarily agreed to waive a portion of its fee equal to .05% of the average
daily net assets of the Portfolio in excess of $1 billion. The Investment
Manager may terminate this voluntary agreement at any time.
AST Lord Abbett Small Cap Value Portfolio: An annual rate of 0.95% of the
average daily net assets of the Portfolio.
AST JanCap Growth Portfolio: An annual rate of .90% of the average
daily net assets of the Portfolio. The Investment Manager has voluntarily agreed
to waive a portion of its fee equal to .05% of the average daily net assets of
the Portfolio in excess of $1 billion. The Investment Manager may terminate this
voluntary agreement at any time.
AST Janus Overseas Growth Portfolio: An annual rate of 1.0% of the average
daily net assets of the Portfolio.
AST Janus Small-Cap Growth Portfolio: An annual rate of .90% 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 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.
AST Federated High Yield Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
AST T. Rowe Price Asset Allocation Portfolio: An annual rate of .85% of the
average daily net assets of the Portfolio.
AST T. Rowe Price International Equity Portfolio: An annual rate of 1.0% of
the average daily net assets of the Portfolio.
AST T. Rowe Price Natural Resources Portfolio: An annual rate of .90% of
the average daily net assets of the Portfolio.
AST T. Rowe Price International Bond Portfolio: An annual rate of .80% of
the average daily net assets of the Portfolio.
AST T. Rowe Price Small Company Value Portfolio: An annual rate of .90% of
the average daily net assets of the Portfolio.
AST Founders Passport Portfolio: An annual rate of 1.0% of the average
daily net assets of the Portfolio.
AST INVESCO Equity Income Portfolio: An annual rate of .75% of the average
daily net assets of the Portfolio.
AST PIMCO Total Return Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio.
AST PIMCO Limited Maturity Bond Portfolio: An annual rate of .65% of the
average daily net assets of the Portfolio.
AST American Century International Growth Portfolio: An annual rate of 1.0%
of the average daily net assets of the Portfolio.
AST American 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.
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.
AST Cohen & Steers Realty Portfolio: An annual rate of 1.00% of the average
daily net assets of the Portfolio.
AST Stein Roe Venture Portfolio: An annual rate of .95% of the average
daily net assets of the Portfolio.
AST Bankers Trust Enhanced 500 Portfolio: An annual rate of .60% of the
average daily net assets of the Portfolio
AST Marsico Capital Growth Portfolio: An annual rate of .90% of the average
daily net assets of the Portfolio.
AST Neuberger Berman Mid-Cap Value Portfolio: An annual rate of .90% of the
portion of the average daily net assets of the Portfolio not in excess of $1
billion; plus .85% of the portion of the net assets over $1 billion. Prior to
May 1, 1998, the Investment Manager had engaged Federated Investment Counseling
as Sub-advisor for the Portfolio (formerly, the Federated Utility Income
Portfolio), for a total Investment Management fee 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.
AST Neuberger Berman Mid-Cap Growth Portfolio: An annual rate of .90%
of the portion of the average daily net assets of the Portfolio not in excess of
$1 billion; plus .85% of the portion of the net assets over $1 billion. Prior to
May 1, 1998, the Investment Manager had engaged Berger Associates, Inc. as
Sub-advisor for the Portfolio (formerly, the Berger Capital Growth Portfolio),
for a total Investment Management fee of .75% of the average daily net assets of
the Portfolio.
AST Oppenheimer Large-Cap Growth Portfolio: An annual rate of .90% of
the portion of the average daily net assets of the Portfolio not in excess of $1
billion; plus .85% of the portion of the net assets over $1 billion. Prior to
January 1, 1999, the Investment Manager had engaged Robertson, Stephens &
Company Investment Management, L.P. as Sub-advisor for the Portfolio (formerly
the Robertson Stephens Value + Growth Portfolio), for a total Investment
Management fee of 1.00% of the average daily net assets of the Portfolio.
AST Kemper Small-Cap Growth Portfolio: An annual rate of .95% of the
portion of the average daily net assets of the Portfolio not in excess of $1
billion; plus .90% of the portion of the net assets over $1 billion.
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 AST 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 AST 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 AST 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.
Janus Capital Corporation for the AST Janus Small-Cap Growth Portfolio:
An annual rate of .50% of the portion of the average daily net assets of the
Portfolio not in excess of $100 million; plus .45% of the portion of the net
assets over $100 million but not in excess of $500 million; plus .40% of the
portion of the net assets over $500 million but not in excess of $1 billion;
plus .35% of the portion of the net assets over $1 billion. Commencing January
1, 1999, the Sub-advisor has voluntarily agreed to waive a portion of its fee
equal to .05% of the portions of the Portfolio's average daily net assets over
$400 million but not in excess of $500 million and over $900 million but not in
excess of $1 billion. The Sub-advisor may terminate this voluntary agreement at
any time. Prior to January 1, 1999, the Investment Manager had engaged Founders
Asset Management LLC as Sub-advisor for the Portfolio (formerly the Founders
Capital Appreciation Portfolio), for a total Sub-advisory fee 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; plus .55% of the portion of the net assets over $150
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 AST 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 AST 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 AST 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. 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. Furthermore, the Sub-advisor has voluntarily agreed to
waive an additional portion of its fee equal to .05% of the Portfolio's average
daily net assets so long as the combined average daily net assets of the
Portfolio and the ASMT T. Rowe Price International Equity Portfolio of American
Skandia Master Trust equal or exceed $500 million.
The Sub-advisor may terminate these voluntary agreements at any time.
T. Rowe Price Associates, Inc. for the AST 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 AST T. Rowe Price
International Bond Portfolio: An annual rate of .40% of the average daily net
assets of the Portfolio.
T. Rowe Price Associates, Inc. for the AST 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 LLC for the AST 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.
INVESCO Funds Group, Inc. for the AST 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 AST 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 AST 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.
American Century Investment Management, Inc. for the AST American 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 AST American 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.
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.
Cohen & Steers Capital Management, Inc. for the AST Cohen & Steers
Realty 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
of the net assets over $100 million but not in excess of $250 million; plus .30%
of the portion of the net assets over $250 million.
Stein Roe & Farnham Incorporated for the AST Stein Roe Venture Portfolio:
An annual rate of .50% of the average daily net assets of the Portfolio.
Bankers Trust Company for the AST Bankers Trust Enhanced 500 Portfolio:
An annual rate of .17% of the portion of the average daily net assets of the
Portfolio not in excess of $300 million; plus .13% of the portion of the net
assets over $300 million.
Marsico Capital Management, LLC for the AST Marsico Capital Growth
Portfolio: An annual rate of 0.45% of the average daily net assets of the
Portfolio.
Neuberger & Berman Management, Incorporated for the Neuberger & Berman
Mid-Cap Value Portfolio: An annual rate of .50% of the portion of the average
daily net assets of the Portfolio not in excess of $750 million; plus .45% of
the portion of the net assets over $750 million but not in excess of $1 billion;
plus .40% of the portion in excess of $1 billion. Prior to May 1, 1998, the
Investment Manager had engaged Federated Investment Counseling as Sub-advisor
for the Portfolio (formerly, the Federated Utility Income Portfolio), for a
total Sub-advisory fee 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.
Neuberger & Berman Management, Incorporated for the Neuberger & Berman
Mid-Cap Growth Portfolio: An annual rate of .45% of the portion of the average
daily net assets of the Portfolio not in excess of $100 million; plus .40% of
the portion of the net assets over $100 million. Prior to May 1, 1998, the
Investment Manager had engaged Berger Associates, Inc. as Sub-advisor for the
Portfolio (formerly, the Berger Capital Growth Portfolio), for a total
Sub-advisory fee 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.
OppenheimerFunds, Inc. for the AST Oppenheimer Large-Cap Growth
Portfolio: An annual rate of .35% of the portion of the average daily net assets
of the Portfolio not in excess of $500 million; plus .30% of the portion of the
net assets over $500 million but not in excess of $1 billion; plus .25% of the
portion of the net assets over $1 billion. Prior to January 1, 1999, the
Investment Manager had engaged Robertson, Stephens & Company Investment
Management, L.P. as Sub-advisor for the Portfolio (formerly the Robertson
Stephens Value + Growth Portfolio), for a total Sub-advisory fee of .60% of the
portion of the average daily net assets of the Portfolio not in excess of $200
million; plus .50% of the portion of the net assets over $200 million.
Scudder Kemper Investments, Inc. for the AST Kemper Small-Cap Growth
Portfolio: An annual rate of .50% of the average daily net assets of the
Portfolio not in excess of $100 million; plus .45% of the portion of the net
assets over $100 million but not in excess of $400 million; plus .40% of the
portion of the net assets over $400 million but not in excess of $900 million;
plus .35% of the portion of the net assets over $900 million.
Administrator: PFPC Inc. (the "Administrator"), 103 Bellevue Parkway,
Wilmington, Delaware 19809, a Delaware corporation that is an indirect
wholly-owned subsidiary of PNC Financial Corp., serves as the administrator for
the Trust pursuant to a Trust Accounting and Administration Agreement between
the Trust and the Administrator, dated May 1, 1992 (the "Administration
Agreement"). The Administrator provides certain fund accounting and
administrative services to the Trust, including, among other services,
accounting relating to the Trust and investment transactions of the Trust, and
computing daily net asset values. The Administrator does not have any
responsibility or authority for the management of the assets of the Trust, the
determination of its investment policies, or for any matter pertaining to the
distribution of securities issued by the Trust.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreement, the Trust has agreed to pay to
the Administrator its "out-of-pocket" expenses plus the greater of certain
percentages of the average daily net assets of the Trust or certain specified
minimum annual amounts calculated for each Portfolio. The percentages of the
average daily net assets are: (a) 0.10% of the first $200 million; (b) 0.06% of
the next $200 million; (c) 0.0375% of the next $200 million; and (d) 0.03% of
average daily net assets over $600 million. The minimum amount is $75,000 for
each of the AST Lord Abbett Growth and Income Portfolio, the AST JanCap Growth
Portfolio, the AST Money Market Portfolio, the AST Federated High Yield
Portfolio, the AST T. Rowe Price Asset Allocation Portfolio, the AST T. Rowe
Price Natural Resources Portfolio, the AST T. Rowe Price Small Company Value
Portfolio, the Founders Capital Appreciation Portfolio, the AST INVESCO Equity
Income Portfolio, the AST PIMCO Total Return Bond Portfolio, the AST PIMCO
Limited Maturity Bond Portfolio, the AST Oppenheimer Large-Cap Growth Portfolio,
the AST American Century Strategic Balanced Portfolio, the AST Putnam Value
Growth & Income Portfolio, the AST Putnam Balanced Portfolio, the AST Neuberger
Berman Mid-Cap Value Portfolio and the AST Neuberger Berman Mid-Cap Growth
Portfolio. The minimum amount is $100,000 for the AST Janus Overseas Growth
Portfolio, the AST T. Rowe Price International Bond Portfolio, the AST T. Rowe
Price International Equity Portfolio, the AST Founders Passport Portfolio, the
AST American Century International Growth Portfolio and the AST Putnam
International Equity Portfolio. The minimum amount for the fiscal year ending
December 31, 1998 for each of the AST Lord Abbett Small Cap Value Portfolio, the
AST Cohen & Steers Realty Portfolio, the AST Stein Roe Venture Portfolio, the
AST Bankers Trust Enhanced 500 Portfolio, and the AST Marsico Capital Growth
Portfolio is $34,375. 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 the Skandia Qualified Plan. 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 in the future. Owners of variable
annuity contracts and variable insurance policies will receive annual and
semi-annual reports including the financial statements of the Portfolios that
they have authorized for investment.
TAX MATTERS:
This discussion of federal income tax consequences applies to the
Participating Insurance Companies and qualified plans since the separate
accounts of the Participating Insurance Companies and the 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 qualify for the 70%
dividends-received deduction for corporate shareholders only to the extent
designated as attributable to dividends received by the Trust in a notice from
the Trust. 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, 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.
<PAGE>
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, AST T. Rowe Price International Equity
Portfolio, AST T. Rowe Price International Bond Portfolio, AST Founders Passport
Portfolio, AST American 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, AST T. Rowe Price International Equity Portfolio, AST
T. Rowe Price International Bond Portfolio, AST Founders Passport Portfolio, AST
American Century International Growth Portfolio and AST Putnam International
Equity Portfolio is The Chase Manhattan Bank, 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, The Chase Manhattan Bank
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 (800) 752-6342 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 semi-annual reports containing unaudited financial
statements and annual reports containing year-end financial statements audited
by the Trust's independent auditors. Participants in the Skandia Qualified Plan
may request such reports from the plan's trustees. 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 31, 1998
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 AST Lord Abbett Growth and Income Portfolio,
the AST Lord Abbett Small Cap Value Portfolio, the AST JanCap Growth Portfolio,
the AST Janus Overseas Growth Portfolio, the AST Janus Small-Cap Growth
Portfolio, the AST Money Market Portfolio, the AST Federated High Yield
Portfolio, the AST T. Rowe Price Asset Allocation Portfolio, the AST T. Rowe
Price International Equity Portfolio, the AST T. Rowe Price Natural Resources
Portfolio, the AST T. Rowe Price International Bond Portfolio, the AST T. Rowe
Price Small Company Value Portfolio, the AST Founders Passport Portfolio, the
AST INVESCO Equity Income Portfolio, the AST PIMCO Total Return Bond Portfolio,
the AST PIMCO Limited Maturity Bond Portfolio, the AST American Century
International Growth Portfolio, the AST American 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 Realty Portfolio, the AST Stein Roe Venture Portfolio, the AST Bankers
Trust Enhanced 500 Portfolio, the AST Marsico Capital Growth Portfolio, the AST
Neuberger Berman Mid-Cap Value Portfolio, the AST Neuberger Berman Mid-Cap
Growth Portfolio, the AST Oppenheimer Large-Cap Growth Portfolio and the AST
Kemper Small-Cap 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.: AST Lord Abbett Growth and
Income Portfolio, AST Lord Abbett Small Cap Value Portfolio; (b) Janus Capital
Corporation: AST JanCap Growth Portfolio, AST Janus Overseas Growth Portfolio,
AST Janus Small-Cap Growth Portfolio; (c) J.P. Morgan Investment Management
Inc.: AST Money Market Portfolio; (d) Federated Investment Counseling: AST
Federated High Yield Portfolio; (e) T. Rowe Price Associates, Inc.: AST T. Rowe
Price Asset Allocation Portfolio, AST T. Rowe Price Natural Resources Portfolio,
AST T. Rowe Price Small Company Value Portfolio; (f) Rowe Price-Fleming
International, Inc.: AST T. Rowe Price International Equity Portfolio, AST T.
Rowe Price International Bond Portfolio; (g) Founders Asset Management LLC: AST
Founders Passport Portfolio; (h) INVESCO Funds Group, Inc.: AST INVESCO Equity
Income Portfolio; (i) Pacific Investment Management Company: AST PIMCO Total
Return Bond Portfolio, AST PIMCO Limited Maturity Bond Portfolio; (j) American
Century Investment Management, Inc.: AST American Century International Growth
Portfolio, AST American Century Strategic Balanced Portfolio; (k) Putnam
Investment Management, Inc.: AST Putnam Value Growth & Income Portfolio, AST
Putnam International Equity Portfolio, AST Putnam Balanced Portfolio; (l) Cohen
& Steers Capital Management, Inc.: AST Cohen & Steers Realty Portfolio; (m)
Stein Roe & Farnham Incorporated: AST Stein Roe Venture Portfolio; (n) Bankers
Trust Company: AST Bankers Trust Enhanced 500 Portfolio; (o) Marsico Capital
Management, LLC: AST Marsico Capital Growth Portfolio; (p) Neuberger Berman
Management, Incorporated: AST Neuberger Berman Mid-Cap Value Portfolio, AST
Neuberger Berman Mid-Cap Growth Portfolio; (q) OppenheimerFunds, Inc.: AST
Oppenheimer Large-Cap Growth Portfolio; (r) Scudder Kemper Investments, Inc.:
AST Kemper Small-Cap 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 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Caption Page
<S> <C> <C>
General Information and History...................................................................................3
Investment Objectives and Policies................................................................................3
AST Lord Abbett Growth and Income Portfolio..................................................................3
AST Lord Abbett Small Cap Value Portfolio....................................................................4
AST JanCap Growth Portfolio..................................................................................8
AST Janus Overseas Growth Portfolio.........................................................................10
AST Janus Small-Cap Growth Portfolio........................................................................13
AST Money Market Portfolio..................................................................................17
AST Federated High Yield Portfolio..........................................................................18
AST T. Rowe Price Asset Allocation Portfolio................................................................20
AST T. Rowe Price International Equity Portfolio............................................................29
AST T. Rowe Price Natural Resources Portfolio...............................................................38
AST T. Rowe Price International Bond Portfolio..............................................................48
AST T. Rowe Price Small Company Value Portfolio.............................................................57
AST Founders Passport Portfolio.............................................................................66
AST INVESCO Equity Income Portfolio.........................................................................74
AST PIMCO Total Return Bond Portfolio.......................................................................75
AST PIMCO Limited Maturity Bond Portfolio...................................................................86
AST American Century International Growth Portfolio.........................................................97
AST American Century Strategic Balanced Portfolio..........................................................100
AST Putnam Value Growth & Income Portfolio.................................................................105
AST Putnam International Equity Portfolio..................................................................114
AST Putnam Balanced Portfolio..............................................................................122
AST Cohen & Steers Realty Portfolio........................................................................131
AST Stein Roe Venture Portfolio............................................................................134
AST Bankers Trust Enhanced 500 Portfolio...................................................................143
AST Marsico Capital Growth Portfolio.......................................................................147
AST Neuberger Berman Mid-Cap Value Portfolio...............................................................149
AST Neuberger Berman Mid-Cap Growth Portfolio..............................................................156
AST Oppenheimer Large-Cap Growth Portfolio.................................................................167
AST Kemper Small-Cap Growth Portfolio......................................................................169
Investment Restrictions.........................................................................................172
Certain Risk Factors and Investment Methods.....................................................................188
Portfolio Turnover..............................................................................................203
Management......................................................................................................204
Investment Advisory and Other Services..........................................................................207
Brokerage Allocation............................................................................................211
Allocation of Investments.......................................................................................212
Computation of Net Asset Values.................................................................................212
Purchase and Redemption of Shares...............................................................................213
Tax Matters.....................................................................................................213
Underwriter.....................................................................................................213
Performance.....................................................................................................213
Other Information...............................................................................................215
Financial Statements............................................................................................215
Appendix A Financial Statements for American Skandia Trust......................................................A-1
Appendix B Definition of Certain Debt Securities Ratings........................................................B-1
</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 AST Lord Abbett Growth and Income
Portfolio was first offered as of May 1, 1992. The AST JanCap Growth Portfolio
and the AST Money Market Portfolio were first offered as of November 4, 1992.
The AST Neuberger Berman Mid-Cap Value Portfolio (formerly, 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
AST Federated High Yield Portfolio, the AST T. Rowe Price Asset Allocation
Portfolio, the AST T. Rowe Price International Equity Portfolio, the AST Janus
Small-Cap Growth Portfolio (formerly, the Founders Capital Appreciation
Portfolio), the AST INVESCO Equity Income Portfolio and the AST PIMCO Total
Return Bond Portfolio were first offered as of December 31, 1993. The AST T.
Rowe Price International Bond Portfolio (formerly, the AST Scudder International
Bond Portfolio) was first offered as of May 1, 1994. The AST Neuberger Berman
Mid-Cap Growth Portfolio (formerly, the Berger Capital Growth Portfolio) was
first offered as of October 19, 1994. The AST Founders Passport Portfolio
(formerly, the Seligman Henderson International Small Cap Portfolio), the AST T.
Rowe Price Natural Resources Portfolio and the AST PIMCO Limited Maturity Bond
Portfolio were first offered as of May 2, 1995. The AST Oppenheimer Large-Cap
Growth Portfolio (formerly, the Robertson Stephens Value + Growth Portfolio) was
first offered as of May 2, 1996. The AST Janus Overseas Growth Portfolio, the
AST T. Rowe Price Small Company Value Portfolio, the AST American Century
International Growth Portfolio, the AST American Century Strategic Balanced
Portfolio and the AST Putnam Value Growth & Income Portfolio were first offered
as of January 2, 1997. The AST Marsico Capital Growth Portfolio was first
offered as of December 22, 1997. The AST Lord Abbett Small Cap Value Portfolio,
the AST Cohen & Steers Realty Portfolio, the AST Stein Roe Venture Portfolio,
and the AST Bankers Trust Enhanced 500 Portfolio were first offered as of
January 2, 1998. The AST Kemper Small-Cap Growth Portfolio will first be offered
subsequent to 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.
AST 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."
AST 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 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 call 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 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 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 AST 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.
<PAGE>
AST 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. 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 AST 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. 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 and commercial paper. 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 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 ("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 Janus Small-Cap Growth Portfolio:
Investment Objective: As stated in the Prospectus, the Portfolio's investment
objective is capital appreciation. Realization of income is not a significant
investment consideration and any income realized on the Portfolio's investments
therefore will be incidental to the Portfolio's objective.
Investment Policies:
Illiquid Investments. The Portfolio may invest up to 15% of its net
assets in illiquid investments (i.e., securities that are not readily
marketable). The Trustees have authorized the Sub-advisor to make liquidity
determinations with respect to certain securities, including Rule 144A
Securities and commercial paper purchased by the Portfolio. Under the guidelines
established by the Trustees, the Sub-advisor will consider, among other 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; 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; and 5) any rating
of the security by a Nationally Recognized Statistical Rating Organization
("NRSRO"). In the case of commercial paper, the Sub-advisor will also determine
that the paper is not traded flat or in default as to principal and interest. A
foreign security that may be freely traded on or through the facilities of an
offshore exchange or other established offshore securities market is not
considered an illiquid security.
Investment Company Securities. From time to time, the Portfolio may
invest in securities of other investment companies, subject to the provisions of
Section 12(d)(1) of the 1940 Act. The Portfolio may invest in securities of
money market funds managed by the Sub-advisor subject to the terms of an
exemptive order obtained by the Sub-advisor and the funds that are advised or
sub-advised by the Sub-advisor. Under such order, the Portfolio will limit its
aggregate investment in a money market fund managed by the Sub-adviser to the
greater of (i) 5% of its total assets or (ii) $2.5 million, although the Trust's
Board of Trustees may increase this limit up to 25% of the Trust's total assets.
Depositary Receipts. The Portfolio may invest in sponsored and
unsponsored American Depositary Receipts ("ADRs"), which are described in the
Trust's Prospectus under "Certain Risk Factors and Investment Methods." Holders
of unsponsored 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"), Global Depositary Receipts ("GDRs") and in other similar
instruments representing securities of foreign companies.
Income-Producing Securities. Types of income producing securities that
the Portfolio may purchase include, but are not limited to, (i) variable and
floating rate obligations, which are securities having interest rates that are
adjusted periodically according to a specified formula, usually with reference
to some interest rate index or market interest rate, (ii) standby commitments,
which are instruments similar to puts that give the holder the option to
obligate a broker, dealer or bank to repurchase a security at a specified price,
and (iii) tender option bonds, which are securities that are coupled with the
option to tender the securities to a bank, broker-dealer or other financial
institution at periodic intervals and receive the face value of the bond. The
Portfolio will purchase standby commitments, tender option bonds and instruments
with demand features primarily for the purpose of increasing the liquidity of
its portfolio. The Portfolio may also invest in inverse floaters, which are debt
instruments the interest on which varies in an inverse relationship to the
interest rate on another security. For example, certain inverse floaters pay
interest at a rate that varies inversely to prevailing short-term interest
rates. Some inverse floaters have an interest rate reset mechanism that
multiplies the effects of changes in an underlying index. Such a mechanism may
increase fluctuations in the security's market value. The Portfolio will not
invest more than 5% of its assets in inverse floaters.
High-Yield/High-Risk Securities. The Portfolio intends to invest less
than 35% of its net assets in debt securities that are rated below investment
grade (e.g., securities rated BB or lower by Standard & Poor's Ratings Services
("Standard & Poor's") or Ba or lower by Moody's Investors Service, Inc.
("Moody's")). Lower rated securities involve a higher degree of credit risk,
which is the risk that the issuer will not make interest or principal payments
when due. In the event of an unanticipated default, the Portfolio would
experience a reduction in its income, and could expect a decline in the market
value of the securities so affected.
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. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the Sub-advisor may treat such securities as unrated debt. Because of
the size and perceived demand of the issue, among other factors, certain
municipalities may not incur the costs of obtaining a rating. The Sub-advisor
will analyze the creditworthiness of the issuer, as well as any financial
institution or other party responsible for payments on the security, in
determining whether to purchase unrated municipal bonds. Unrated debt securities
will be included in the 35% limit unless the portfolio managers deem such
securities to be the equivalent of investment grade securities.
The Portfolio may purchase defaulted securities subject to the above
limits, but only when the Sub-advisor believes, based upon its analysis of the
financial condition, results of operations and economic outlook of an issuer,
that there is potential for resumption of income payments and that the
securities offer an unusual opportunity for capital appreciation.
Notwithstanding the Sub-advisor's belief as to the resumption of income,
however, the purchase of any security on which payment of interest or dividends
is suspended involves a high degree of risk. Such risk includes, among other
things, the following:
Financial and Market Risks. Investments in securities that are
in default involve a high degree of financial and market risks that can result
in substantial or, at times, even total losses. Issuers of defaulted securities
may have substantial capital needs and may become involved in bankruptcy or
reorganization proceedings. Among the problems involved in investments in such
issuers is the fact that it may be difficult to obtain information about their
condition. The market prices of securities of such issuers also are subject to
abrupt and erratic movements and above average price volatility, and the spread
between the bid and asked prices of such securities may be greater than normally
expected.
Disposition of Portfolio Securities. Although the Portfolio
generally will purchase securities for which the Sub-advisor expects an active
market to be maintained, defaulted securities may be less actively traded than
other securities and it may be difficult to dispose of substantial holdings of
such securities at prevailing market prices. The Portfolio will limit holdings
of any such securities to amounts that the Sub-advisor believes could be readily
sold, and holdings of such securities would, in any event, be limited so as not
to limit the Portfolio's ability to readily dispose of securities to meet
redemptions.
Other. Defaulted securities require active monitoring and may, at times,
require participation in bankruptcy or receivership proceedings on behalf of the
Portfolio.
Repurchase and Reverse Repurchase Agreements. The Portfolio may enter
into repurchase agreements. While it is not possible to eliminate all risks from
repurchase agreement transactions, the Portfolio will limit repurchase
agreements to those parties whose creditworthiness has been reviewed and found
satisfactory by the Sub-advisor under guidelines established by the Board of
Trustees of the Trust.
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. The
Portfolio will enter into reverse repurchase agreements only with parties that
the Sub-advisor deems creditworthy. Using reverse repurchase agreements to earn
additional income involves the risk that the interest earned on the invested
proceeds is less than the expense of the reverse repurchase agreement
transaction. This technique may also have a leveraging effect on the Portfolio,
although the requirement for the Portfolio to segregate assets in the amount of
the reverse repurchase agreement minimizes this effect.
For an additional discussion of repurchase agreements and reverse
repurchase agreements and their risks, see the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Futures, Options and Forward Contracts. 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, and forward contracts. 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 Portfolio's total assets. 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 on 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 pursuant to procedures
adopted by the Sub-advisor for monitoring the creditworthiness of those
entities. To the extent that an option purchased or written by the Portfolio in
a negotiated transaction is illiquid, the value of the option purchased or the
amount of the Portfolio's obligations under an option it has written, 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 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 of their risks, 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 that 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
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, 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 NRSRO 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, are less liquid than swaps. To the extent the
Portfolio sells (i.e., writes) caps and floors, it will segregate cash or other
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. The Portfolio
bears the risk of loss of any payments it is contractually obligated to make in
connection with interest rate swaps. In addition, if the other party to an
interest rate swap that is not collateralized defaults, the Portfolio would risk
the loss 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.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the Janus Small-Cap 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 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 Portfolio's 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 ("Rule 144A Securities"), or any
successor to such rule, Section 4(2) commercial paper and municipal lease
obligations. Accordingly, such securities may not be subject to the foregoing
limitation.
4. The Portfolio may not invest in companies for the purpose of
exercising control of management.
<PAGE>
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.
AST 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 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 AST 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.
AST 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 three
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.
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 AST 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.
AST 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 AST 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 three
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.
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 AST 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.
AST 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 three 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.
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 AST 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.
<PAGE>
AST 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 three
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.
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 AST 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.
AST 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 three 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.
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 AST 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.
AST 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. In
addition, the Portfolio may engage in "proxy-hedging," i.e., entering into
forward contracts to sell a different foreign currency than the one in which the
underlying investments are denominated with the expectation that the value of
the hedged currency will correlate with the value of the underlying currency.
The Portfolio 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 or a proxy currency in excess
of the value of its portfolio securities or other assets denominated in the
currency being hedged. 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 AST 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.
AST 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.
AST PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek to
maximize total return, consistent with preservation of capital. The Sub-advisor
will seek to employ prudent investment management techniques, especially in
light of the broad range of investment instruments in which the Portfolio may
invest.
Investment Policies:
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 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.
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.
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 longer 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.
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 related to another economic indicator or
financial market index. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by such 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 AST 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.
AST 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.
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.
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 longer 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.
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 related to another economic indicator or
financial market index. Indexed securities include structured notes as well as
securities other than debt securities, the interest rate or principal of which
is determined by such 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 AST 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."
AST American 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."
Investments in Companies with Limited Operating History. The Portfolio
may invest in the securities of issuers with limiting operating history. The
Sub-advisor considers an issuer to have a limited operating history if that
issuer has a record of less than three years of continuous operation.
Investments in securities of issuers with limited operating history may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating history and financial
information upon which the manager may base its investment decision on behalf of
the Portfolio. In addition, financial and other information regarding such
issuers, when available, may be incomplete or inaccurate.
The Portfolio will not invest more than 5% of its total assets in the
securities of issuers with less than a three-year operating history. The
Sub-advisor will consider periods of capital formation, incubation,
consolidation, and research and development in determining whether a particular
issuer has a record of three years of continuous operation.
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.
If the Portfolio sells short securities that it owns, any future gains
or losses in the Portfolio's long position should be reduced by a gain or loss
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 AST American 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.
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AST American 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."
Investments in Companies with Limited Operating History. The Portfolio
may invest in the securities of issuers with limiting operating history. The
Sub-advisor considers an issuer to have a limited operating history if that
issuer has a record of less than three years of continuous operation.
Investments in securities of issuers with limited operating history may
involve greater risks than investments in securities of more mature issuers. By
their nature, such issuers present limited operating history and financial
information upon which the manager may base its investment decision on behalf of
the Portfolio. In addition, financial and other information regarding such
issuers, when available, may be incomplete or inaccurate.
The Portfolio will not invest more than 5% of its total assets in the
securities of issuers with less than a three-year operating history. The
Sub-advisor will consider periods of capital formation, incubation,
consolidation, and research and development in determining whether a particular
issuer has a record of three years of continuous operation.
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.
If the Portfolio sells short securities that it owns, any future gains
or losses in the Portfolio's long position should be reduced by a gain or loss
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 AST American 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.
<PAGE>
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.
<PAGE>
AST Cohen & Steers Realty Portfolio:
Investment Objective: The investment objective of AST Cohen & Steers Realty
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 AST Cohen & Steers Realty
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, AST Cohen & Steers Realty 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 securities of investment companies except in compliance with the
1940 Act; 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.
AST Stein Roe Venture Portfolio:
Investment Objective: The investment objective of the AST Stein Roe Venture
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.
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 AST Stein Roe Venture
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 securities of other investment companies except in compliance
with the 1940 Act;
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.
<PAGE>
AST Bankers Trust Enhanced 500 Portfolio:
Investment Objective: The investment objective of the AST Bankers Trust Enhanced
500 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 hedging 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 AST Bankers Trust Enhanced 500
Portfolio. These limitations are not "fundamental' restrictions and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. 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 securities of other investment companies except in
compliance with the 1940 Act; 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 Rule 144A securities and commercial paper that is sold
under section 4(2) of the 1933 Act that have been determined to be liquid under
procedures established by the Board of Trustees.
AST 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."
High-Yield/High-Risk Securities. High-yield/high-risk securities (or
"junk" bonds) are debt securities rated below investment grade by the primary
rating agencies such as Standard & Poor's Rating Services ("Standard & Poor's")
and Moody's Investors Service, Inc. ("Moody's"). The Portfolio will not invest
more than 5% of its total assets in these securities.
The value of lower quality securities generally is more dependent on
the ability of the issuer to meet interest and principal payments (i.e. credit
risk) than is the case for higher quality securities. Conversely, the value of
higher quality securities may be more sensitive to interest rate movements than
lower quality securities. The Portfolio will not purchase debt securities rated
below "CCC-" by Standard & Poor's or "Caa" by Moody's. The Portfolio may also
purchase unrated bonds of foreign and domestic issuers. For an additional
discussion of high-yield/high-risk securities, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the AST 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.
AST Neuberger Berman Mid-Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Portfolio
purchases securities from a Federal Reserve member bank or a securities dealer
deemed creditworthy by the Sub-advisor under procedures established by the Board
of Trustees of the Trust. The bank or securities dealer agrees to repurchase the
securities from the Portfolio at a higher price on a designated future date.
Repurchase agreements generally are for a short period of time, usually less
than a week. Repurchase agreements with a maturity of more than seven business
days are considered to be illiquid securities; the Portfolio may not enter into
such a repurchase agreement if, as a result, more than 15% of the value of its
net assets would then be invested in such repurchase agreements and other
illiquid securities. The Portfolio will enter into a repurchase agreement only
if (1) the underlying securities are of the type (excluding maturity and
duration limitations) that the Portfolio's investment policies and limitations
would allow it to purchase directly, (2) the market value of the underlying
securities, including accrued interest, and any other collateral for the
repurchase agreement at al1 times equals or exceeds the amount paid by the
Portfolio under the agreement, and (3) payment for the underlying securities is
made only upon satisfactory evidence that the securities are being held for the
Portfolio's account by the custodian or a bank acting as the Portfolio's agent.
Securities Loans. In order to realize income, the Portfolio may lend
portfolio securities with a value not exceeding 33-1/3% of its total assets to
banks, brokerage firms, or institutional investors. Borrowers are required
continuously to secure their obligations to return securities on loan from the
Portfolio by depositing collateral, which will be marked to market daily, in a
form determined to be satisfactory by the Trustees and equal to at least 100% of
the market value of the loaned securities, which will also be marked to market
daily. The Sub-advisor believes the risk of loss on these transactions is slight
because, if a borrower were to default for any reason, the collateral should
satisfy the obligation. However, as with other extensions of secured credit,
loans of portfolio securities involve some risk of loss of rights in the
collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Portfolio may
invest in restricted securities, which are securities that may not be sold to
the public without an effective registration statement under the 1933 Act.
Before they are registered, such securities may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration. In
recognition of the increased size and liquidity of the institutional markets for
unregistered securities and the importance of institutional investors in the
formation of capital, the SEC has adopted Rule 144A under the 1933 Act, which is
designed to facilitate efficient trading among institutional investors by
permitting the sale of certain unregistered securities to qualified
institutional buyers. To the extent privately placed securities held by the
Portfolio qualify under Rule 144A, and an institutional market develops for
those securities, the Portfolio likely will be able to dispose of the securities
without registering them under the 1933 Act. To the extent that institutional
buyers become, for a time, uninterested in purchasing these securities,
investing in Rule 144A securities could have the effect of increasing the level
of the Portfolio's illiquidity. The Sub-advisor, acting under guidelines
established by the Board of Trustees of the Trust, may determine that certain
securities qualified for trading under Rule 144A are liquid.
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 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,
excluding Rule 144A securities deemed liquid by the Sub-advisor, are considered
illiquid, and will be subject to the Portfolio's 15% limit on investments in
illiquid securities. Foreign securities that are freely tradable in their
principal markets are not considered by the Portfolio to be illiquid. Illiquid
securities for which no market exists are priced by a method that the Trustees
believe accurately reflects fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Portfolio sells portfolio securities subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest; these agreements are considered borrowings for purposes of the
Portfolio's investment limitations and policies concerning borrowings. There is
a risk that the counterparty to a reverse repurchase agreement will be unable or
unwilling to complete the transaction as scheduled, which may result in losses
to the Portfolio.
Covered Call Options. The Portfolio may write covered call options on
securities it owns valued at up to 10% of its net assets and may purchase call
options in related closing transactions. Generally, the purpose of writing these
options is to reduce the effect of price fluctuations of securities held by the
Portfolio on the Portfolio's net asset value. Securities on which call options
may be written by the Portfolio are purchased solely on the basis of investment
considerations consistent with the Portfolio's investment objectives.
When the Portfolio writes a call option, it is obligated to sell a
security to a purchaser at a specified price at any time until a certain date if
the purchaser decides to exercise the option. The Portfolio receives a premium
for writing the call option. The Portfolio writes only "covered" call options on
securities it owns. So long as the obligation of the writer of the call option
continues, the writer may be assigned an exercise notice, requiring it to
deliver the underlying security against payment of the exercise price. The
Portfolio may be obligated to deliver securities underlying a call option at
less than the market price thereby giving up any additional gain on the
security.
When the Portfolio purchases a call option, it pays a premium for the
right to purchase a security from the writer at a specified price until a
specified date. A call option would be purchased by the Portfolio to offset a
previously written call option.
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 call options, which the Portfolio will not do), but is
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 above the exercise
price, but conversely retains the risk of loss should the price of the security
decline. If a call option that the Portfolio has written expires unexercised,
the Portfolio will realize a gain in the amount of the premium; however, that
gain may be offset by a decline in the market value of the underlying security
during the option period. If the call or put option is exercised, the Portfolio
will realize a gain or loss from the sale or purchase of the underlying
security.
The exercise price of an option may be below, equal to, or above the
market value of the underlying security at the time the option is written.
Options normally have expiration dates between three and nine months from the
date written. The obligation under any option terminates upon expiration of the
option or, at an earlier time, when the writer offsets the option by entering
into a "closing purchase transaction" to purchase an option of the same series.
If an option is purchased by the Portfolio and is never exercised, the Portfolio
will lose the entire amount of the premium paid.
Options are traded both on national securities exchanges and in the
over-the-counter ("OTC") market. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on which the option is
listed; the clearing organization in effect guarantees completion of, every
exchange-traded option. In contrast, OTC options are contracts between the
Portfolio and its counter-party with no clearing organization guarantee. Thus,
when the Portfolio sells or purchases an OTC 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 whom or from whom the
Portfolio originally sold or purchased the option. The Sub-advisor monitors the
creditworthiness of dealers with which the Portfolio may engage in OTC options,
and will limit counterparties in such transactions to dealers with a net worth
of at least $20 million as reported in their latest financial statements. For an
additional discussion of OTC options and their risks, see this Statement under
"Certain Risk Factors and Investment Methods."
The premium received (or paid) by the Portfolio when it writes (or
purchases) an option is the amount at which the option is currently traded on
the applicable exchange, less (or plus) a commission. The premium may reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to the market price, the historical price
volatility of the underlying security, the length of the option period, the
general supply of and demand for credit, and the general interest rate
environment. The premium received by the Portfolio for writing an option is
recorded as a liability on the Portfolio's statement of assets and liabilities.
This liability is adjusted daily to the option's current market value.
The Portfolio pays the brokerage commissions in connection with
purchasing or writing options, including those used to close out existing
positions. These brokerage commissions normally are higher than those applicable
to purchases and sales of portfolio securities.
From time to time, the Portfolio may purchase an underlying security
for delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering the security from its portfolio. In those cases,
additional brokerage commissions are incurred.
For an additional discussion of options and their risks, 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
securities issued by foreign issuers (including governments and
quasi-governments) and foreign branches of U.S. banks, including negotiable CDs
and commercial paper. These investments are subject to the Portfolio's quality
standards. While investments in foreign securities are intended to reduce risk
by providing further diversification, such investments involve sovereign and
other risks, in addition to the credit and market risks normally associated with
domestic securities.
The Portfolio may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) CDs, commercial paper, fixed-time deposits, and bankers' acceptances issued
by foreign banks, (4) obligations of other corporations, and (5) obligations of
foreign governments, or their subdivisions, agencies, and instrumentalities,
international agencies, and supranational entities. Risks of investing in
foreign currency denominated securities include (1) nationalization,
expropriation, or confiscatory taxation, (2) adverse changes in investment or
exchange control regulations (which could prevent cash from being brought back
to the U.S.), and (3) expropriation or nationalization of foreign portfolio
companies. Mail service between the U.S. and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. For an additional discussion of the risks associated with foreign
securities, whether denominated in U.S. dollars or foreign currencies, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Prices of foreign securities and exchange rates for foreign currencies
may be affected by the interest rates prevailing in other countries. The
interest rates in other countries are often affected by local factors, including
the strength of the local economy, the demand for borrowing, the government's
fiscal and monetary policies, and the international balance of payments.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Foreign 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. Such delays in settlement could result
in temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio securities, or,
if the Portfolio has entered into a contract to sell the securities, could
result in possible liability to the purchaser.
The Portfolio may invest in foreign corporate bonds and debentures and
sovereign debt instruments issued or guaranteed by foreign governments, their
agencies or instrumentalities. The Portfolio may invest in lower-rated foreign
debt securities subject to the Portfolio's 15% limitation on lower-rated debt
securities. Foreign debt securities are subject to risks similar to those of
other foreign securities, as well as risks similar to those of other debt
securities, as discussed in this Statement and in the Trust's Prospectus under
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods."
In order to limit the risk inherent in investing in foreign
currency-denominated securities, the Portfolio may not purchase any such
security if after such purchase more than 10% of its total assets (taken at
market value) would be invested in such securities. Within such limitation,
however, the Portfolio is not restricted in the amount it may invest in
securities denominated in any one foreign currency.
Foreign Currency Transactions. The Portfolio may engage in foreign
currency exchange transactions. Foreign currency exchange transactions will be
conducted 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 ("forward contracts"). The Portfolio may
enter into forward contracts in order to protect against uncertainty in the
level of future foreign currency exchange rates, and only in amounts not
exceeding 5% of the Portfolio's net assets.
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
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between 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.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread) between the price at which
they are buying and selling various currencies.
When the Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may wish 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 security transactions, the Portfolio will be
able to protect itself against a possible loss. When the Sub-advisor believes
that the currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, it may also enter into a forward contract to
sell the amount of foreign currency for a fixed amount of dollars which
approximates the value of some or all of a Portfolio's securities denominated in
such foreign currency. The Portfolio may also engage in cross-hedging by using
forward contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency, when the Sub-advisor believes
that there is a pattern of correlation between the two currencies.
When the Portfolio engages in forward contracts for hedging purposes,
it will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if their consummation would obligate the Portfolio to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. At the consummation of
the forward contract, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver by purchasing an
offsetting contract obligating it to purchase the same amount of such foreign
currency at the same maturity date. 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 assets into such currency. If the Portfolio engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been a
change in forward contract prices. Closing purchase transactions with respect to
forward contracts are usually made with the currency trader who is a party to
the original forward contract.
The Portfolio is not required to enter into such transactions and will
not do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Portfolio's
portfolio 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. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of the Portfolio's foreign assets.
While the Portfolio may enter forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Portfolio than if it had not engaged in any such transactions. Moreover, there
may be imperfect correlation between the Portfolio's holdings of securities
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may cause the Portfolio to sustain losses
which will prevent it from achieving a complete hedge or expose it to risk of
foreign exchange loss.
The Portfolio generally will not enter into a forward contract with a
term of greater than one year. The Portfolio may experience delays in the
settlement of its foreign currency transactions.
When the Portfolio engages in forward contracts for the sale or
purchase of currencies, the Portfolio will either cover its position or
establish a segregated account. The Portfolio will consider its position covered
if it has securities in the currency subject to the forward contract, or
otherwise has the right to obtain that currency at no additional cost. In the
alternative, the Portfolio will place cash, fixed income, or equity securities
(denominated in the foreign currency subject to the forward contract) in a
separate account. The amounts in such separate account will equal the value of
the Portfolio's assets which are committed to the consummation of foreign
currency exchange contracts. If the value of the securities placed in the
separate account declines, the Portfolio will place additional cash or
securities in the account on a daily basis so that the value of the account will
equal the amount of its commitments with respect to such contracts.
For an additional discussion of forward foreign currency exchange
contracts and their risks, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Options on Foreign Currencies. The Portfolio may write and purchase
covered call and put options on foreign currencies in amounts not exceeding 5%
of its net assets for the purpose of protecting against declines in the U.S.
dollar value of portfolio securities or increases in the U.S.-dollar cost of
securities to be acquired, or to protect the dollar equivalent of dividend,
interest, or other payment on those securities. A decline in the dollar value of
a foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such decreases in the value of
portfolio securities, the Portfolio may purchase put options on the foreign
currency. If the value of the currency declines, the Portfolio will have the
right to sell such currency for a fixed amount of dollars which exceeds the
market value of such currency. This would result in a gain that may offset, in
whole or in part, the negative effect of currency depreciation on the value of
the Portfolio's securities denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be
acquired by the Portfolio are denominated rises, thereby increasing the cost of
such securities, the Portfolio may purchase call options on such currency. If
the value of such currency increases sufficiently, the Portfolio will have the
right to purchase that currency for a fixed amount of dollars which is less than
the market value of that currency. Such a purchase would result in a gain that
may offset, at least partially, the effect of any currency-related increase in
the price of securities the Portfolio intends to acquire.
As in the case of other types of options transactions, however, the
benefit the Portfolio derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging
purposes. For example, if the Sub-advisor anticipates a decline in the dollar
value of foreign currency denominated securities because of declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the decrease in value of portfolio securities will be
offset, at least in part, by the amount of the premium received by the
Portfolio.
Similarly, the Portfolio could write a put option on the relevant
currency, instead of purchasing a call option, to hedge against an anticipated
increase in the dollar cost of securities to be acquired. If exchange rates move
in the manner projected, the put option most likely will not be exercised, and
such increased cost will be offset, at least in part, by the amount of the
premium received. However, as in the case of other types of options
transactions, the writing of a foreign currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the
expected direction.
If unanticipated exchange rate fluctuations occur, a put or call option
may be exercised and the Portfolio could be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in currency exchange
rates. Certain options on foreign currencies are traded on the OTC market and
involve liquidity and credit risks that may not be present in the case of
exchange-traded currency options.
A call option written on foreign currency by the Portfolio is "covered"
if the Portfolio owns the underlying foreign currency subject to the call, or if
it has an absolute and immediate right to acquire that foreign currency without
additional cash consideration. A call option is also covered if the Portfolio
holds a call on the same foreign currency for the same principal amount as the
call written where the exercise price of the call held is (a) equal to or less
than the exercise price of the call written or (b) greater than the exercise
price of the call written if the amount of the difference is maintained by the
Portfolio in cash, fixed income or equity securities in a segregated account
with its custodian.
The risks of currency options are similar to the risks of other
options, as discussed above and in this Statement under "Certain Risk Factors
and Investment Methods."
Cover for Options on Securities, Forward Contracts, and Options on
Foreign Currencies ("Hedging Instruments"). The Portfolio will comply with SEC
staff guidelines regarding "cover" for Hedging Instruments and, if the
guidelines so require, set aside in a segregated account with its custodian the
prescribed amount of cash, fixed income, or equity securities. Securities held
in a segregated account cannot be sold while the futures, option, or forward
strategy covered by those securities is outstanding, unless they are replaced
with other suitable assets. As a result, segregation of a large percentage of
the Portfolio's assets could impede portfolio management or the Portfolio's
ability to meet current obligations. The Portfolio may be unable promptly to
dispose of assets that cover, or are segregated with respect to, an illiquid
options or forward position; this inability may result in a loss to the
Portfolio.
When-Issued Securities. The Portfolio may purchase securities on a
when-issued basis, that is, by committing to purchase securities and completing
the purchase by making payment against delivery of the securities at a future
date. The price of the underlying securities (usually expressed in terms of
yield) and the date when the securities will be delivered and paid for (the
settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases are negotiated directly with the other party, and are not
traded on exchanges. When-issued purchases enable the Portfolio to "lock in"
what the Sub-advisor believes to be an attractive price or yield on a particular
security for a period of time, regardless of future changes in interest rates.
For instance, in periods of falling interest rates and rising prices, the
Portfolio might purchase a security on a when-issued basis and sell a similar
security to settle such purchase, thereby obtaining the benefit of currently
higher yields.
The value of securities purchased on a when-issued basis and any
subsequent fluctuations in their value are reflected in the computation of a
Portfolio's net asset value starting on the date of the agreement to purchase
the securities. Because the Portfolio has not yet paid for the securities, this
produces an effect similar to leverage. The Portfolio does not earn interest on
the securities it has committed to purchase until they are paid for and
delivered on the settlement date.
The Portfolio will purchase securities on a when-issued basis only with
the intention of completing the transaction and actually purchasing the
securities. If deemed advisable as a matter of investment strategy, however, the
Portfolio may dispose of or renegotiate a commitment after it has been entered
into. The Portfolio also may sell securities it has committed to purchase before
those securities are delivered to the Portfolio on the settlement date. The
Portfolio may realize a gain or loss in connection with these transactions.
When the Portfolio purchases securities on a when-issued basis, it will
deposit, in a segregated account with its custodian, until payment is made,
cash, fixed income, or equity securities having an aggregate market value
(determined daily to the extent required by SEC staff policy) at least equal to
the amount of the Portfolio's purchase commitments. These procedures are
designed to ensure that a Portfolio will maintain sufficient assets at all times
to cover its obligations under when-issued purchases.
Preferred Stock. The Portfolio may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors, although preferred
shareholders may have certain rights if dividends are not paid. Shareholders may
suffer a loss of value if dividends are not paid, and generally have no legal
recourse against the issuer. The market prices of preferred stocks are generally
more sensitive to changes in the issuer's creditworthiness than are the prices
of debt securities.
Fixed Income Securities. The Portfolio may invest in money market
instruments, U.S. Government or Agency securities, and corporate bonds and
debentures receiving one of the four highest ratings from Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities ("Comparable Unrated Securities"). In addition, the Portfolio may
invest up to 15% of its net assets, measured at the time of investment, in
corporate debt securities rated below investment grade or Comparable Unrated
Securities. The ratings of an NRSRO represent its opinion as to the quality of
securities it undertakes to rate. Ratings are not absolute standards of quality;
consequently, securities with the same maturity, coupon, and rating may have
different yields. Although the Portfolio may rely on the ratings of any NRSRO,
the Portfolio mainly refers to ratings assigned by S&P and Moody's, which are
described in Appendix A to this Statement.
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations ("credit
risk") and also may be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity ("market risk"). Lower-rated securities are
more likely to react to developments affecting market and credit risk than are
more highly rated securities, which react primarily to movements in the general
level of interest rates.
Changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuer of such securities to make principal and interest payments than is the
case for higher-grade debt securities. An economic downturn affecting the issuer
may result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
Pricing of thinly traded securities requires greater judgment than pricing of
securities for which market transactions are regularly reported.
Convertible Securities. The Portfolio may invest in convertible
securities. A convertible security entitles the holder to receive interest paid
or accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stocks of the same or similar issuers, but
lower than the yield on non-convertible debt. Convertible securities are usually
subordinated to comparable-tier nonconvertible securities but rank senior to
common stock in a corporation's capital structure. The value of a convertible
security is a function of (1) its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege, and (2) its worth, at market value, if converted into the underlying
common stock. Convertible debt securities are subject to the Portfolio's
investment policies and limitations concerning fixed-income investments.
Convertible securities are typically issued by smaller companies whose
stock prices may be volatile. The price of a convertible security often reflects
such variations in the price of the underlying common stock in a way that
nonconvertible debt does not. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Portfolio is called
for redemption, the Portfolio will be required to convert it into the underlying
common stock, sell it to a third party or permit the issuer to redeem the
security. Any of these actions could have an adverse effect on the Portfolio's
ability to achieve its investment objective.
Commercial Paper. Commercial paper is a short-term debt security issued
by a corporation, bank, municipality, or other issuer, usually for purposes such
as financing current operations. The Portfolio may invest only in commercial
paper receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by
the Sub-advisor to be of equivalent quality.
The Portfolio may invest in commercial paper that cannot be resold to
the public because it was issued under the exception for private offerings in
Section 4(2) of the Securities Act of 1933. While such securities normally will
be considered illiquid and subject to the Portfolio's 15% limitation on
investments in illiquid securities, the Sub-advisor may in certain cases
determine that such paper is liquid under guidelines established by the Board of
Trustees.
Zero Coupon Securities. The Portfolio may invest up to 5% of its net
assets in zero coupon securities, which are debt obligations that do not entitle
the holder to any periodic payment of interest prior to maturity or specify a
future date when the securities begin paying current interest. Rather, they are
issued and traded at a discount from their face amount or par value, which
discount varies depending on prevailing interest rates, the time remaining until
cash payments begin, the liquidity of the security, and the perceived credit
quality of the issuer.
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do other types of
debt securities having similar maturities and credit quality.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Neuberger Berman Mid-Cap
Value Portfolio. These limitations are not fundamental restrictions, and can be
changed without shareholder approval.
1. The Portfolio may not purchase securities if outstanding borrowings,
including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in
repurchase agreements, the Portfolio may not make any loans other than
securities loans.
3. The Portfolio may not purchase securities on margin from brokers,
except that the Portfolio may obtain such short-term credits as are necessary
for the clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin and shall not be deemed to
violate the foregoing limitation.
4. The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold without payment of additional consideration. Transactions in futures
contracts and options shall not constitute selling securities short.
5. The Portfolio may not purchase any security if, as a result, more
than 15% of its net assets would be invested in illiquid securities. Illiquid
securities include securities that cannot be sold within seven days in the
ordinary course of business for approximately the amount at which the Portfolio
has valued the securities, such as repurchase agreements maturing in more than
seven days.
6. The Portfolio may not invest in puts, calls, straddles, spreads, or
any combination thereof, except that the Portfolio may (i) write (sell) covered
call options against portfolio securities having a market value not exceeding
10% of its net assets and (ii) purchase call options in related closing
transactions. The Portfolio does not construe the foregoing limitation to
preclude it from purchasing or writing options on futures contracts.
7. The Portfolio may not invest more than 10% of the value of its total
assets in securities of foreign issuers, provided that this limitation shall not
apply to foreign securities denominated in U.S. dollars.
AST Neuberger Berman Mid-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation.
Investment Policies:
Repurchase Agreements. In a repurchase agreement, the Portfolio
purchases securities from a Federal Reserve member bank or a securities dealer
deemed creditworthy by the Sub-advisor under procedures established by the Board
of Trustees of the Trust. The bank or securities dealer agrees to repurchase the
securities from the Portfolio at a higher price on a designated future date.
Repurchase agreements generally are for a short period of time, usually less
than a week. Repurchase agreements with a maturity of more than seven business
days are considered to be illiquid securities; the Portfolio may not enter into
such a repurchase agreement if, as a result, more than 15% of the value of its
net assets would then be invested in such repurchase agreements and other
illiquid securities. The Portfolio will enter into a repurchase agreement only
if (1) the underlying securities are of the type (excluding maturity and
duration limitations) that the Portfolio's investment policies and limitations
would allow it to purchase directly, (2) the market value of the underlying
securities, including accrued interest, and any other collateral for the
repurchase agreement at al1 times equals or exceeds the amount paid by the
Portfolio under the agreement, and (3) payment for the underlying securities is
made only upon satisfactory evidence that the securities are being held for the
Portfolio's account by the custodian or a bank acting as the Portfolio's agent.
Securities Loans. In order to realize income, the Portfolio may lend
portfolio securities with a value not exceeding 33-1/3% of its total assets to
banks, brokerage firms, or institutional investors. Borrowers are required
continuously to secure their obligations to return securities on loan from the
Portfolio by depositing collateral, which will be marked to market daily, in a
form determined to be satisfactory by the Trustees and equal to at least 100% of
the market value of the loaned securities, which will also be marked to market
daily. The Sub-advisor believes the risk of loss on these transactions is slight
because, if a borrower were to default for any reason, the collateral should
satisfy the obligation. However, as with other extensions of secured credit,
loans of portfolio securities involve some risk of loss of rights in the
collateral should the borrower fail financially.
Restricted Securities and Rule 144A Securities. The Portfolio may
invest in restricted securities, which are securities that may not be sold to
the public without an effective registration statement under the 1933 Act.
Before they are registered, such securities may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration. In
recognition of the increased size and liquidity of the institutional markets for
unregistered securities and the importance of institutional investors in the
formation of capital, the SEC has adopted Rule 144A under the 1933 Act, which is
designed to facilitate efficient trading among institutional investors by
permitting the sale of certain unregistered securities to qualified
institutional buyers. To the extent privately placed securities held by the
Portfolio qualify under Rule 144A, and an institutional market develops for
those securities, the Portfolio likely will be able to dispose of the securities
without registering them under the 1933 Act. To the extent that institutional
buyers become, for a time, uninterested in purchasing these securities,
investing in Rule 144A securities could have the effect of increasing the level
of the Portfolio's illiquidity. The Sub-advisor, acting under guidelines
established by the Board of Trustees of the Trust, may determine that certain
securities qualified for trading under Rule 144A are liquid.
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 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,
excluding Rule 144A securities deemed liquid by the Sub-advisor, are considered
illiquid, and will be subject to the Portfolio's 15% limit on investments in
illiquid securities. Foreign securities that are freely tradable in their
principal markets are not considered by the Portfolio to be illiquid. Illiquid
securities for which no market exists are priced by a method that the Trustees
believe accurately reflects fair value.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the
Portfolio sells portfolio securities subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest; these agreements are considered borrowings for purposes of the
Portfolio's investment limitations and policies concerning borrowings. There is
a risk that the counterparty to a reverse repurchase agreement will be unable or
unwilling to complete the transaction as scheduled, which may result in losses
to the Portfolio.
Covered Call Options and Put Options on Securities. The Portfolio may
write and purchase put and call options on securities. Securities on which call
and put options may be written and purchased by the Portfolio are purchased
solely on the basis of investment considerations consistent with the Portfolio's
investment objectives.
The Portfolio may write call options and purchase put options on
securities in order to hedge (i.e., write or purchase options to reduce the
effect of price fluctuations of securities held by the Portfolio), and may also
purchase or write put options, purchase call options and write covered call
options in an attempt to enhance income.
When the Portfolio writes a put option, it receives a premium and
becomes obligated to acquire a certain security at a price at any time until a
certain date if the purchaser of the option decides to exercise the option. The
writer of the option may be obligated to purchase the security at more than its
current value.
When the Portfolio purchases a put option, it pays a premium to the
writer for the right to sell a security to the writer for a specified amount at
any time until a certain date. The Portfolio would purchase a put option in
order to protect itself against a decline in the market value of a security it
owns.
When the Portfolio writes a call option, it is obligated to sell a
security to a purchaser at a specified price at any time until a certain date if
the purchaser decides to exercise the option. The Portfolio receives a premium
for writing the call option. The Portfolio writes only "covered" call options on
securities it owns. So long as the obligation of the writer of the call option
continues, the writer may be assigned an exercise notice, requiring it to
deliver the underlying security against payment of the exercise price. The
Portfolio may be obligated to deliver securities underlying a call option at
less than the market price thereby giving up any additional gain on the
security.
When the Portfolio purchases a call option, it pays a premium for the
right to purchase a security from the writer at a specified price until a
specified date. A call option would be purchased by the Portfolio to offset a
previously written call option.
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 call options, which the Portfolio will not do), but is
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 above the exercise
price, but conversely retains the risk of loss should the price of the security
decline. When writing a put option, the Portfolio, in return for the premium,
takes the risk that it must purchase the underlying security at a price that may
be more than the current market price of the security. If a call or put option
that the Portfolio has written expires unexercised, the Portfolio will realize a
gain in the amount of the premium; however, in the case of a call option, that
gain may be offset by a decline in the market value of the underlying security
during the option period. If the call or put option is exercised, the Portfolio
will realize a gain or loss from the sale or purchase of the underlying
security.
The exercise price of an option may be below, equal to, or above the
market value of the underlying security at the time the option is written.
Options normally have expiration dates between three and nine months from the
date written. The obligation under any option terminates upon expiration of the
option or, at an earlier time, when the writer offsets the option by entering
into a "closing purchase transaction" to purchase an option of the same series.
If an option is purchased by the Portfolio and is never exercised, the Portfolio
will lose the entire amount of the premium paid.
Options are traded both on national securities exchanges and in the
over-the-counter ("OTC") market. Exchange-traded options are issued by a
clearing organization affiliated with the exchange on which the option is
listed; the clearing organization in effect guarantees completion of, every
exchange-traded option. In contrast, OTC options are contracts between the
Portfolio and its counter-party with no clearing organization guarantee. Thus,
when the Portfolio sells or purchases an OTC 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 whom or from whom the
Portfolio originally sold or purchased the option. The Sub-advisor monitors the
creditworthiness of dealers with which the Portfolio may engage in OTC options,
and will limit counterparties in such transactions to dealers with a net worth
of at least $20 million as reported in their latest financial statements. For an
additional discussion of OTC options and their risks, see this Statement under
"Certain Risk Factors and Investment Methods."
The premium received (or paid) by the Portfolio when it writes (or
purchases) an option is the amount at which the option is currently traded on
the applicable exchange, less (or plus) a commission. The premium may reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to the market price, the historical price
volatility of the underlying security, the length of the option period, the
general supply of and demand for credit, and the general interest rate
environment. The premium received by the Portfolio for writing an option is
recorded as a liability on the Portfolio's statement of assets and liabilities.
This liability is adjusted daily to the option's current market value.
From time to time, the Portfolio may purchase an underlying security
for delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering the security from its portfolio. In those cases,
additional brokerage commissions are incurred.
The Portfolio pays the brokerage commissions in connection with
purchasing or writing options, including those used to close out existing
positions. These brokerage commissions normally are higher than those applicable
to purchases and sales of portfolio securities.
For an additional discussion of options and their risks, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Options on Securities Indices. The Portfolio also may write or purchase
put and call options on securities indices for the purpose of hedging against
the risk of unfavorable price movements adversely affecting the value of the
Portfolio's securities or securities the Portfolio intends to buy. However, the
Portfolio currently does not expect to invest a substantial portion of its
assets in securities index options. Unlike a securities option, which gives the
holder the right to purchase or sell a specified security at a specified price,
an option on a securities index gives the holder the right to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying securities index on the
exercise date multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market values of the
securities included in the index. Options on stock indexes are currently traded
on the Chicago Board Options Exchange, the NYSE, the AMex and foreign exchanges.
The Portfolio may purchase put options in order to hedge against an
anticipated decline in securities market prices that might adversely affect the
value of the Portfolio's portfolio securities. If the Portfolio purchases a put
option on a securities index, the amount of the payment it would receive upon
exercising the option would depend on the extent of any decline in the level of
the securities index below the exercise price. Such payments would tend to
offset a decline in the value of the Portfolio's portfolio securities. However,
if the level of the securities index increases and remains above the exercise
price while the put option is outstanding, the Portfolio will not be able to
exercise the option profitably and will lose the amount of the premium and any
transaction costs. Such loss may be partially offset by an increase in the value
of the Portfolio's securities.
The Portfolio may purchase call options on securities indices in order
to participate in an anticipated increase in securities market prices. If the
Portfolio purchases a call option on a securities index, the amount of the
payment it receives upon exercising the option depends on the extent of any
increase in the level of the securities index above the exercise price. Such
payments would, in effect, allow the Portfolio to benefit from securities market
appreciation even though it may not have had sufficient cash to purchase the
underlying securities. Such payments may also offset increases in the price of
securities that the Portfolio intends to purchase. If, however, the level of the
securities index declines and remains below the exercise price while the call
option is outstanding, the Portfolio will not be able to exercise the option
profitably and will lose the amount of the premium and transaction costs. In
circumstances where a securities index is declining, the Portfolio also may
experience a loss in the value of its portfolio securities. Such losses may be
partially offset by a reduction in the price the Portfolio pays to buy
additional securities for its portfolio.
The Portfolio may write securities index options in order to close out
positions in securities index options which it has purchased. These closing sale
transactions enable the Portfolio immediately to realize gains or minimize
losses on its options positions. If the Portfolio is unable to effect a closing
sale transaction with respect to options that it has purchased, it would have to
exercise the options in order to realize any profit and may incur transaction
costs upon the purchase or sale of underlying securities.
All securities index options purchased by the Portfolio will be listed
and traded on an exchange. While exchange-traded options may be more liquid than
OTC options, there is no assurance that a liquid secondary market on a domestic
or foreign options exchange will exist for any particular exchange-traded option
at any particular time. As is the case with options on securities, the Portfolio
will incur brokerage commissions and other transactions costs in connection with
purchasing and writing options on securities indices.
For an additional discussion of options on securities indices and their
risks, see this Statement and the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Futures Contracts and Options Thereon. The Portfolio may enter into
futures contracts for the purchase or sale of individual securities, futures
contracts on securities indices, which are traded on exchanges licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") or on foreign
exchanges. Trading on foreign exchanges is subject to the legal requirements of
the jurisdiction in which the exchange is located and the rules of such foreign
exchange. The Portfolio may purchase and sell futures for bona fide hedging
purposes and for non-hedging purposes (i.e., in an effort to enhance income) to
the extent permitted in CFTC regulations.
A "sale" of a futures contract (or a "short" futures position) entails
the assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) entails the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures, including bond index futures, are settled on a net cash payment basis
rather than by the sale and delivery of the securities underlying the futures.
U.S. futures (except certain currency futures) are traded on exchanges
that have been designated as "contract markets" by the CFTC; futures
transactions must be executed through a futures commission merchant that is a
member of the relevant contract market. The exchange's affiliated clearing
organization guarantees performance of the contracts between the clearing
members of the exchange.
"Margin" with respect to futures is the amount of assets that must be
deposited by the Portfolio with, or for the benefit of, a futures commission
merchant in order to initiate and maintain the Portfolio's futures positions.
The margin deposit made by the Portfolio when it enters into a futures contract
("initial margin") is intended to assure its performance of the contract. If the
price of the futures contract changes -- increases in the case of a short (sale)
position or decreases in the case of a long (purchase) position -- so that the
unrealized loss on the contract causes the margin deposit not to satisfy margin
requirements, the Portfolio will be required to make an additional margin
deposit ("variation margin"). However, if favorable price changes in the futures
contract cause the margin on deposit to exceed the required margin, the excess
will be paid to the Portfolio. In computing its daily net asset value, the
Portfolio marks to market the value of its open futures positions. The Portfolio
also must make margin deposits with respect to options on futures that it has
written. If the futures commission merchant holding the deposit goes bankrupt,
the Portfolio could suffer a delay in recovering its funds and could ultimately
suffer a loss.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, 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 option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (it the option is a call) or a long futures position (if the option is
a put). Upon exercise of the option, the accumulated cash balance in the
writer's futures margin account is delivered to the holder of the option. That
balance 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.
Although the Sub-advisor believes that the use of futures contracts
will benefit the Portfolio, if the Sub-advisor's judgment about the general
direction of the markets is incorrect, the Portfolio's overall return would be
lower than if it had not entered into any such contracts. For an additional
discussion of futures contracts, related options and their risks, 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
equity and debt securities issued by foreign issuers (including governments,
quasi-governments and foreign banks) and foreign branches of U.S. banks,
including negotiable CDs and commercial paper. These investments are subject to
the Portfolio's quality standards. While investments in foreign securities are
intended to reduce risk by providing further diversification, such investments
involve sovereign and other risks, in addition to the credit and market risks
normally associated with domestic securities.
The Portfolio may invest in equity, debt, or other income-producing
securities that are denominated in or indexed to foreign currencies, including,
but not limited to (1) common and preferred stocks, (2) convertible securities,
(3) warrants, (4) CDs, commercial paper, fixed-time deposits, and bankers'
acceptances issued by foreign banks, (5) obligations of other corporations, and
(6) obligations of foreign governments, or their subdivisions, agencies, and
instrumentalities, international agencies, and supranational entities. Risks of
investing in foreign currency denominated securities include (1)
nationalization, expropriation, or confiscatory taxation, (2) adverse changes in
investment or exchange control regulations (which could prevent cash from being
brought back to the U.S.), and (3) expropriation or nationalization of foreign
portfolio companies. Mail service between the U.S. and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. For an additional discussion of the risks associated with
foreign securities, whether denominated in U.S. dollars or foreign currencies,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Prices of foreign securities and exchange rates for foreign currencies
may be affected by the interest rates prevailing in other countries. The
interest rates in other countries are often affected by local factors, including
the strength of the local economy, the demand for borrowing, the government's
fiscal and monetary policies, and the international balance of payments.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
Foreign 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. Such delays in settlement could result
in temporary periods when a portion of the assets of the Portfolio is uninvested
and no return is earned thereon. The inability of the Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio securities, or,
if the Portfolio has entered into a contract to sell the securities, could
result in possible liability to the purchaser.
The Portfolio may invest in foreign corporate bonds and debentures and
sovereign debt instruments issued or guaranteed by foreign governments, their
agencies or instrumentalities. The Portfolio may invest in lower-rated foreign
debt securities subject to the Portfolio's 10% limitation on lower-rated debt
securities. Foreign debt securities are subject to risks similar to those of
other foreign securities, as well as risks similar to those of other debt
securities, as discussed in this Statement and in the Trust's Prospectus under
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods."
<PAGE>
In order to limit the risk inherent in investing in foreign
currency-denominated securities, the Portfolio may not purchase any such
security if after such purchase more than 20% of its total assets (taken at
market value) would be invested in such securities. Within such limitation,
however, the Portfolio is not restricted in the amount it may invest in
securities denominated in any one foreign currency.
Foreign Currency Transactions. The Portfolio may engage in foreign
currency exchange transactions. Foreign currency exchange transactions will be
conducted 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 ("forward contracts"). The Portfolio may
enter into forward contracts in order to protect against uncertainty in the
level of future foreign currency exchange rates. The Portfolio may also use
forward contracts for non-hedging purposes.
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
(usually less than one year) from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between 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.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the spread) between the price at which
they are buying and selling various currencies.
When the Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may wish 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 security transactions, the Portfolio will be
able to protect itself against a possible loss. When the Sub-advisor believes
that the currency of a particular foreign country may suffer a substantial
decline against the U.S. dollar, it may also enter into a forward contract to
sell the amount of foreign currency for a fixed amount of dollars which
approximates the value of some or all of a Portfolio's securities denominated in
such foreign currency.
The Portfolio may also engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency, when the Sub-advisor believes
that there is a pattern of correlation between the two currencies. The Portfolio
may also purchase and sell forward contracts for non-hedging purposes when the
Sub-advisor anticipates that the foreign currency will appreciate or depreciate
in value, but securities in that currency do not present attractive investment
opportunities and are not held in the Portfolio's portfolio.
When the Portfolio engages in forward contracts for hedging purposes,
it will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if their consummation would obligate the Portfolio to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency. At the consummation of
the forward contract, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver by purchasing an
offsetting contract obligating it to purchase the same amount of such foreign
currency at the same maturity date. 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 assets into such currency. If the Portfolio engages in an offsetting
transaction, it will incur a gain or a loss to the extent that there has been a
change in forward contract prices. Closing purchase transactions with respect to
forward contracts are usually made with the currency trader who is a party to
the original forward contract.
The Portfolio is not required to enter into such transactions and will
not do so unless deemed appropriate by the Sub-advisor.
Using forward contracts to protect the value of the Portfolio's
portfolio 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. The precise projection of short-term currency market movements is not
possible, and short-term hedging provides a means of fixing the dollar value of
only a portion of the Portfolio's foreign assets.
While the Portfolio may enter forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Portfolio may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for the
Portfolio than if it had not engaged in any such transactions. Moreover, there
may be imperfect correlation between the Portfolio's holdings of securities
denominated in a particular currency and forward contracts entered into by the
Portfolio. Such imperfect correlation may cause the Portfolio to sustain losses
which will prevent it from achieving a complete hedge or expose it to risk of
foreign exchange loss.
The Portfolio generally will not enter into a forward contract with a
term of greater than one year. The Portfolio may experience delays in the
settlement of its foreign currency transactions.
When the Portfolio engages in forward contracts for the sale or
purchase of currencies, the Portfolio will either cover its position or
establish a segregated account. The Portfolio will consider its position covered
if it has securities in the currency subject to the forward contract, or
otherwise has the right to obtain that currency at no additional cost. In the
alternative, the Portfolio will place cash, fixed income, or equity securities
(denominated in the foreign currency subject to the forward contract) in a
separate account. The amounts in such separate account will equal the value of
the Portfolio's assets which are committed to the consummation of foreign
currency exchange contracts. If the value of the securities placed in the
separate account declines, the Portfolio will place additional cash or
securities in the account on a daily basis so that the value of the account will
equal the amount of its commitments with respect to such contracts.
For an additional discussion of forward foreign currency exchange
contracts and their risks, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Currency Futures and Related Options. The Portfolio may enter into
currency futures contracts and options on such futures contracts in domestic and
foreign markets. The Portfolio may sell a currency futures contract or a call
option, or it may purchase a put option on such futures contract, if the
Sub-advisor anticipates that exchange rates for a particular currency will fall.
Such a transaction will be used as a hedge (or, in the case of a sale of a call
option, a partial hedge) against a decrease in the value of the Portfolio's
securities denominated in such currency. If the Sub-advisor anticipates that
exchange rates will rise, the Portfolio may purchase a currency futures contract
or a call option to protect against an increase in the price of securities which
are denominated in a particular currency and which the Portfolio intends to
purchase. The Portfolio will use these futures contracts and related options for
hedging purposes. The Portfolio may also purchase a currency futures contract,
or a call option thereon, for non-hedging purposes (i.e., in an effort to
enhance income) when the Sub-advisor anticipates that a particular currency will
appreciate in value, but securities denominated in that currency do not present
an attractive investment and are not included in the Portfolio's portfolio.
The sale of a currency futures contract creates an obligation by the
Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a specified price. The purchase of a
currency futures contract creates an obligation by the 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. To close out a currency futures
contract sold by the Portfolio, the Portfolio may purchase a currency futures
contract for the same aggregate amount of currency and same delivery date. If
the price in the sale exceeds the price in the offsetting purchase, the
Portfolio is immediately paid the difference. Similarly, to close out a currency
futures contract purchased by the Portfolio, the Portfolio sells a currency
futures contract. If the offsetting sale price exceeds the purchase price, the
Portfolio realizes a gain. Likewise, if the offsetting sale price is less than
the purchase price, the Portfolio realizes a loss.
Unlike a currency futures contract, which requires the parties to buy
and sell currency on a set date, an option on a 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 lost. For the holder of an option, there are no daily payments
of cash for "variation" or "maintenance" margin payments to reflect the change
in the value of the underlying contract as there are by a purchaser or seller of
a currency futures contract.
A risk in employing currency futures contracts to protect against price
volatility of portfolio securities which are denominated in a particular
currency is that the prices of such securities subject to currency futures
contracts may not completely correlate with the behavior of the cash prices of
the Portfolio's securities. The correlation may be distorted by the fact that
the currency futures market may be dominated by short-term traders seeking to
profit from changes in exchange rates. This would reduce the value of such
contracts used for hedging purposes over a short-term period. Such distortions
are generally minor and would diminish as the contract approached maturity.
Another risk is that the Sub-advisor could be incorrect in its expectation as to
the direction or extent of various exchange rate movements or the time span
within which the movements take place. When the Portfolio engages in the
purchase of currency futures contracts, an amount equal to the market value of
the currency futures contract (minus any required margin) will be deposited in a
segregated account of securities, cash, or cash equivalents to collateralize the
position and thereby limit the use of such futures contracts.
Put and call options on currency futures have characteristics similar
to those of other options. In addition to the risks associated with investing in
options on securities, however, there are particular risks associated with
transactions in options on currency futures. In particular, the ability to
establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market for such options.
Options on Foreign Currencies. The Portfolio may write and purchase
covered call and put options on foreign currencies in amounts not exceeding 5%
of its net assets for the purpose of protecting against declines in the U.S.
dollar value of portfolio securities or increases in the U.S.-dollar cost of
securities to be acquired, or to protect the dollar equivalent of dividend,
interest, or other payment on those securities. A decline in the dollar value of
a foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such decreases in the value of
portfolio securities, the Portfolio may purchase put options on the foreign
currency. If the value of the currency declines, the Portfolio will have the
right to sell such currency for a fixed amount of dollars which exceeds the
market value of such currency. This would result in a gain that may offset, in
whole or in part, the negative effect of currency depreciation on the value of
the Portfolio's securities denominated in that currency.
Conversely, if the dollar value of a currency in which securities to be
acquired by the Portfolio are denominated rises, thereby increasing the cost of
such securities, the Portfolio may purchase call options on such currency. If
the value of such currency increases sufficiently, the Portfolio will have the
right to purchase that currency for a fixed amount of dollars which is less than
the market value of that currency. Such a purchase would result in a gain that
may offset, at least partially, the effect of any currency-related increase in
the price of securities the Portfolio intends to acquire.
As in the case of other types of options transactions, however, the
benefit the Portfolio derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging
purposes. For example, if the Sub-advisor anticipates a decline in the dollar
value of foreign currency denominated securities because of declining exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the decrease in value of portfolio securities will be
offset, at least in part, by the amount of the premium received by the
Portfolio.
Similarly, the Portfolio could write a put option on the relevant
currency, instead of purchasing a call option, to hedge against an anticipated
increase in the dollar cost of securities to be acquired. If exchange rates move
in the manner projected, the put option most likely will not be exercised, and
such increased cost will be offset, at least in part, by the amount of the
premium received. However, as in the case of other types of options
transactions, the writing of a foreign currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the
expected direction.
If unanticipated exchange rate fluctuations occur, a put or call option
may be exercised and the Portfolio could be required to purchase or sell the
underlying currency at a loss which may not be fully offset by the amount of the
premium. As a result of writing options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in currency exchange
rates. Certain options on foreign currencies are traded on the OTC market and
involve liquidity and credit risks that may not be present in the case of
exchange-traded currency options.
The Portfolio may purchase call options on currency for non-hedging
purposes when the Sub-advisor anticipates that the currency will appreciate in
value, but the securities denominated in that currency do not present attractive
investment opportunities and are not included in the Portfolio's portfolio. The
Portfolio may write (sell) put and covered call options on any currency in order
to realize greater income than would be realized on portfolio securities alone.
However, in writing covered call options for additional income, the Portfolio
may forego the opportunity to profit from an increase in the market value of the
underlying currency. Also, when writing put options, the Portfolio accepts, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
The Portfolio would normally purchase call options for non-hedging
purposes in anticipation of an increase in the market value of a currency. The
Portfolio would ordinarily realize a gain if, during the option period, the
value of such currency exceeded the sum of the exercise price, the premium paid
and transaction costs. Otherwise the Portfolio would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by the
Portfolio for the purpose of benefiting from a decline in the value of
currencies which it does not own. The Portfolio would ordinarily realize a gain
if, during the option period, the value of the underlying currency decreased
below the exercise price sufficiently to more than cover the premium and
transaction costs. Otherwise the Portfolio would realize either no gain or a
loss on the purchase of the put option.
A call option written on foreign currency by the Portfolio is "covered"
if the Portfolio owns the underlying foreign currency subject to the call, or if
it has an absolute and immediate right to acquire that foreign currency without
additional cash consideration. A call option is also covered if the Portfolio
holds a call on the same foreign currency for the same principal amount as the
call written where the exercise price of the call held is (a) equal to or less
than the exercise price of the call written or (b) greater than the exercise
price of the call written if the amount of the difference is maintained by the
Portfolio in cash, fixed income or equity securities in a segregated account
with its custodian.
The risks of currency options are similar to the risks of other
options, as discussed above and in this Statement under "Certain Risk Factors
and Investment Methods."
Cover for Futures, Options on Futures, Options on Securities and
Indices, Forward Contracts, and Options on Foreign Currencies ("Hedging
Instruments"). The Portfolio will comply with SEC staff guidelines regarding
"cover" for Hedging Instruments and, if the guidelines so require, set aside in
a segregated account with its custodian the prescribed amount of cash, fixed
income, or equity securities. Securities held in a segregated account cannot be
sold while the futures, option, or forward strategy covered by those securities
is outstanding, unless they are replaced with other suitable assets. As a
result, segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet current obligations. The
Portfolio may be unable promptly to dispose of assets that cover, or are
segregated with respect to, an illiquid options or forward position; this
inability may result in a loss to the Portfolio.
Forward Commitments and When-Issued Securities. The Portfolio may
purchase securities on a when-issued basis, that is, by committing to purchase
securities (to secure an advantageous price and yield at the time of the
commitment) and completing the purchase by making payment against delivery of
the securities at a future date. The Portfolio also may purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities at a future date
(ordinarily within two months although the Portfolio may agree to a longer
settlement period). The price of the underlying securities (usually expressed in
terms of yield) and the date when the securities will be delivered and paid for
(the settlement date) are fixed at the time the transaction is negotiated.
When-issued purchases and forward commitment transactions are negotiated
directly with the other party, and such commitments are not traded on exchanges.
When-issued purchases and forward commitment transactions enable the
Portfolio to "lock in" what the Sub-advisor believes to be an attractive price
or yield on a particular security for a period of time, regardless of future
changes in interest rates. For instance, in periods of rising interest rates and
falling prices, the Portfolio might sell securities it owns on a forward
commitment basis to limit its exposure to falling prices. In periods of failing
interest rates and rising prices, the Portfolio might purchase a security on a
when-issued or forward commitment basis and sell a similar security to settle
such purchase, thereby obtaining the benefit of currently higher yields.
The value of securities purchased on a when-issued or forward
commitment basis and any subsequent fluctuations in their value are reflected in
the computation of the Portfolio's net asset value starting on the date of the
agreement to purchase the securities. Because the Portfolio has not yet paid for
the securities, this produces an effect similar to leverage. The Portfolio does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When the Portfolio makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Portfolio's assets. Fluctuations in the market
value of the underlying securities are not reflected in the Portfolio's net
asset value as long as the commitment to sell remains in effect.
The Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, the
Portfolio may dispose of or renegotiate a commitment after it has been entered
into. The Portfolio also may sell securities it has committed to purchase before
those securities are delivered to the Portfolio on the settlement date. The
Portfolio may realize a capital gain or loss in connection with these
transactions.
When the Portfolio purchases securities on a when-issued basis, it will
deposit, in a segregated account with its custodian, until payment is made,
cash, fixed income, or equity securities having an aggregate market value
(determined daily to the extent required by SEC staff policy) at least equal to
the amount of the Portfolio's purchase commitments. In the case of a forward
commitment to sell portfolio securities, the custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. These procedures are designed to ensure that the Portfolio will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases and forward commitments.
Short Sales Against-the-Box. The Portfolio may make short sales
against-the-box. To effect a short sale, the Portfolio will borrow a security
from a brokerage firm to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed at a later date. A short sale is
"against-the-box" when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount of
securities sold short. Short sales against-the-box allow the Portfolio to hedge
against price fluctuations by locking in a sale price for securities it does not
wish to sell immediately.
Preferred Stock. The Portfolio may invest in preferred stock. Unlike
interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors, although preferred
shareholders may have certain rights if dividends are not paid. Shareholders may
suffer a loss of value if dividends are not paid, and generally have no legal
recourse against the issuer. The market prices of preferred stocks are generally
more sensitive to changes in the issuer's creditworthiness than are the prices
of debt securities.
Fixed Income Securities. The Portfolio may invest in money market
instruments, U.S. Government or Agency securities, and corporate bonds and
debentures receiving one of the four highest ratings from Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or any other
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by any NRSRO, deemed comparable by the Sub-advisor to such rated
securities ("Comparable Unrated Securities"). In addition, the Portfolio may
invest up to 10% of its net assets, measured at the time of investment, in
corporate debt securities rated below investment grade or Comparable Unrated
Securities, but may not invest in securities rated below C by Moody's or S&P or
Comparable Unrated Securities. The ratings of an NRSRO represent its opinion as
to the quality of securities it undertakes to rate. Ratings are not absolute
standards of quality; consequently, securities with the same maturity, coupon,
and rating may have different yields. Although the Portfolio may rely on the
ratings of any NRSRO, the Portfolio mainly refers to ratings assigned by S&P and
Moody's, which are described in Appendix A to this Statement.
Fixed income securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations ("credit
risk") and also may be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity ("market risk"). Lower-rated securities are
more likely to react to developments affecting market and credit risk than are
more highly rated securities, which react primarily to movements in the general
level of interest rates.
Changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuer of such securities to make principal and interest payments than is the
case for higher-grade debt securities. An economic downturn affecting the issuer
may result in an increased incidence of default. The market for lower-rated
securities may be thinner and less active than for higher-rated securities.
Pricing of thinly traded securities requires greater judgment than pricing of
securities for which market transactions are regularly reported.
If the quality of any fixed income securities held by the Portfolio
deteriorates so that they are no longer rated at least C by Moody's or S&P, or,
if unrated, are determined by the Sub-advisor to no longer be of comparable
quality, the Portfolio will engage in an orderly disposition of the securities
to the extent necessary to ensure that the Portfolio's holding of such
securities will not exceed 5% of its net assets.
Convertible Securities. The Portfolio may invest in convertible
securities of any quality. A convertible security entitles the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities ordinarily provide a stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower than the yield on non-convertible debt. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation's capital structure. The value
of a convertible security is a function of (1) its yield in comparison with the
yields of other securities of comparable maturity and quality that do not have a
conversion privilege, and (2) its worth, at market value, if converted into the
underlying common stock. Convertible debt securities are subject to the
Portfolio's investment policies and limitations concerning fixed-income
investments.
Convertible securities are typically issued by smaller companies whose
stock prices may be volatile. The price of a convertible security often reflects
such variations in the price of the underlying common stock in a way that
nonconvertible debt does not. A convertible security may be subject to
redemption at the option of the issuer at a price established in the security's
governing instrument. If a convertible security held by the Portfolio is called
for redemption, the Portfolio will be required to convert it into the underlying
common stock, sell it to a third party or permit the issuer to redeem the
security. Any of these actions could have an adverse effect on the Portfolio's
ability to achieve its investment objective.
Zero Coupon Securities. The Portfolio may invest in zero coupon
securities, which are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or specify a future date when the
securities begin paying current interest. Rather, they are issued and traded at
a discount from their face amount or par value, which discount varies depending
on prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do other types of
debt securities having similar maturities and credit quality.
Commercial Paper. Commercial paper is a short-term debt security issued
by a corporation, bank, municipality, or other issuer, usually for purposes such
as financing current operations. The Portfolio may invest only in commercial
paper receiving the highest rating from S&P (A-1) or Moody's (P-1), or deemed by
the Sub-advisor to be of equivalent quality.
The Portfolio may invest in commercial paper that cannot be resold to
the public because it was issued under the exception for private offerings in
Section 4(2) of the Securities Act of 1933. While such securities normally will
be considered illiquid and subject to the Portfolio's 15% limitation on
investments in illiquid securities, the Sub-advisor may in certain cases
determine that such paper is liquid under guidelines established by the Board of
Trustees.
Banking and Savings Institution Securities. The Portfolio may invest in
banking and savings institution obligations, which include CDs, time deposits,
bankers' acceptances, and other short-term debt obligations issued by savings
institutions. CDs are receipts for funds deposited for a specified period of
time at a specified rate of return; time deposits generally are similar to CDs,
but are uncertificated; and bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
commercial transactions. The CDs, time deposits, and bankers' acceptances in
which the Portfolio invests typically are not covered by deposit insurance.
Investment Policies Which May be Changed Without Shareholder Approval.
The following limitations are applicable to the AST Neuberger Berman Mid-Cap
Growth Portfolio. These limitations are not fundamental restrictions and can be
changed without shareholder approval.
1. The Portfolio may not purchase securities if outstanding borrowings,
including any reverse repurchase agreements, exceed 5% of its total assets.
2. Except for the purchase of debt securities and engaging in
repurchase agreements, the Portfolio may not make any loans other than
securities loans.
3. The Portfolio may not purchase securities on margin from brokers,
except that the Portfolio may obtain such short-term credits as are necessary
for the clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin and shall not be deemed to
violate the foregoing limitation.
4. The Portfolio may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold without payment of additional consideration. Transactions in futures
contracts and options shall not constitute selling securities short.
5. The Portfolio may not purchase any security if, as a result, more
than 15% of its net assets would be invested in illiquid securities. Illiquid
securities include securities that cannot be sold within seven days in the
ordinary course of business for approximately the amount at which the Portfolio
has valued the securities, such as repurchase agreements maturing in more than
seven days.
AST Oppenheimer Large-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation. The Portfolio does not invest to seek current income.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor evaluates
the merits of securities primarily through the exercise of its own investment
analysis. This may include, among other things, evaluation of the history of the
issuer's operations, prospects for the industry of which the issuer is part, the
issuer's financial condition, the issuer's pending product developments and
developments by competitors, the effect of general market and economic
conditions on the issuer's business, and legislative proposals or new laws that
might affect the issuer. Current income is not a consideration in the selection
of securities for the Portfolio, whether for appreciation, defensive or
liquidity purposes. The fact that a security has a low yield or does not pay
current income will not be an adverse factor in selecting securities to try to
achieve the Portfolio's investment objective of capital appreciation unless the
Sub-advisor believes that the lack of yield might adversely affect appreciation
possibilities.
The portion of the Portfolio's assets allocated to securities and
methods selected for capital appreciation will depend upon the judgment of the
Sub-advisor as to the future movement of the equity securities markets. If the
Sub-advisor believes that economic conditions favor a rising market, the
Portfolio will emphasize securities and investment methods selected for high
capital growth.
Foreign Securities. The Portfolio may invest in securities (which may be
denominated in U.S. dollars or non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (described below) and
foreign governments or their agencies or instrumentalities and in securities
issued by U.S. corporations denominated in non-U.S. currencies. The types of
foreign debt obligations and other securities in which the Portfolio may invest
are the same types of debt and equity securities identified in the Prospectus.
Foreign securities include equity and debt securities of companies
organized under the laws of countries other than the United States and debt
securities of foreign governments that are traded on foreign securities
exchanges or in the foreign over-the-counter markets, as well as American
Depository Receipts that are listed on a U.S. securities exchange or traded in
the U.S. over-the-counter markets. However, American Depository Receipts are not
subject to some of the special considerations and risks that apply to foreign
securities traded and held abroad.
Investing in foreign securities offers potential benefits not available
from investing solely in securities of domestic issuers, including the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets.
Investing in foreign securities involves special additional risks and
considerations not typically associated with investing in securities of issuers
traded in the U.S. From time to time, U.S. Government policies have discouraged
certain investments abroad by U.S. investors, through taxation or other
restrictions, and it is possible that such restrictions could be re-imposed. For
an additional discussion of foreign investing and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Illiquid and Restricted Securities. The Portfolio may invest in
illiquid and restricted securities. Illiquid securities include repurchase
agreements maturing in more than seven days, or certain participation interests
other than those puts exercisable within seven days. Under the guidelines
established by the Trust's Board of Trustees, the Sub-advisor determines the
liquidity of certain of the Portfolio's investments. The Sub-advisor monitors
holdings of illiquid securities on an ongoing basis and at times the Fund may be
required to sell some holdings to maintain adequate liquidity.
The Portfolio has percentage limitations that apply to purchases of
illiquid securities, as stated in the Prospectus. Those percentage restrictions
do not limit purchases of restricted securities that are eligible for sale to
qualified institutional purchasers pursuant to Rule 144A under the Securities
Act of 1933, provided that those securities have been determined to be liquid by
the Board of Trustees of the Trust or by the Sub-advisor under Board-approved
guidelines. Those guidelines take into account the trading activity for such
securities and the availability of reliable pricing information, among other
factors. If there is a lack of trading interest in a particular Rule 144A
security, the Portfolio's holding of that security may be considered illiquid.
For an additional discussion of illiquid and restricted securities and certain
risks involved therein, see the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Loans of Portfolio Securities. The Portfolio may lend its portfolio
securities subject to the restrictions stated in the Prospectus under "Certain
Risk Factors and Investment Methods." Repurchase transactions are not considered
"loans" for the purpose of the Portfolio's limit on the percentage of its assets
that can be loaned. In a portfolio securities lending transaction, the Portfolio
receives from the borrower an amount equal to the interest paid or the dividends
declared on the loaned securities during the term of the loan as well as the
interest on the collateral securities, less any finders', administrative or
other fees the Portfolio pays in connection with the loan. The terms of the
Portfolio's loans must meet applicable tests under the Internal Revenue Code and
must permit the Portfolio to reacquire loaned securities, generally within the
customary settlement period, in time to vote on any important matter. For an
additional discussion of securities lending and certain risks involved therein,
see the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Portfolio may acquire securities subject to
repurchase agreements for liquidity purposes to meet anticipated redemptions, or
pending the investment of the proceeds from sales of Portfolio shares, or
pending the settlement of purchases of Portfolio securities. In a repurchase
transaction, the Portfolio acquires a security from, and simultaneously agrees
to resell it to, an approved vendor. An "approved vendor" is a U.S. commercial
bank or the U.S. branch of a foreign bank or a broker-dealer that has been
designated a primary dealer in government securities, which must meet credit
requirements set forth in guidelines established by the Trust's Board of
Trustees. Repurchase agreements are similar to loans collateralized by the
underlying security. The Portfolio's repurchase agreements require that at all
times while the repurchase agreement is in effect, the value of the collateral
must equal or exceed the repurchase price to fully collateralize the repayment
obligation. Additionally, the Sub-advisor will continuously monitor the
collateral's value. For an additional discussion of repurchase agreements and
certain risks and regulatory limits involved therein, see the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Hedging with Futures Contracts. The Portfolio may use hedging
instruments for the purposes described in the Prospectus. When hedging to
attempt to protect against declines in the market value of the Portfolio's
portfolio, or to permit the Portfolio to protect unrealized gains on portfolio
securities that have appreciated, or to facilitate selling securities for
investment reasons, the Portfolio may sell financial futures. When hedging to
establish a position in the equities market as a temporary substitute for the
purchase of individual equity securities, the Portfolio may buy futures.
Normally, the Portfolio may thereafter purchase the equity securities and
terminate the hedging position.
The Portfolio's strategy of hedging with futures will be incidental to
the Portfolio's investment activities in the underlying cash market. In the
future, the Portfolio may employ hedging instruments and strategies that are not
presently contemplated but which may be developed, to the extent such investment
methods are consistent with the Portfolio's investment objective, and are
legally permissible and disclosed in the Prospectus. Additional information
about the hedging instruments the Portfolio may use is provided below.
The Portfolio may buy and sell futures contracts related to financial
indices, including stock indices. Financial indices cannot be purchased or sold
directly. All futures transactions are effected through a clearinghouse
associated with the exchange on which the contracts are traded. For an
additional discussion on futures, including certain risks involved therein, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Regulatory Aspects of Futures. The Portfolio is required to
operate within certain guidelines and restrictions with respect to its use of
futures and options on futures established by the Commodity Futures Trading
Commission ("CFTC"). In addition, due to requirements under the Investment
Company Act of 1940 (the "Investment Company Act"), when the Portfolio purchases
a stock index future, the Portfolio will identify on the Trust's records, liquid
assets in an amount equal to the market value of the securities underlying such
future, less the margin deposit applicable to it. For an additional discussion
on the regulatory aspects of hedging instruments, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Risks of Hedging with Futures. Selling futures to attempt to
protect against declines in the values of the portfolio's securities involves
the risk that the prices of the futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of the Portfolio's securities.
To compensate for the imperfect correlation of movements in the price of the
securities being hedged and movements in the price of the hedging instruments,
the Portfolio may use hedging instruments 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 more than the historical volatility of
the applicable index.
If the Portfolio uses hedging instruments to establish a position in
the equities markets as a temporary substitute for the purchase of individual
equity securities (long hedging) by buying futures, it is possible that the
market may decline. If the Portfolio then concludes not to invest in equity
securities at that time because of concerns as to a possible further market
decline or for other reasons, the Portfolio will realize a loss on the hedging
instruments that is not offset by a reduction in the price of the equity
securities purchased. For an additional discussion of hedging instruments,
including certain risks involved therein, see this Statement under "Certain Risk
Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the AST Oppenheimer Large-Cap Growth
Portfolio. This limitation is not a "fundamental" restriction and may be changed
by the Trustees without shareholder approval.
The Portfolio will not invest in interests in oil, gas, or other
mineral exploration or development programs.
AST Kemper Small-Cap Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
maximum appreciation of investors' capital from a portfolio primarily of growth
stocks of smaller companies.
Investment Policies:
Options. The Portfolio may write (sell) call options on securities as
long as it owns the underlying securities subject to the option, or an option to
purchase the same underlying securities having an exercise price equal to or
less than the exercise price of the option, or will establish and maintain with
the Portfolio's custodian for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. The Portfolio may write put options provided that, so long as the
Portfolio is obligated as the writer of the option, the Portfolio owns an option
to sell the underlying securities subject to the option having an exercise price
equal to or greater than the exercise price of the option, or it deposits and
maintains with the custodian in a segregated account eligible securities having
a value equal to or greater than the exercise price of the option. The premium
received for writing an option will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to such market price, the price volatility of the underlying security, the
option period, supply and demand and interest rates. The Portfolio may write or
purchase spread options, which are options for which the exercise price may be a
fixed dollar spread or yield spread between the security underlying the option
and another security that is used as a benchmark. The exercise price of an
option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
If a secured put option expires unexercised, the writer realizes a gain
from the amount of the premium, plus the interest income on the securities in
the segregated account. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received and
any interest income earned on the securities in the segregated account.
For an additional discussion of investing in options and the risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Over-the-Counter Options. The Portfolio may deal in
over-the-counter traded options ("OTC options"). Unlike exchange-traded options,
OTC options are transacted directly with dealers and not with a clearing
corporation. Since there is no exchange, pricing is normally done by reference
to information from market makers, which information is carefully monitored by
the Sub-advisor and verified in appropriate cases.
The staff of the Securities and Exchange Commission ("SEC") takes the
position that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities. Accordingly, the Portfolio will only engage
in OTC options transactions with dealers that have been specifically approved by
the Sub-advisor. The Sub-advisor believes that the approved dealers should be
able to enter into closing transactions if necessary and, therefore, present
minimal credit risks to the Portfolio. The Sub-advisor will monitor the
creditworthiness of the approved dealers on an on-going basis. The Portfolio
currently will not engage in OTC options transactions if the amount invested by
the Portfolio in OTC options, plus a "liquidity charge" related to OTC options
written by the Portfolio, plus the amount invested by the Portfolio in other
illiquid securities, would exceed 15% of the Portfolio's net assets. The
"liquidity charge" referred to above is computed as described below.
The Portfolio anticipates entering into agreements with dealers to
which the Portfolio sells OTC options. Under these agreements the Portfolio
would have the absolute right to repurchase the OTC options from the dealer at
any time at a price no greater than a price established under the agreements
(the "Repurchase Price"). The "liquidity charge" referred to above for a
specific OTC option transaction will be the Repurchase Price related to the OTC
option less the intrinsic value of the OTC option. The intrinsic value of an OTC
call option for such purposes will be the amount by which the current market
value of the underlying security exceeds the exercise price. In the case of an
OTC put option, intrinsic value will be the amount by which the exercise price
exceeds the current market value of the underlying security. If there is no such
agreement requiring a dealer to allow the Portfolio to repurchase a specific OTC
option written by the Portfolio, the "liquidity charge" will be the current
market value of the assets serving as "cover" for such OTC option.
Options on Securities Indices. The Portfolio, as part of its
options transactions, may also use options on securities indices in an attempt
to hedge against market conditions affecting the value of securities that the
Portfolio owns or intends to purchase, and not for speculation. When the
Portfolio writes an option on a securities index, it will be required to deposit
with its custodian and mark-to-market eligible securities to the extent required
by applicable regulation. In addition, where the Portfolio writes a call option
on a securities index at a time when the contract value exceeds the exercise
price, the Portfolio will segregate and mark-to-market, until the option expires
or is closed out, cash or cash equivalents equal in value to such excess. The
Portfolio may also purchase and sell options on indices other than securities
indices, as available, such as foreign currency indices. Index options involve
risks similar to those risks relating to transactions in financial futures
contracts described below.
For an additional discussion of investing in OTC options and options on
securities indices, and the risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Financial Futures Contracts and Related Options. The Portfolio may
enter into financial futures contracts. This investment technique is designed
primarily to hedge (i.e. protect) against anticipated future changes in market
conditions or foreign exchange rates which otherwise might affect adversely the
value of securities or other assets which the Portfolio holds or intends to
purchase. At the time of delivery, in the case of fixed income securities
pursuant to the contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than that
specified in the contract. In some cases, securities to be delivered under a
futures contract may not have been issued at the time the contract was written.
The Portfolio may purchase and write call and put options on financial
futures contracts. Options on futures contracts involve risks similar to those
risks relating to transactions in financial futures contracts. For an additional
discussion of investing in financial futures contracts and options on financial
futures contracts and the risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Collateralized Obligations. The Portfolio may invest in asset-backed
and mortgage-backed securities, including interest only ("IO") and principal
only ("PO") securities (collectively, "collateralized obligations"). A
collateralized obligation is a debt security issued by a corporation, trust or
custodian, or by a U.S. Government agency or instrumentality, that is
collateralized by a portfolio or pool of mortgages, mortgage pass-through
securities, U.S. Government securities or other assets. Collateralized
obligations, depending on their structure and the rate of prepayments, can be
volatile.
The Portfolio will currently invest in only those collateralized
obligations that are fully collateralized and that meet the quality standards
otherwise applicable to the Portfolio's investments. Fully collateralized means
that the collateral will generate cash flows sufficient to meet obligations to
holders of the collateralized obligations under even the most conservative
prepayment and interest rate projections. Thus, the collateralized obligations
are structured to anticipate a worst case prepayment condition and to minimize
the reinvestment rate risk for cash flows between coupon dates for the
collateralized obligations. A worst case prepayment condition generally assumes
immediate prepayment of all securities purchased at a premium and zero
prepayment of all securities purchased at a discount. Reinvestment rate risk may
be minimized by assuming very conservative reinvestment rates and by other means
such as by maintaining the flexibility to increase principal distributions in a
low interest rate environment. The effective credit quality of the
collateralized obligations in such instances is the credit quality of the issuer
of the collateral. The requirements as to collateralization are determined by
the issuer or sponsor of the collateralized obligation in order to satisfy
rating agencies, if rated. The Portfolio does not currently intend to invest
more than 5% of its total assets in collateralized obligations.
Because some collateralized obligations are issued in classes with
varying maturities and interest rates, the investor may obtain greater
predictability of maturity through these collateralized obligations than through
direct investments in mortgage pass-through securities. Classes with shorter
maturities may have lower volatility and lower yield while those with longer
maturities may have higher volatility and higher yield. Payments of principal
and interest on the underlying collateral securities are not passed through
directly to the holders of these collateralized obligations. Rather, the
payments on the underlying portfolio or pool of obligations are used to pay
interest on each class and to retire successive maturities in sequence. These
relationships may in effect "strip" the interest payments from principal
payments of the underlying obligations and allow for the separate purchase of
either the interest or the principal payments, sometimes called interest only
("IO") and principal only ("PO") securities. By investing in IOs and POs, an
investor has the option to select from a pool of underlying collateral the
portion of the cash flows that most closely corresponds to the investor's
forecast of interest rate movements.
Collateralized obligations are designed to be retired as the underlying
obligations are repaid. In the event of prepayment on or call of such
securities, the class of collateralized obligation first to mature generally
will be paid down first. Although in most cases the issuer of collateralized
obligations will not supply additional collateral in the event of such
prepayment, there generally will be sufficient collateral to secure
collateralized obligations that remain outstanding. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of the
Portfolio's limitation on illiquid securities unless they are determined to be
liquid under guidelines established by the Board of Trustees.
In reliance on an interpretation by the SEC, the Portfolio's
investments in certain qualifying collateralized obligations are not subject to
the limitations in the 1940 Act regarding investments by a registered investment
company, such as the Portfolio, in another investment company.
The Portfolio may also invest in "inverse floaters." These inverse
floaters are more volatile than conventional fixed or floating rate
collateralized obligations, and their yield and value will fluctuate in inverse
proportion to changes in the index upon which rate adjustments are based. As a
result, the yield on an inverse floater will generally increase when market
yields (as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the extent
of anticipated changes in market rates of interest. Generally, inverse floaters
provide for interest rate adjustments based upon a multiple of the specified
interest index, which further increases their volatility. The degree of
additional volatility will be directly proportional to the size of the multiple
used in determining interest rate adjustments. Currently, the Portfolio does not
intend to invest more than 5% of its net assets in inverse floaters.
For an additional discussion of investing in collateralized obligations
and the risks involved therein, 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 AST Kemper Small-Cap Growth
Portfolio. These limitations are not "fundamental" restrictions and may be
changed without shareholder approval.
The Portfolio will not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in compliance
with the 1940 Act.
3. Invest more than 15% of its net assets in illiquid securities.
<PAGE>
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 AST Lord Abbett Growth and Income
Portfolio, the AST JanCap Growth Portfolio, the AST Money Market Portfolio, the
AST Federated High Yield Portfolio, the AST INVESCO Equity Income Portfolio, the
AST PIMCO Total Return Bond Portfolio, and the AST PIMCO Limited Maturity Bond
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 AST Lord Abbett Growth and
Income Portfolio:
1. The Portfolio will not purchase a security if as a result, that
Portfolio would own more than 10% of the outstanding voting securities of any
issuer.
2. The Portfolio will not lend money or securities to any person except
through entering into short-term repurchase agreements with sellers of
securities the Portfolio has purchased, and through lending Portfolio securities
to registered broker-dealers where the loan is 100% secured by cash or its
equivalent as long as the Portfolio complies with regulatory requirements and
the Sub-advisor deems such loans not to expose the Portfolio to significant risk
or adversely affect the Portfolio's qualification for pass-through tax treatment
under the Internal Revenue Code (investment in repurchase agreements exceeding 7
days and in other illiquid investments is limited to a maximum of 10% of
Portfolio net assets).
3. The Portfolio will not pledge, mortgage, or hypothecate its assets --
however, this provision does not apply to the grant of escrow receipts or the
entry into other similar escrow arrangements arising out of the writing of
covered call options.
4. The Portfolio will not purchase securities of any issuer unless it or
its predecessor has a record of three years' continuous operation, except that
the Portfolio may purchase securities of such issuers through subscription
offers or other rights it receives as a security holder of companies offering
such subscriptions or rights, and such purchases will then be limited in the
aggregate to 5% of the Portfolio's net assets at the time of investment.
5. The Portfolio will not concentrate its investments in any one industry
(the Portfolio's investment policy of keeping its assets in those securities
which are selling at the most reasonable prices in relation to value normally
results in diversification among many industries -- consistent with this, the
Portfolio does not intend to invest more than 25% of its assets in any one
industry classification used by the Sub-advisor for investment purposes,
although such concentration could, under unusual economic and market conditions,
amount to 30% or conceivably somewhat more).
6. The Portfolio will not borrow money except from banks and then in
amounts not in excess of 33 1/3% of its total assets. The Portfolio may borrow
at prevailing interest rates and invest the Portfolios in additional securities.
The Portfolio's borrowings are limited so that immediately after such borrowing
the value of the Portfolio's assets (including borrowings) less its liabilities
(not including borrowings) is at least three times the amount of the borrowings.
Should the Portfolio, for any reason, have borrowings that do not meet the above
test then, within three business days, the Portfolio must reduce such borrowings
so as to meet the necessary test. Under such a circumstance, the Portfolio have
to liquidate securities at a time when it is disadvantageous to do so.
7. The Portfolio will not make short sales except short sales made "against
the box" to defer recognition of taxable gains or losses.
8. The Portfolio will not purchase or sell real estate (although it may
purchase securities secured by real estate interests or interests therein, or
issued by companies or investment trusts which invest in real estate or
interests therein).
9. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
10. The Portfolio will not purchase a security if as a result, more than 5%
of the value of that Portfolio's assets, at market value, would be invested in
the securities of issuers which, with their predecessors, have been in business
less than three years.
Investment Restrictions Applicable Only to the AST 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 AST 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 AST 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 AST 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 AST 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 AST 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 AST 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 AST 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 Baseline, 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 AST 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 AST 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 AST 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 AST American 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 AST American 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 AST Lord Abbett Small Cap Value
Portfolio, the AST Janus Small-Cap Growth Portfolio, the AST Cohen & Steers
Realty Portfolio, the AST Stein Roe Venture Portfolio, the AST Bankers Trust
Enhanced 500 Portfolio, the AST Marsico Capital Growth Portfolio, the AST
Neuberger Berman Mid-Cap Value Portfolio, the AST Neuberger Berman Mid-Cap
Growth Portfolio, the AST Oppenheimer Large-Cap Growth Portfolio and the AST
Kemper Small-Cap 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 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.
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 AST Cohen & Steers Realty 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 AST Cohen & Steers Realty 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 AST Cohen & Steers Realty 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 AST Cohen & Steers Realty 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 the 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.
<PAGE>
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.
<PAGE>
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.
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 instruments 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.
Forward Foreign Currency Exchange 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 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.
Currency Futures Contracts and Related Options. 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. Unlike forward foreign currency
exchange contracts, currency futures contracts and options on currency futures
contracts are standardized as to amount and delivery period and are traded on
boards of trade and commodities exchanges. 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.
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.
Securities Lending:
The Trust has made arrangements for certain Portfolios to lend
securities. While a Portfolio may earn additional income from lending
securities, such activity is incidental to the investment objective of the
Portfolio. In addition to the compensation payable by borrowers under securities
loans, a Portfolio would also earn income from the investment of cash collateral
for such loans. Any cash collateral received by a Portfolio in connection with
such loans normally will be invested in high-quality money market securities.
However, any losses resulting from the investment of cash collateral would be
borne by the lending Portfolio. There is no assurance that collateral for loaned
securities will be sufficient to provide for recovery of interest, dividends, or
other distributions paid in respect of loaned securities and not received by a
Portfolio or to pay all expenses incurred by a Portfolio in arranging the loans
or in exercising rights in the collateral in the event that loaned securities
are not returned.
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 AST Founders Passport Portfolio (formerly, the Seligman Henderson
International Small Cap Portfolio) for the years ended December 31, 1996 and
1997 were 133% and 73% respectively. 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 AST PIMCO Limited Maturity Bond Portfolio for the year ended December 31,
1996 was 247% and for the year ended December 31, 1997 was 54%. The Portfolio's
turnover rate decreased in 1997 as the Portfolio's growth slowed and the
consequent restructuring of its portfolio was completed early in the year. The
turnover rate for the AST Putnam Balanced Portfolio (formerly, the AST Phoenix
Balanced Asset Portfolio) for the years ended December 31, 1996 and 1997 were
276% and 170% 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 AST Oppenheimer Large-Cap Growth Portfolio was 77% for the period from
commencement of operations (May 2, 1996) to December 31, 1996, and 219% for the
year ended December 31, 1997. The portfolio turnover rate for the first partial
year of the Portfolio's operations was abnormally low, as the Sub-advisor
focused on investing incoming cash rather than selling portfolio securities. The
turnover rate for the AST Neuberger Berman Mid-Cap Growth Portfolio (formerly,
the Berger Capital Growth Portfolio) for the year ended December 31, 1996 was
156% and for the year ended December 31, 1997 was 305%. The Portfolio underwent
portfolio manager changes during 1997 (when it was managed by its prior
Sub-advisor, Berger Associates, Inc.), which resulted in higher portfolio
turnover.
The annual rates of turnover for the AST Janus Overseas Growth
Portfolio, the AST T. Rowe Price Small Company Value Portfolio, the AST American
Century International Growth Portfolio, the AST American 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%, 250%, 250% and 100%, respectively, under normal market conditions.
The annual rates of turnover for the AST Lord Abbett Small Cap Value Portfolio,
the AST Cohen & Steers Realty Portfolio, the AST Stein Roe Venture Portfolio,
the AST Bankers Trust Enhanced 500 Portfolio, and the AST Marsico Capital Growth
Portfolio, which were first publicly offered in December 1997 or January 1998,
are not anticipated to exceed 100%, 150%, 100%, 100%, and 100%, respectively,
under normal market conditions. The turnover rate for the AST Kemper Small-Cap
Growth Portfolio, which has not been publicly offered prior to the date of this
prospectus, is not anticipated to exceed [insert]% 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:
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Name, Office and Age Principal Occupation
John Birch+ Chief Operating Officer:
Vice President (48) American Skandia Investment Services, Incorporated
December 1997 to present
Executive Vice President and
Chief Operating Officer
International Fund Administration
Bermuda
August 1996 to October 1997
Senior Vice President and
Chief Administrative Officer
Gabelli Funds, Inc.
Rye, New York
March 1995 to August 1996
Executive Vice President
Kansallis Osake Pankki
New York, New York
May 1985 to March 1995
Gordon C. Boronow*+ President and Chief Operating Officer:
Vice President and Trustee (45) 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 (53) Skandia Insurance Company Ltd.
September 1986 to present
David E. A. Carson Chairman
Trustee (64) People's Bank
850 Main Street
Bridgeport, Connecticut 06604
Commencing January 1999
Chairman and Chief Executive Officer:
People's Bank
January 1998 to December 1998
President, Chairman and Chief Executive Officer:
People's Bank
1983 to December 1997
Richard G. Davy, Jr.*+ Vice President
Treasurer (50) (June 1997 to present)
Controller (September 1994 to June 1997)
American Skandia Investment
Services, Incorporated
Management Consultant
December 1991 to September 1994
Eric. C. Freed* Securities Counsel and Senior Counsel, Securities
Secretary (35) 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
Trustee (45)* Chief Financial Officer
American Skandia Life Assurance Corporation
April 1988 to present
Thomas M. O'Brien Vice Chairman
Trustee (48) 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 (63) 1101 Penn Grant Road
Lancaster, PA 17602
April 1985 to present
</TABLE>
* Interested person as defined in the 1940 Act.
+ Unless otherwise indicated, each officer and Trustee listed above has held
his/her principal occupation for at least the last five years. In addition to
the principal occupations noted above, the following officers and Trustees of
the Trust hold various positions with American Skandia Investment Services,
Incorporated ("ASISI"), the Trust's Investment Manager, and its affiliates,
including American Skandia Life Assurance Corporation ("ASLAC"), American
Skandia Marketing, Incorporated ("ASM"), American Skandia Information Services
and Technology Corporation ("ASIST") or American Skandia Investment Holding
Corporation ("ASIHC"): Mr. Boronow also serves as Executive Vice President,
Deputy Chief Executive Officer and a Director of ASIHC, and a Director of ASLAC,
ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President, Chief
Executive Officer and a Director of ASIHC, and Chief Executive Officer and a
Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director of
ASISI. Mr. Mazzaferro also serves as Executive Vice President and Chief
Financial Officer of ASIHC, ASM and ASIST, and President and Chief Financial
Officer of ASISI.
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, 1997 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 $45,500 $64,500
Julian A. Lerner 45,500 64,500
Thomas M. O'Brien 45,500 60,500
F. Don Schwartz 45,500 64,500
</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"). ASAF commenced operations in July, 1997 and ASMT
commenced operations in June, 1997.
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 1998 was as follows:
<TABLE>
<CAPTION>
Investment Management Fees
---------------------------- --------------------------- ---------------------------
1995 1996 1997
---------------------------- --------------------------- ---------------------------
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
AST Lord Abbett Growth and Income 1,059,567 2,881,119 5,424,483
AST JanCap Growth 2,977,217 5,726,567 11,384,457
AST Janus Overseas Growth 0 0 1,260,797
AST Janus Small-Cap Growth 486,749 1,240,016 2,219,824
AST Money Market 1,503,661 2,092,880 2,941,160
AST Federated High Yield 346,448 991,953 2,345,042
AST T. Rowe Price Asset Allocation 314,161 727,787 1,413,730
AST T. Rowe Price International Equity 1,412,350 3,011,378 4,640,262
AST T. Rowe Price Natural Resources 20,950 351,569 986,496
AST T. Rowe Price International Bond 276,299 595,953 941,760
AST T. Rowe Price Small Company Value 0 0 713,045
AST Founders Passport 76,285 778,018 1,257,908
AST INVESCO Equity Income 821,220 1,883,792 3.565.372
AST PIMCO Total Return Bond 652,311 1,895,849 2,979,876
AST PIMCO Limited Maturity Bond 100,949 1,239,854 1,649,461
AST Putnam International Equity 2,198,484 2,771,876 3,428,762
AST Putnam Balanced 1,107,736 1,828,306 2,387,734
AST Putnam Value Growth & Income 0 0 416,420
AST American Century Strategic Balanced 0 0 115,602
AST American Century International Growth 0 0 157,826
AST Marsico Capital Growth 0 0 1,568
AST Neuberger Berman Mid-Cap Value 601,598 764,844 886,649
AST Neuberger Berman Mid-Cap Growth 160,794 683,999 1,259,790
AST Oppenheimer Large-Cap Growth 0 117,917 1,501,894
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:
Sub-Advisory Fees
---------------------------- --------------------------- ---------------------------
1995 1996 1997
---------------------------- --------------------------- ---------------------------
AST Lord Abbett Growth and Income 705,288 1,736,325 3,018,989
AST JanCap Growth 1,869,411 3,451,651 6,261,619
AST Janus Overseas Growth 0 0 793,793
AST Janus Small-Cap Growth(1) 350,949 859,376 1,469,059
AST Money Market 501,220 697,446 885,676
AST Federated High Yield 210,529 448,151 899,181
AST T. Rowe Price Asset Allocation 166,105 301,555 503,303
AST T. Rowe Price International Equity 786,175 1,532,137 2,320,131
AST T. Rowe Price Natural Resources 13,967 208,022 548,053
AST T. Rowe Price International Bond(2) 165,779 315,293 470,880
AST T. Rowe Price Small Company Value 0 0 413,993
AST Founders Passport(3) 45,904 463,898 728,954
AST INVESCO Equity Income 482,833 979,103 1,763,840
AST PIMCO Total Return Bond 299,969 804,173 1,221,106
AST PIMCO Limited Maturity Bond 47,155 551,613 709,408
AST Putnam International Equity(4) 1,389,549 1,752,761 2,205,668
AST Putnam Balanced(5) 576,648 942,912 1,343,009
AST Putnam Value Growth & Income 0 0 249,852
AST American Century Strategic Balanced 0 0 68,001
AST American Century International Growth 0 0 110,478
AST Marsico Capital Growth 0 0 784
AST Neuberger Berman Mid-Cap Value(6) 306,916 374,935 425,687
AST Neuberger Berman Mid-Cap Growth(7) 116,002 427,236 734,388
AST Oppenheimer Large-Cap Growth(9) 0 70,750 892,079
</TABLE>
(1) For the fiscal years 1995, 1996 and 1997, the entire fee noted above was
paid to Founders Asset Management LLC, the prior Sub-advisor for the Portfolio.
(2) For fiscal year 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.
(3) For fiscal year 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. (4) For fiscal year
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. (5) For fiscal year 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. (6) For fiscal years 1995, 1996 and 1997, the entire fee noted above
was paid to Federated Investment Counseling, the prior Sub-advisor for the
Portfolio. (7) For fiscal years 1995, 1996 and 1997, the entire fee noted above
was paid to Berger Associates, Inc., the prior Sub-advisor for the Portfolio.
(8) For fiscal years 1996 and 1997, the entire fee noted above was paid to
Robertson, Stephens & Company Investment Management, L.P., the prior Sub-advisor
for the Portfolio.
<PAGE>
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:
AST Lord Abbett Growth and Income Portfolio: 1.25%
AST 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 AST 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.
AST Federated High Yield Portfolio: 1.15%
AST T. Rowe Price Asset Allocation Portfolio: 1.25%
AST 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 AST T. Rowe Price International
Equity Portfolio. This voluntary agreement may be terminated by the Investment
Manager at any time.
AST T. Rowe Price Natural Resources Portfolio: 1.35%
AST T. Rowe Price International Bond Portfolio: 1.75%
AST Founders Passport Portfolio: 1.75%
AST INVESCO Equity Income Portfolio: 1.20%
AST PIMCO Total Return Bond Portfolio: 1.05%
AST PIMCO Limited Maturity Bond Portfolio: 1.05%
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 Lord Abbett Small Cap Value Portfolio: 1.35%
AST Janus Overseas Growth Portfolio: 1.75%
AST Janus Small-Cap Portfolio: 1.30%
AST T. Rowe Price Small Company Value Portfolio: 1.30%
AST American Century International Growth Portfolio: 1.75%
AST American Century Strategic Balanced Portfolio: 1.25%
AST Putnam Value Growth & Income Portfolio: 1.25%
AST Cohen & Steers Realty Portfolio: 1.45%
AST Stein Roe Venture Portfolio: 1.35%
AST Bankers Trust Enhanced 500 Portfolio: .80%
AST Marsico Capital Growth Portfolio: 1.35%
AST Neuberger Berman Mid-Cap Value Portfolio: 1.25%
AST Neuberger Berman Mid-Cap Growth Portfolio: 1.25%
AST Oppenheimer Large-Cap Growth Portfolio: 1.45%
AST Kemper Small-Cap Growth Portfolio: 1.35%
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, 1995, 1996 and 1997, the Trust paid the
Administrator $2,080,598 and $3,330,687 and $4,902,309 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, 1995, 1996 and
1997, aggregate brokerage commissions of $3,220,077, $7,096,640 and $7,265,436,
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 years ended December 31, 1996 and December 31, 1997
brokerage commissions were paid to certain affiliates of Rowe Price-Fleming
International, Inc. by the AST T. Rowe Price International Equity Portfolio in
the amounts of $17,032 and $29,585 respectively. For the year ended December 31,
1997, 5.0% of the total brokerage commissions paid by this Portfolio were paid
to the affiliated brokers, with respect to transactions representing 5.2% 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 AST Oppenheimer Large-Cap Growth Portfolio (formerly, the Robertson
Stephens Value + Growth Portfolio) in the aggregate amounts of $31,999 and
$68,772 for the years ended December 31, 1996 and 1997 respectively. For the
year ended December 31, 1997, 12.3% of the total brokerage commissions paid by
this Portfolio was paid to Robertson Stephens & Co., with respect to
transactions representing 14.6% 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, Martin Luther King, Jr. 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 or under procedures
established by the Board of Trustees. Short-term obligations with sixty days or
less remaining to maturity are valued on an amortized cost basis. 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, their effects may not
be reflected in the net asset value of a Portfolio calculated as of the close of
the Exchange on that day.
Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. 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
or any unfair results to shareholders, such as changing dividend policy,
shortening the average maturity of the investments in the Portfolio or valuing
securities on the basis of current market prices if available or, if not, at
fair market value.
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 that had commenced
operations as of June 30, 1998, computed as of that date, 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 Portfolio(1) 05/17/89 22.91% 20.25% 15.91% 13.33%
AST Founders Passport Portfolio(2) 05/02/95 16.49% 12.70% N/A 12.59%
AST Lord Abbett Growth and Income 05/01/92 16.86% 21.06% 17.64% 16.62%
Portfolio
AST JanCap Growth Portfolio 11/06/92 44.91% 35.87% 24.80% 24.37%
AST Federated High Yield Portfolio 01/04/94 11.55% 13.02% N/A 10.34%
AST Putnam Balanced Portfolio(3) 05/04/93 15.67% 17.07% 12.80% 12.70%
AST T. Rowe Price Asset Allocation 01/04/94 18.01% 17.01% N/A 14.27%
Portfolio
AST T. Rowe Price Internat'l Equity 01/04/94 2.96% 11.70% N/A 7.70%
Portfolio
AST T. Rowe Price Natural Resources 05/02/95 0.00% 15.13% N/A 14.60%
Portfolio
AST T. Rowe Price Internat'l Bond 05/03/94 1.50% 3.16% N/A 2.92%
Portfolio(4)
AST Janus Small-Cap Growth Portfolio(5) 01/04/94 11.29% 14.04% N/A 15.34%
AST INVESCO Equity Income Portfolio 01/04/94 19.61% 21.46% N/A 16.99%
AST PIMCO Total Return Bond Portfolio 01/04/94 11.00% 8.36% N/A 7.26%
AST PIMCO Limited Maturity Bond Portfolio 05/02/95 6.54% 6.00% N/A 5.84%
AST Oppenheimer Large-Cap Growth 05/02/96 17.01% N/A N/A 20.08%
Portfolio(6)
AST Janus Overseas Growth Portfolio 01/02/97 25.80% N/A N/A 28.90%
AST T. Rowe Price Small Company Value 01/02/97 15.88% N/A N/A 20.32%
Portfolio
AST American Century Internat'l Growth 01/02/97 24.20% N/A N/A 27.43%
Portfolio
AST American Century Strategic Balanced 01/02/97 20.99% N/A N/A 18.55%
Portfolio
AST Putnam Value Growth & Income 01/02/97 16.13% N/A N/A 20.77%
Portfolio
AST Cohen & Steers Realty Portfolio 01/02/98 N/A N/A N/A (5.20)%*
AST Stein Roe Venture Portfolio 01/02/97 N/A N/A N/A (8.20)%*
AST Bankers Trust Enhanced 500 Portfolio 01/02/98 N/A N/A N/A 17.00%*
AST Lord Abbett Small Cap Value Portfolio 01/02/98 N/A N/A N/A 8.50%*
AST Marsico Capital Growth 12/22/97 N/A N/A N/A 32.01%*
AST Neuberger Berman Mid-Cap Value(7) 05/04/93 13.47% 16.24% 11.04% 11.44%
AST Neuberger Berman Mid-Cap Growth(8) 10/20/94 30.23% 21.95% N/A 20.57%
</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. (5) Prior to January 1, 1999, Founders Asset Management LLC.
served as Sub-advisor to the Portfolio. The performance information provided in
the above chart reflects that of the Portfolio for periods during which the
Portfolio was sub-advised by the prior Sub-advisor. (6) Prior to December 31,
1998, Robertson, Stephens & Company Investment Management L.P. served as
Sub-advisor to the Portfolio. The performance information provided in the above
chart reflects that of the Portfolio for periods during which the Portfolio was
sub-advised by the prior Sub-advisor. (7) Prior to May 1, 1998, Federated
Investment Counseling 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. (8) Prior to May 1, 1998, Berger Associates, 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, 1998:
Current Yield Effective Yield
5.03% 5.15%
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 December 3, 1998, 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.
As of December 3, 1998, 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 who
are shown as such in the section of this Statement entitled "Management," was
less than one percent of the shares. To the knowledge of the Trust, no person
owned beneficially more than 5% of any class of the Trust's outstanding shares
as of December 3, 1998.
The Participating Insurance Companies 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 for which
shares of the Trust are the investment vehicle will receive from the
Participating Insurance Companies, unaudited semi-annual financial statements
and audited year-end financial statements. Participants in the Skandia Qualified
Plan may request such information from the plan's trustees. 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: The statements which follow in Appendix A of this
Statement of Additional Information are Audited Financial Statements for the
Trust for the year ended December 31, 1997 as well as Unaudited Financial
Statements for the Trust for the period ending June 30, 1998. 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.
AMERICAN SKANDIA TRUST
SCHEDULES OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
LORD ABBETT GROWTH AND INCOME PORTFOLIO
JANCAP GROWTH PORTFOLIO
AST MONEY MARKET PORTFOLIO
NEUBERGER&BERMAN MID-CAP VALUE 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
NEUBERGER&BERMAN MID-CAP 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
MARSICO CAPITAL GROWTH PORTFOLIO
COHEN & STEERS REALTY PORTFOLIO
LORD ABBETT SMALL CAP VALUE PORTFOLIO
BANKERS TRUST ENHANCED 500 PORTFOLIO
STEIN ROE VENTURE PORTFOLIO
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FOREIGN STOCK -- 94.6%
AUSTRALIA -- 0.4%
QBE Insurance Group Ltd. ......... 604,356 $ 2,133,206
------------
BRAZIL -- 0.8%
Telecomunicacoes de Sao Paulo
SA.............................. 10,600 2,492,802
Telecomunicacoes de Sao Paulo SA
Rights*......................... 498 41
Telesp Celular SA Pfd. Cl-B*...... 17,800 1,477,421
------------
3,970,264
------------
CANADA -- 6.4%
Bank of Nova Scotia............... 311,067 7,699,783
BCE, Inc. ........................ 219,874 9,322,524
BCE Mobile Communications,
Inc. ........................... 82,400 2,143,295
BCE Mobile Communications, Inc.
144A............................ 4,900 127,453
Bombardier, Inc. Cl-B............. 182,300 4,958,723
National Bank of Canada........... 211,241 4,129,897
Northern Telecom Ltd. ............ 83,400 4,729,936
------------
33,111,611
------------
DENMARK -- 0.4%
Unidanmark AS Cl-A................ 21,100 1,896,141
------------
FINLAND -- 2.5%
Huhtamaki Co. .................... 22,000 1,251,075
Nokia Oyj Cl-A.................... 149,668 11,007,247
Sampo Insurance Co. Ltd. Cl-A..... 16,900 800,878
------------
13,059,200
------------
FRANCE -- 15.1%
Alcatel Alsthom................... 23,980 4,882,440
Assurances Generales de France*... 56,338 3,187,750
Banque Nationale de Paris......... 122,577 10,015,339
Bouygues SA....................... 24,345 4,421,217
Credit Commercial de France....... 37,750 3,178,077
Michelin C.G.D.E. Cl-B............ 111,560 6,439,670
Scor SA........................... 122,600 7,776,524
Societe Generale.................. 46,088 9,581,927
Societe Nationale Elf Aquitaine
SA.............................. 36,676 5,156,210
Societe Television Francaise...... 31,792 4,927,052
STMicroelectronics NV [ADR]*...... 81,710 5,709,486
Total SA Cl-B..................... 8,232 1,070,182
Vivendi........................... 53,874 11,503,637
------------
77,849,511
------------
GERMANY -- 8.0%
Bayer AG.......................... 71,546 3,690,206
Bayerische Motoren Werke AG....... 5,395 5,442,732
Bayerische Motoren Werke AG
(New)*.......................... 1,354 1,346,277
Bayerische Vereinsbank AG......... 18,560 1,578,345
Deutsche Bank AG.................. 80,043 6,778,044
Deutsche Lufthansa AG............. 209,800 5,265,253
Deutsche Telekom AG............... 138,060 3,724,881
Mannesmann AG..................... 84,070 8,639,737
Veba AG........................... 71,635 4,881,418
------------
41,346,893
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
GREECE -- 0.3%
Hellenic Telecommunication
Organization SA................. 51,217 $ 1,312,913
------------
HONG KONG -- 1.2%
China Telecom Ltd. ............... 1,889,000 3,278,930
Dao Heng Bank Group Ltd. ......... 214,500 304,507
Guoco Group Ltd. ................. 522,000 549,043
Smartone Telecommunications....... 588,000 1,434,224
Smartone Telecommunications
144A............................ 239,000 582,959
------------
6,149,663
------------
IRELAND -- 4.2%
Allied Irish Banks PLC............ 511,917 7,390,318
Bank of Ireland PLC............... 374,011 7,642,672
CRH PLC........................... 470,177 6,669,689
------------
21,702,679
------------
ITALY -- 1.8%
Telecom Italia SPA................ 1,279,051 9,415,421
------------
JAPAN -- 8.3%
Canon, Inc. ...................... 187,000 4,244,334
Circle K Japan Co. Ltd. .......... 6,000 208,812
Fuji Photo Film Co. .............. 75,000 2,610,152
Fujitsu Ltd. ..................... 176,000 1,851,497
Honda Motor Co. Ltd. ............. 53,000 1,886,515
Mabuchi Motor Co. Ltd. ........... 27,000 1,712,000
Matsushita-Kotobuki Electronics
Industries Ltd. ................ 57,000 1,421,047
Mitsumi Electric Co. Ltd. ........ 106,000 1,871,239
Nikko Securities Co. Ltd. ........ 1,904,000 7,888,459
Nippon Television Network
Corp. .......................... 7,670 2,221,666
Promise Co. Ltd. ................. 59,700 2,456,223
Ricoh Co. Ltd. ................... 245,000 2,579,133
Shiseido Co. Ltd. ................ 126,000 1,430,817
Sony Corp. ....................... 118,400 10,194,760
------------
42,576,654
------------
KOREA -- 1.0%
Korea Electric Power Corp. ....... 499,000 5,324,359
------------
MEXICO -- 0.5%
Coca-Cola Femsa SA [ADR].......... 154,000 2,675,750
------------
NETHERLANDS -- 8.0%
ABN AMRO Holding NV............... 213,744 5,001,531
AKZO Nobel NV..................... 35,526 7,897,306
Gucci Group NV.................... 2,000 106,000
ING Groep NV...................... 207,340 13,576,549
KNP NV............................ 28,864 1,111,016
Royal Philips Electronics NV...... 110,170 9,261,078
TNT Post Group NV*................ 28,864 737,840
Vedior NV......................... 54,136 1,530,224
Vendex NV......................... 54,860 2,063,095
------------
41,284,639
------------
POLAND -- 0.1%
Bank Handlowy W Warszawie 144A*... 24,900 473,598
------------
</TABLE>
1
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PORTUGAL -- 1.0%
Cimpor-Cimentos de Portugal SA.... 45,400 $ 1,595,095
Electricidade de Portugal SA...... 156,974 3,649,016
------------
5,244,111
------------
SINGAPORE -- 1.8%
Developmental Bank of Singapore
Ltd. ........................... 314,200 1,738,860
Overseas -- Chinese Banking Corp.
Ltd. ........................... 998,000 3,396,607
Overseas Union Bank Ltd. ......... 904,000 1,979,781
United Overseas Bank Ltd. ........ 657,000 2,041,605
------------
9,156,853
------------
SPAIN -- 1.2%
Telefonica SA..................... 133,877 6,200,195
------------
SWEDEN -- 5.3%
Ericsson, (L.M.) Telephone Co.
Cl-B............................ 190,568 5,567,727
Fastighets AB Balder*............. 81,156 81,411
ForeningsSparbanken AB............ 102,760 3,092,483
Nordbanken Holding Co. AB*........ 433,114 3,177,094
Pharmacia & Upjohn, Inc. ......... 200,460 9,224,988
Svenska Handelsbanken Cl-A........ 81,156 3,765,255
Volvo AB Cl-B..................... 86,376 2,572,342
------------
27,481,300
------------
SWITZERLAND -- 10.9%
Edipresse S.A. Bearer............. 3,167 870,669
Fischer, (Georg) AG............... 8,740 3,399,635
Julius Baer Holdings AG Cl-B...... 2,318 7,251,343
Liechtenstein Global Trust AG..... 1,943 2,126,423
Nestle SA......................... 5,947 12,726,684
Novartis AG....................... 4,404 7,328,338
Publicitas Holdings SA............ 9,886 3,063,284
Sairgroup......................... 3,710 1,220,515
UBS AG*........................... 37,075 13,785,708
Zurich
Versicherungs-Gesellschaft...... 6,432 4,104,783
------------
55,877,382
------------
UNITED KINGDOM -- 15.4%
Avis Europe PLC................... 572,505 2,583,886
B.A.T. Industries PLC............. 919,822 9,208,349
Bass PLC.......................... 276,133 5,173,981
British Airways PLC............... 480,976 5,204,274
British Petroleum Co. PLC......... 105,200 1,534,103
Dixons Group PLC.................. 291,300 2,354,838
Glaxo Wellcome PLC................ 134,081 4,024,622
Granada Group PLC................. 276,200 5,087,676
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
Molins PLC........................ 84,700 $ 304,549
National Westminster Bank PLC..... 335,271 5,991,178
Orange PLC*....................... 383,800 4,066,356
Premier Farnell PLC............... 45,000 229,002
Rio Tinto PLC..................... 267,500 3,012,689
Securicor PLC..................... 848,500 6,951,205
Siebe PLC......................... 244,724 4,895,787
Smith Industries PLC.............. 329,900 4,568,642
SmithKline Beecham PLC............ 556,600 6,774,781
Tomkins PLC....................... 188,890 1,025,069
Vodafone Group PLC................ 495,973 6,297,518
------------
79,288,505
------------
TOTAL FOREIGN STOCK (COST
$397,207,783)....................... 487,530,848
------------
COMMON STOCK -- 0.5%
INSURANCE -- 0.2%
AFLAC, Inc. ...................... 31,200 945,750
------------
TELECOMMUNICATIONS -- 0.3%
DSC Communications Corp.*......... 56,000 1,680,000
------------
TOTAL COMMON STOCK (COST
$2,558,856)......................... 2,625,750
------------
PAR
(000)
---------
<S> <C> <C>
COMMERCIAL PAPER -- 2.9%
Delaware Funding Corp. 5.68%,
07/08/98........................ $ 5,000 4,994,478
Merrill Lynch & Co., Inc. 5.63%,
07/08/98........................ 10,000 9,989,053
------------
(COST $14,983,531)................ 14,983,531
------------
REPURCHASE AGREEMENTS -- 2.1%
J.P. Morgan Securities, Inc.,
5.75%, dated 06/30/98, maturing
07/01/98, repurchase price
$10,455,670 (Collateralized by
U.S. Treasury Bonds, par value
$9,056,000, market value
$10,717,335, due 08/15/25) (COST
$10,454,000).................... 10,454 10,454,000
------------
TOTAL INVESTMENTS -- 100.1% (COST
$425,204,170)....................... 515,594,129
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%).................... (333,867)
------------
NET ASSETS -- 100.0%.................. $515,260,262
============
</TABLE>
2
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy CAD 400,391 $ 272,412 $ 272,293 $ (119)
07/98 Buy CHF 2,201,675 1,443,141 1,451,738 8,597
07/98 Buy DEM 454,303 250,429 251,719 1,290
07/98 Buy FRF 5,840,314 967,520 967,556 36
10/98 Buy GBP 10,520,000 17,113,147 17,435,404 322,257
07/98 Buy ITL 2,754,709,136 1,549,039 1,549,711 672
07/98 Buy JPY 10,059,798 72,435 72,517 82
07/98 Buy PTE 420,970,000 2,271,707 2,279,176 7,469
07/98 Buy SEK 19,034,441 2,386,425 2,386,803 378
----------- ----------- --------
$26,326,255 $26,666,917 $340,662
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell ATS 7,866,880 $ 620,190 $ 619,844 $ 346
07/98 Sell CHF 206,029 135,590 135,873 (283)
07/98 Sell ESP 50,429,977 328,705 329,414 (709)
07/98 Sell FRF 1,227,069 203,322 203,287 35
07/98 Sell GBP 3,544,214 5,912,071 5,912,576 (505)
07/98 Sell HKD 485,700 62,681 62,667 14
07/98 Sell JPY 104,681,503 736,092 754,385 (18,293)
09/98 Sell JPY 5,199,787,000 36,904,993 37,889,747 (984,754)
07/98 Sell SGD 1,036,634 615,786 613,453 2,333
----------- ----------- -----------
$45,519,430 $46,521,246 $(1,001,816)
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 0.2% of net assets.
See Notes to Financial Statements.
3
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 95.3%
AEROSPACE -- 0.6%
United Technologies Corp. ..... 70,000 $ 6,475,000
--------------
AIRLINES -- 2.0%
Delta Air Lines, Inc. ......... 90,000 11,632,500
US Airways Group, Inc.*........ 140,000 11,095,000
--------------
22,727,500
--------------
AUTOMOBILE MANUFACTURERS -- 1.8%
Ford Motor Co. ................ 100,000 5,900,000
General Motors Corp. .......... 210,000 14,030,625
--------------
19,930,625
--------------
CHEMICALS -- 3.6%
Dow Chemical Co. .............. 125,000 12,085,937
Du Pont, (E.I.) de Nemours &
Co. ......................... 190,000 14,178,750
Lyondell Petrochemical Co. .... 270,000 8,218,125
Rohm & Haas Co. ............... 55,000 5,716,562
--------------
40,199,374
--------------
CLOTHING & APPAREL -- 2.4%
Liz Claiborne, Inc. ........... 260,000 13,585,000
VF Corp. ...................... 250,000 12,875,000
--------------
26,460,000
--------------
COMPUTER HARDWARE -- 5.9%
Compaq Computer Corp. ......... 235,000 6,668,125
EMC Corp.*..................... 260,000 11,651,250
Hewlett-Packard Co. ........... 210,000 12,573,750
International Business
Machines Corp. .............. 220,000 25,258,750
Seagate Technology, Inc.*...... 400,000 9,525,000
--------------
65,676,875
--------------
COMPUTER SERVICES & SOFTWARE -- 1.7%
First Data Corp. .............. 170,000 5,663,125
Sun Microsystems, Inc.*........ 310,000 13,465,625
--------------
19,128,750
--------------
CONSUMER PRODUCTS & SERVICES -- 4.6%
Corning, Inc. ................. 210,000 7,297,500
Eastman Kodak Co. ............. 170,000 12,420,625
Fortune Brands, Inc. .......... 390,000 14,990,625
International Flavors &
Fragrances, Inc. ............ 130,000 5,646,875
Whirlpool Corp. ............... 150,000 10,312,500
--------------
50,668,125
--------------
CONTAINERS & PACKAGING -- 0.9%
Crown Cork & Seal Co., Inc. ... 210,000 9,975,000
--------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.3%
Emerson Electric Co. .......... 420,000 25,357,500
--------------
ENVIRONMENTAL SERVICES -- 1.0%
USA Waste Services, Inc.*...... 220,000 10,862,500
--------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 7.2%
Banc One Corp. ................ 440,000 $ 24,557,500
BankAmerica Corp. ............. 125,000 10,804,687
BankBoston Corp. .............. 100,000 5,562,500
Bankers Trust Corp. ........... 30,000 3,481,875
Chase Manhattan Corp. ......... 160,000 12,080,000
First Union Corp. ............. 220,000 12,815,000
Mellon Bank Corp. ............. 150,000 10,443,750
--------------
79,745,312
--------------
FINANCIAL SERVICES -- 3.2%
Morgan Stanley, Dean Witter &
Co. ......................... 260,000 23,757,500
Washington Mutual, Inc. ....... 262,500 11,402,344
--------------
35,159,844
--------------
FOOD -- 6.8%
Archer-Daniels-Midland Co. .... 540,000 10,462,500
Bestfoods, Inc. ............... 220,000 12,773,750
ConAgra, Inc. ................. 360,000 11,407,500
Heinz, (H.J.) Co. ............. 275,000 15,434,375
Ralston Purina Group........... 100,000 11,681,250
Sara Lee Corp. ................ 240,000 13,425,000
--------------
75,184,375
--------------
HEALTHCARE SERVICES -- 1.2%
Columbia HCA Healthcare
Corp. ....................... 200,000 5,825,000
United Healthcare Corp. ....... 120,000 7,620,000
--------------
13,445,000
--------------
INSURANCE -- 10.7%
Allstate Corp. ................ 125,000 11,445,313
American General Corp. ........ 340,000 24,203,750
Chubb Corp. ................... 300,000 24,112,500
CIGNA Corp. ................... 155,000 10,695,000
Jefferson-Pilot Corp. ......... 175,000 10,139,063
Progressive Corp. ............. 70,000 9,870,000
St. Paul Companies, Inc. ...... 340,000 14,301,250
Transamerica Corp. ............ 120,000 13,815,000
--------------
118,581,876
--------------
MACHINERY & EQUIPMENT -- 2.2%
Deere & Co. ................... 460,000 24,322,500
--------------
MEDICAL SUPPLIES & EQUIPMENT -- 2.0%
Baxter International, Inc. .... 410,000 22,063,125
--------------
OIL & GAS -- 9.1%
British Petroleum Co. PLC
[ADR]........................ 250,000 22,062,500
Coastal Corp. ................. 210,000 14,660,625
Consolidated Natural Gas
Co. ......................... 110,000 6,476,250
ENI Co. SPA [ADR].............. 240,000 15,600,000
Mobil Corp. ................... 260,000 19,922,500
Occidental Petroleum Corp. .... 499,965 13,499,055
Sonat, Inc. ................... 220,000 8,497,500
--------------
100,718,430
--------------
</TABLE>
4
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 4.4%
Bowater, Inc. ................. 220,000 $ 10,395,000
Fort James Corp. .............. 410,000 18,245,000
Georgia Pacific Group.......... 102,700 6,052,881
Georgia Pacific Timber Group... 200,000 4,612,500
Kimberly-Clark Corp. .......... 210,000 9,633,750
--------------
48,939,131
--------------
PHARMACEUTICALS -- 3.0%
American Home Products
Corp. ....................... 300,000 15,525,000
Pharmacia & Upjohn, Inc. ...... 220,000 10,147,500
SmithKline Beecham PLC [ADR]... 120,000 7,260,000
--------------
32,932,500
--------------
PRINTING & PUBLISHING -- 1.0%
Dow Jones & Co., Inc. ......... 210,000 11,707,500
--------------
RETAIL & MERCHANDISING -- 5.5%
May Department Stores Co. ..... 280,000 18,340,000
Penney, (J.C.) Co., Inc. ...... 175,000 12,654,688
Toys 'R' Us, Inc.*............. 74,400 1,753,050
Wal-Mart Stores, Inc. ......... 460,000 27,945,000
--------------
60,692,738
--------------
TELECOMMUNICATIONS -- 6.2%
AT&T Corp. .................... 425,000 24,278,125
Bell Atlantic Corp. ........... 260,000 11,862,500
SBC Communications, Inc. ...... 430,000 17,200,000
WorldCom, Inc.*................ 310,000 15,015,625
--------------
68,356,250
--------------
UTILITIES -- 6.0%
Baltimore Gas & Electric
Co. ......................... 239,600 7,442,575
Carolina Power & Light Co. .... 360,000 15,615,000
Duke Energy Corp. ............. 280,000 16,590,000
FirstEnergy Corp............... 420,000 12,915,000
FPL Group, Inc. ............... 215,000 13,545,000
--------------
66,107,575
--------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TOTAL COMMON STOCK
(COST $886,331,968).............. $1,055,417,405
--------------
PREFERRED STOCK -- 2.0%
INSURANCE -- 1.3%
Aetna, Inc. Cl-C 6.25%......... 200,000 15,025,000
--------------
UTILITIES -- 0.7%
Houston Industries, Inc.
7.00%........................ 100,000 7,450,000
--------------
TOTAL PREFERRED STOCK
(COST $22,832,642)............... 22,475,000
--------------
SHORT-TERM INVESTMENTS -- 2.9%
Temporary Investment Cash Fund... 16,114,129 16,114,129
Temporary Investment Fund...... 16,114,129 16,114,129
--------------
(COST $32,228,258)............. 32,228,258
--------------
TOTAL INVESTMENTS -- 100.2%
(COST $941,392,868).............. 1,110,120,663
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.2%)........... (2,867,479)
--------------
NET ASSETS -- 100.0%............... $1,107,253,184
==============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
5
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 88.6%
AIRLINES -- 0.2%
UAL Corp.*..................... 42,760 $ 3,335,280
--------------
BEVERAGES -- 6.0%
Coca-Cola Co. ................. 497,200 42,510,600
Coca-Cola Enterprises, Inc. ... 2,327,015 91,335,339
--------------
133,845,939
--------------
CHEMICALS -- 5.3%
Cytec Industries, Inc.*........ 743,950 32,919,787
Monsanto Co. .................. 1,534,180 85,722,307
--------------
118,642,094
--------------
COMPUTER HARDWARE -- 7.7%
Dell Computer Corp.*........... 1,871,080 173,659,612
--------------
COMPUTER SERVICES & SOFTWARE -- 21.1%
America Online, Inc.*.......... 1,443,560 153,017,360
Cisco Systems, Inc.*........... 985,160 90,696,292
EarthLink Network, Inc.*....... 125,000 9,593,750
Edwards, (J.D.) & Co.*......... 470,475 20,201,020
Intuit, Inc.*.................. 422,006 25,847,867
Microsoft Corp.*............... 1,577,900 171,004,912
Sapient Corp.*................. 68,000 3,587,000
--------------
473,948,201
--------------
CONGLOMERATES -- 1.2%
Textron, Inc................... 388,850 27,875,684
--------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.5%
AES Corp.*..................... 384,600 20,215,538
General Electric Co. .......... 931,550 84,771,050
Texas Instruments, Inc......... 296,650 17,298,403
--------------
122,284,991
--------------
ENTERTAINMENT & LEISURE -- 3.7%
Carnival Corp. Cl-A............ 500,000 19,812,500
Time Warner, Inc. ............. 748,815 63,976,882
--------------
83,789,382
--------------
FARMING & AGRICULTURE -- 0.4%
Delta & Pine Land Co. ......... 202,480 9,010,360
--------------
FINANCIAL-BANK & TRUST -- 4.3%
BankAmerica Corp. ............. 388,875 33,613,383
Citicorp....................... 311,160 46,440,630
Mercantile Bancorporation,
Inc.......................... 166,800 8,402,550
U.S. Bancorp................... 205,500 8,836,500
--------------
97,293,063
--------------
FINANCIAL SERVICES -- 9.2%
Fannie Mae..................... 971,065 58,992,199
Freddie Mac.................... 692,300 32,581,369
Merrill Lynch & Co., Inc....... 493,400 45,516,150
Morgan Stanley, Dean Witter &
Co........................... 502,995 45,961,168
Schwab, (Charles) Corp. ....... 735,510 23,904,075
--------------
206,954,961
--------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
HOTELS & MOTELS -- 1.1%
Starwood Hotels & Resorts
[REIT]....................... 497,625 $ 24,041,508
--------------
INSURANCE -- 1.0%
Life Re Corp. ................. 260,000 21,320,000
--------------
PHARMACEUTICALS -- 13.4%
Lilly, (Eli) & Co.............. 1,132,170 74,793,981
Pfizer, Inc.................... 1,025,475 111,456,314
Warner-Lambert Co. ............ 1,658,775 115,077,516
--------------
301,327,811
--------------
RETAIL & MERCHANDISING -- 2.7%
Costco Companies, Inc.*........ 393,120 24,791,130
Meyer, (Fred), Inc.*........... 835,500 35,508,750
--------------
60,299,880
--------------
TELECOMMUNICATIONS -- 5.8%
Lucent Technologies, Inc....... 1,130,650 94,055,947
Qwest Communications
International, Inc.*......... 1,003,100 34,983,113
--------------
129,039,060
--------------
TOTAL COMMON STOCK
(COST $1,167,426,367)............ 1,986,667,826
--------------
FOREIGN STOCK -- 1.8%
AUTOMOBILE MANUFACTURERS
Porsche AG Pfd. -- (DEM)
(COST $8,294,264).............. 13,419 38,880,999
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
---------
<S> <C> <C>
CORPORATE OBLIGATIONS -- 3.4%
ENTERTAINMENT & LEISURE -- 2.3%
Venetian Casino Resort LLC
Mtge. Notes
12.25%, 11/15/04............. $49,725 51,589,688
--------------
TELECOMMUNICATIONS -- 1.1%
Lenfest Communications, Inc.
Sr. Notes 7.625%, 02/15/08... 11,295 11,549,138
Lenfest Communications, Inc.
Sr. Sub. Notes 8.25%,
02/15/08..................... 12,480 13,041,600
--------------
24,590,738
--------------
TOTAL CORPORATE OBLIGATIONS
(COST $73,517,755)............... 76,180,426
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 2.2%
FEDERAL HOME LOAN MORTGAGE CORP.
5.43%, 07/20/98.................. 25,000 24,928,354
FEDERAL NATIONAL MORTGAGE
ASSOCIATION DISCOUNT NOTE 5.43%,
07/24/98......................... 25,000 24,913,271
--------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $49,841,625)............... 49,841,625
--------------
</TABLE>
6
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
--------- --------------
<S> <C> <C>
COMMERCIAL PAPER -- 3.6%
C.I.T. Group Holdings, Inc.
6.10%, 07/01/98.............. $ 30,000 $ 30,000,000
Household Finance Corp.
6.00%, 07/01/98.............. 51,000 51,000,000
--------------
(COST $81,000,000)............. 81,000,000
--------------
SHARES
-----
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash
Fund......................... 56,165 56,165
Temporary Investment Fund...... 56,164 56,164
--------------
(COST $112,329)................ 112,329
--------------
TOTAL INVESTMENTS -- 99.6%
(COST $1,380,192,340)............ 2,232,683,205
OTHER ASSETS LESS
LIABILITIES -- 0.4%.............. 9,038,102
--------------
NET ASSETS -- 100.0%............... $2,241,721,307
==============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy DEM 44,800,000 $24,917,456 $24,827,388 $ 90,068
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell DEM 67,000,000 $36,966,309 $37,144,299 $(177,990)
11/98 Sell DEM 45,000,000 25,300,076 25,137,558 162,518
----------- ----------- ---------
$62,266,385 $62,281,857 $ (15,472)
=========== =========== =========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
7
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
COMMERCIAL PAPER -- 45.7%
CHEMICALS -- 4.2%
Du Pont, (E.I.) de Nemours & Co.+
5.53%, 07/22/98.................. $35,000 $ 34,887,096
------------
FINANCIAL-BANK & TRUST -- 23.3%
Bank of New York
5.50%, 09/09/98.................. 24,500 24,237,986
5.49%, 09/21/98.................. 13,500 13,331,183
Barclays US Funding Corp.
5.51%, 07/23/98.................. 25,500 25,414,136
Commerzbank USA Finance, Inc.
5.53%, 07/23/98.................. 27,500 27,407,065
Generale Bank, Inc.
5.50%, 09/03/98.................. 20,000 19,804,444
Halifax PLC
5.48%, 09/21/98.................. 15,000 14,812,767
Suntrust Bank, Inc.
5.50%, 08/26/98.................. 20,000 19,828,889
5.49%, 09/09/98.................. 19,000 18,797,175
U.S. Bancorp
5.52%, 07/24/98.................. 12,735 12,690,088
Wachovia Bank NC
5.52%, 08/12/98.................. 15,500 15,400,180
------------
191,723,913
------------
FINANCIAL SERVICES -- 13.7%
Caisse D'Amortissement
de la Dette Sociale
5.37%, 08/03/98.................. 25,000 24,876,938
Diageo Capital PLC+
5.37%, 08/12/98.................. 15,000 14,906,025
Ford Motor Credit Corp.
5.49%, 07/08/98.................. 30,000 29,967,975
5.47%, 07/10/98.................. 5,000 4,993,163
Province of Quebec
5.48%, 12/30/98.................. 19,500 18,959,763
5.50%, 01/11/99.................. 20,000 19,407,222
------------
113,111,086
------------
OIL & GAS -- 0.2%
Koch Industries, Inc.
6.30%, 07/01/98.................. 1,803 1,803,000
------------
PHARMACEUTICALS -- 4.3%
Abbott Laboratories, Inc.
5.50%, 07/22/98.................. 35,000 34,887,708
------------
TOTAL COMMERCIAL PAPER
(COST $376,412,803).................. 376,412,803
------------
CORPORATE OBLIGATIONS -- 26.7%
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.0%
General Electric Co.
7.875%, 09/15/98................. 25,000 25,115,391
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 23.7%
Abbey National Treasury Services
PLC [FRN]
5.482%, 06/01/99................. $35,000 $ 34,965,166
American Express Centurion Bank
[FRN]
5.596%, 05/07/99................. 10,000 10,000,000
Bank of Nova Scotia
5.675%, 03/04/99................. 10,000 9,997,739
5.516%, 06/07/99 [FRN]........... 30,000 29,977,979
CoreStates Bank N.A. [FRN]
5.597%, 05/14/99................. 30,000 30,000,000
Key Bank N.A. [VR]
5.74%, 07/31/98.................. 25,000 24,998,597
Old Kent Bank [VR]
5.65%, 11/04/98.................. 25,000 25,000,000
Southtrust Bank N.A. [FRN]
5.55%, 06/01/99.................. 30,000 29,978,496
------------
194,917,977
------------
TOTAL CORPORATE OBLIGATIONS
(COST $220,033,368).................. 220,033,368
------------
CERTIFICATES OF DEPOSIT -- 21.5%
Abbey National Treasury Services
5.72%, 06/11/99.................. 5,000 4,997,284
Bank of America
5.63%, 02/26/99.................. 5,000 4,998,739
Bank of Boston N.A.
5.87%, 10/14/98.................. 15,000 14,997,936
Bankers Trust NY [VR]
5.74%, 07/07/98.................. 7,000 6,999,878
Bayerische Vereinsbank NY
5.75%, 05/07/99.................. 15,000 14,991,613
Commerzbank NY
5.67%, 03/05/99.................. 10,000 9,996,757
Deutsche Bank NY
5.73%, 04/15/99.................. 15,000 14,994,332
Harris Trust Bank
5.55%, 08/11/98.................. 20,000 20,000,000
5.57%, 08/25/98.................. 20,000 20,000,000
NationsBank Corp.
5.55%, 07/16/98.................. 25,000 25,000,000
5.60%, 09/04/98.................. 10,000 10,000,000
Rabobank Nederland NV NY
5.78%, 05/05/99.................. 10,000 9,996,590
Societe Generale NY [VR]
5.571%, 05/26/99................. 20,000 19,987,566
------------
(COST $176,960,695)................ 176,960,695
------------
</TABLE>
8
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.2%
Greentree Steers Corp. [VR]
5.686%, 11/15/98................. $21,083 $ 21,078,724
The Money Store [VR]
5.682%, 11/15/98................. 21,831 21,830,363
------------
(COST $42,909,087)................. 42,909,087
------------
TOTAL INVESTMENTS -- 99.1% (COST
$816,315,953)........................ 816,315,953
OTHER ASSETS LESS
LIABILITIES -- 0.9%.................. 7,459,491
------------
NET ASSETS -- 100.0%................... $823,775,444
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
+ 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
6.0% of net assets.
See Notes to Financial Statements.
9
<PAGE>
NEUBERGER&BERMAN MID-CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 91.8%
AEROSPACE -- 2.3%
Boeing Co.......................... 50,000 $ 2,228,125
Raytheon Co. Cl-A.................. 47,600 2,742,950
------------
4,971,075
------------
AIRLINES -- 1.5%
Continental Airlines, Inc. Cl-B*... 43,000 2,617,625
Delta Air Lines, Inc............... 5,000 646,250
------------
3,263,875
------------
AUTOMOBILE MANUFACTURERS -- 1.6%
General Motors Corp. .............. 50,500 3,374,031
------------
AUTOMOTIVE PARTS -- 2.5%
Autozone, Inc.*.................... 29,000 926,187
Eaton Corp. ....................... 28,500 2,215,875
Goodyear Tire & Rubber Co. ........ 33,000 2,126,437
------------
5,268,499
------------
BEVERAGES -- 1.4%
Anheuser-Busch Companies, Inc...... 64,500 3,043,594
------------
BROADCASTING -- 1.5%
Scripps, (E.W.) Co. Cl-A........... 58,500 3,206,531
------------
BUILDING MATERIALS -- 0.8%
USG Corp.*......................... 33,500 1,813,187
------------
CHEMICALS -- 4.6%
Cabot Corp. ....................... 69,100 2,232,794
Du Pont, (E.I.) de Nemours &
Co. ............................. 25,000 1,865,625
Morton International, Inc. ........ 58,500 1,462,500
Praxair, Inc. ..................... 92,000 4,306,750
------------
9,867,669
------------
CLOTHING & APPAREL -- 0.8%
Unifi, Inc. ....................... 50,000 1,712,500
------------
COMPUTER HARDWARE -- 1.1%
Quantum Corp.*..................... 117,600 2,440,200
------------
CONGLOMERATES -- 2.9%
Minnesota Mining & Manufacturing
Co. ............................. 32,100 2,638,219
Philip Morris Companies, Inc. ..... 53,000 2,086,875
Tenneco, Inc. ..................... 39,500 1,503,469
------------
6,228,563
------------
CONSUMER PRODUCTS & SERVICES -- 1.8%
Raychem Corp. ..................... 57,600 1,702,800
UST, Inc. ......................... 81,000 2,187,000
------------
3,889,800
------------
CONTAINERS & PACKAGING -- 2.5%
Crown Cork & Seal Co., Inc. ....... 72,400 3,439,000
Owens-Illinois, Inc.*.............. 43,000 1,924,250
------------
5,363,250
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.2%
Teradyne, Inc.*.................... 77,300 2,067,775
Texas Instruments, Inc. ........... 47,500 2,769,844
------------
4,837,619
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 0.8%
Mirage Resorts, Inc.*.............. 85,000 $ 1,811,562
------------
ENVIRONMENTAL SERVICES -- 1.4%
Millipore Corp. ................... 26,200 713,950
Waste Management, Inc. ............ 67,200 2,352,000
------------
3,065,950
------------
FINANCIAL-BANK & TRUST -- 7.7%
Banc One Corp. .................... 75,800 4,230,587
Chase Manhattan Corp. ............. 55,000 4,152,500
Citicorp........................... 24,700 3,686,475
Countrywide Credit Industries,
Inc. ............................ 88,300 4,481,225
------------
16,550,787
------------
FINANCIAL SERVICES -- 3.3%
Nationwide Financial Services,
Inc. ............................ 54,500 2,779,500
SLM Holding Corp................... 89,000 4,361,000
------------
7,140,500
------------
FOOD -- 1.8%
ConAgra, Inc. ..................... 67,400 2,135,737
Nabisco Holdings Corp. Cl-A........ 46,600 1,680,512
------------
3,816,249
------------
HEALTHCARE SERVICES -- 1.3%
Wellpoint Health Networks, Inc.*... 39,000 2,886,000
------------
HOTELS & MOTELS -- 3.2%
Host Marriott Corp.*............... 205,500 3,660,469
Starwood Hotels & Resorts [REIT]... 65,000 3,140,312
------------
6,800,781
------------
INSURANCE -- 11.4%
Ace, Ltd. ......................... 49,200 1,918,800
Aetna, Inc. ....................... 43,900 3,341,887
Allstate Corp. .................... 38,600 3,534,312
AON Corp. ......................... 24,700 1,735,175
CIGNA Corp. ....................... 55,300 3,815,700
EXEL Ltd. ......................... 59,600 4,637,625
St. Paul Companies, Inc. .......... 70,000 2,944,375
Travelers Group, Inc. ............. 45,000 2,728,125
------------
24,655,999
------------
MACHINERY & EQUIPMENT -- 1.9%
Alstom SA [ADR]*................... 85,000 2,767,813
McDermott International, Inc. ..... 40,200 1,384,388
------------
4,152,201
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.1%
Baxter International, Inc. ........ 43,600 2,346,225
------------
METALS & MINING -- 1.0%
AK Steel Holding Corp. ............ 118,400 2,116,400
Nucor Corp. ....................... 1,900 87,400
------------
2,203,800
------------
</TABLE>
10
<PAGE>
NEUBERGER&BERMAN MID-CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OIL & GAS -- 3.2%
Chevron Corp. ..................... 25,500 $ 2,118,094
Noble Affiliates, Inc. ............ 47,000 1,786,000
Unocal Corp. ...................... 71,000 2,538,250
YPF SA [ADR]....................... 14,000 420,875
------------
6,863,219
------------
PAPER & FOREST PRODUCTS -- 3.3%
Kimberly-Clark Corp. .............. 61,500 2,821,313
Mead Corp. ........................ 48,000 1,524,000
Union Camp Corp. .................. 19,900 987,538
Weyerhaeuser Co. .................. 38,000 1,755,125
------------
7,087,976
------------
PHARMACEUTICALS -- 1.8%
Biogen, Inc.*...................... 77,500 3,797,500
------------
REAL ESTATE -- 1.7%
Catellus Development Corp.*........ 86,000 1,521,125
Indymac Mortgage Holdings, Inc.
[REIT]........................... 93,000 2,115,750
------------
3,636,875
------------
RESTAURANTS -- 2.2%
McDonald's Corp. .................. 30,000 2,070,000
Tricon Global Restaurants, Inc.*... 82,000 2,598,375
------------
4,668,375
------------
RETAIL & MERCHANDISING -- 4.3%
Consolidated Stores Corp.*......... 63,500 2,301,875
Harcourt General, Inc. ............ 52,500 3,123,750
Sears, Roebuck & Co. .............. 62,500 3,816,406
------------
9,242,031
------------
SEMICONDUCTORS -- 2.5%
KLA-Tencor Corp.*.................. 42,800 1,185,025
Micron Technology, Inc.*........... 41,100 1,019,794
Motorola, Inc. .................... 35,900 1,886,994
National Semiconductor Corp.*...... 100,000 1,318,750
------------
5,410,563
------------
TELECOMMUNICATIONS -- 2.7%
MCI Communications Corp. .......... 30,000 1,743,750
SBC Communications, Inc. .......... 25,000 1,000,000
WorldCom, Inc.*.................... 64,000 3,100,000
------------
5,843,750
------------
TRANSPORTATION -- 1.4%
FDX Corp.*......................... 46,400 2,911,600
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
UTILITIES -- 6.3%
Edison International Co. .......... 95,000 $ 2,808,438
Enron Corp. ....................... 27,500 1,486,719
Illinova Corp. .................... 43,000 1,290,000
Niagara Mohawk Power Corp.*........ 97,100 1,450,431
PG&E Corp. ........................ 83,400 2,632,313
Unicom Corp. ...................... 109,300 3,832,331
------------
13,500,232
------------
TOTAL COMMON STOCK
(COST $204,016,856).................. 197,672,568
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
COMMERCIAL PAPER -- 6.9%
American Express Credit Corp.
5.75%, 07/06/98.................. $2,000 1,998,403
Bell Atlantic Network Funding, Inc.
5.56%, 07/28/98.................. 2,000 1,991,660
Eksportfinans ASA Corp.
5.80%, 07/06/98.................. 3,000 2,997,583
Ford Motor Credit Co.
5.46%, 07/15/98.................. 2,000 2,000,000
Goldman, Sachs & Co.
5.60%, 07/02/98.................. 2,500 2,499,611
Koch Industries, Inc.+
5.60%, 07/01/98.................. 2,500 2,500,000
Met Life Funding Corp. 5.53%,
07/10/98......................... 1,000 998,618
-----------
(COST $14,985,875)................. 14,985,875
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
-----
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.6%
Temporary Investment Cash Fund... 1,688,658 1,688,658
Temporary Investment Fund........ 1,688,657 1,688,657
------------
(COST $3,377,315)................ 3,377,315
------------
TOTAL INVESTMENTS -- 100.3%
(COST $222,380,046)................ 216,035,758
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.3%)................... (669,741)
------------
NET ASSETS -- 100.0%................. $215,366,017
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
+ 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
1.2% of net assets.
See Notes to Financial Statements.
11
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 53.8%
ADVERTISING -- 0.2%
Omnicom Group, Inc. ............... 12,400 $ 618,450
------------
AEROSPACE -- 0.4%
Boeing Co. ........................ 33,330 1,485,268
------------
AIRLINES -- 0.3%
UAL Corp.*......................... 13,800 1,076,400
------------
AUTOMOBILE MANUFACTURERS -- 0.5%
Ford Motor Co. .................... 31,365 1,850,535
------------
AUTOMOTIVE PARTS -- 1.7%
Dana Corp. ........................ 33,920 1,814,720
Eaton Corp. ....................... 16,445 1,278,599
Goodyear Tire & Rubber Co. ........ 33,913 2,185,269
Lear Corp.*........................ 26,960 1,383,385
------------
6,661,973
------------
BEVERAGES -- 0.6%
Coca-Cola Enterprises, Inc. ....... 14,100 553,425
Coca-Cola Femsa SA [ADR]........... 1,200 20,850
PepsiCo, Inc. ..................... 42,545 1,752,322
------------
2,326,597
------------
BROADCASTING -- 0.4%
Chancellor Media Corp.*............ 12,850 638,083
Clear Channel Communications,
Inc.*............................ 4,200 458,325
Grupo Televisa SA [GDR]*........... 538 20,242
Sinclair Broadcasting Group, Inc.
Cl-A*............................ 14,800 425,500
------------
1,542,150
------------
BUSINESS SERVICES -- 0.2%
Accustaff, Inc.*................... 13,200 411,262
Robert Half International, Inc.*... 8,300 463,762
------------
875,024
------------
CHEMICALS -- 1.2%
Du Pont, (E.I.) de Nemours &
Co. ............................. 32,590 2,432,029
Eastman Chemical Co. .............. 21,277 1,324,493
Witco Corp. ....................... 35,963 1,051,918
------------
4,808,440
------------
CLOTHING & APPAREL -- 0.6%
Abercrombie & Fitch Co. Cl-A*...... 8,200 360,800
Cintas Corp. ...................... 8,400 428,400
Jones Apparel Group, Inc.*......... 13,400 489,937
Tommy Hilfiger, Corp.*............. 7,900 493,750
WestPoint Stevens, Inc.*........... 14,100 465,300
------------
2,238,187
------------
COMPUTER HARDWARE -- 1.5%
Hewlett-Packard Co. ............... 30,425 1,821,697
International Business Machines
Corp. ........................... 26,236 3,012,221
Seagate Technology, Inc.*.......... 56,600 1,347,787
------------
6,181,705
------------
COMPUTER SERVICES & SOFTWARE -- 2.2%
America Online, Inc.*.............. 8,500 901,000
Aspect Development, Inc.*.......... 3,400 257,125
BMC Software, Inc.*................ 14,000 727,125
Cadence Design Systems, Inc.*...... 15,800 493,750
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Computer Associates International,
Inc. ............................ 23,530 $ 1,307,386
Compuware Corp.*................... 9,700 495,912
Comverse Technology, Inc.*......... 7,600 394,250
Fiserv, Inc.*...................... 10,200 433,181
Ingram Micro, Inc. Cl-A*........... 5,200 230,100
Intuit, Inc.*...................... 8,200 502,250
Knology Holdings, Inc. Warrants
144A*............................ 45 0
Lycos, Inc.*....................... 2,500 188,437
NCR Corp.*......................... 33,965 1,103,862
PeopleSoft, Inc.*.................. 11,100 521,700
Sterling Commerce, Inc.*........... 9,000 436,500
VERITAS Software Corp.*............ 15,350 635,106
Yahoo! Inc.*....................... 1,000 157,500
------------
8,785,184
------------
CONGLOMERATES -- 0.9%
Minnesota Mining & Manufacturing
Co. ............................. 19,643 1,614,409
Philip Morris Companies, Inc. ..... 55,202 2,173,579
------------
3,787,988
------------
CONSUMER PRODUCTS & SERVICES -- 2.6%
Apollo Group, Inc. Cl-A*........... 12,000 396,750
Clorox Co.......................... 14,355 1,369,108
Colgate-Palmolive Co............... 19,140 1,684,320
Eastman Kodak Co. ................. 25,140 1,836,791
Estee Lauder Companies, Inc.
Cl-A............................. 5,600 390,250
Hasbro, Inc. ...................... 38,810 1,525,718
Hedstrom Holdings, Inc. 144A*...... 303 379
Mohawk Industries, Inc.*........... 13,000 411,937
Rexall Sundown, Inc.*.............. 14,700 518,175
Twinlab Corp.*..................... 5,500 240,281
Whitman Corp. ..................... 86,691 1,988,475
------------
10,362,184
------------
CONTAINERS & PACKAGING -- 0.6%
Owens-Illinois, Inc.*.............. 53,355 2,387,636
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.6%
Cellnet Data Systems Warrants*..... 95 5,320
Emerson Electric Co. .............. 23,870 1,441,151
FORE Systems, Inc. ................ 15,900 421,350
STMicroelectronics NV*............. 2,978 208,088
Texas Instruments, Inc............. 71,395 4,163,221
------------
6,239,130
------------
ENTERTAINMENT & LEISURE -- 0.5%
Epic Resorts....................... 10,000 10,000
Royal Caribbean Cruises Ltd. ...... 5,000 397,500
Viacom, Inc. Cl-B*................. 24,650 1,435,862
------------
1,843,362
------------
FINANCIAL-BANK & TRUST -- 6.1%
BankBoston Corp. .................. 33,240 1,848,975
Bankers Trust Corp. ............... 12,387 1,437,666
Chase Manhattan Corp. ............. 2,900 218,950
Citicorp........................... 20,490 3,058,132
Crestar Financial Corp. ........... 17,180 937,384
</TABLE>
12
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
First Chicago NBD Corp............. 22,845 $ 2,024,638
Firstar Corp. ..................... 15,230 578,740
Fleet Financial Group, Inc. ....... 12,785 1,067,547
GreenPoint Financial Corp. ........ 9,800 368,725
Hibernia Corp. Cl-A................ 18,445 372,358
Keycorp............................ 36,480 1,299,600
Mercantile Bancorporation, Inc. ... 15,380 774,767
Morgan, (J.P.) & Co., Inc. ........ 13,274 1,554,717
National City Corp. ............... 20,885 1,482,835
Northern Trust Corp. .............. 6,800 518,500
PNC Bank Corp. .................... 32,598 1,754,180
Southtrust Corp. .................. 10,400 452,400
Star Banc Corp. ................... 6,900 440,737
State Street Boston Corp. ......... 7,500 521,250
Summit Bancorp..................... 21,325 1,012,937
Union Planters Corp. .............. 14,885 875,424
Wells Fargo & Co. ................. 5,410 1,996,290
------------
24,596,752
------------
FINANCIAL SERVICES -- 2.2%
Ahmanson, (H.F.) & Co. ............ 1,780 126,380
American Express Co. .............. 10,975 1,251,150
Capital One Financial Corp. ....... 3,700 459,494
Esat Holdings Ltd. Warrants*....... 35 0
Fannie Mae......................... 25,360 1,540,620
FINOVA Group, Inc. ................ 10,400 588,900
Lehman Brothers Holdings, Inc. .... 5,900 457,619
Merrill Lynch & Co., Inc. ......... 14,745 1,360,226
Paine Webber Group, Inc. .......... 10,100 433,037
Providian Financial Corp. ......... 7,700 604,931
Schwab, (Charles) Corp. ........... 12,000 390,000
SunAmerica, Inc. .................. 9,400 539,912
Washington Mutual, Inc. ........... 26,842 1,165,949
------------
8,918,218
------------
FOOD -- 2.0%
Dominick's Supermarkets, Inc.*..... 8,800 392,150
General Mills, Inc. ............... 20,176 1,379,534
Heinz, (H.J.) Co. ................. 38,630 2,168,109
International Home Foods, Inc.*.... 17,600 400,400
Quaker Oats Co. ................... 33,680 1,850,295
Sara Lee Corp. .................... 26,360 1,474,512
Suiza Foods Corp.*................. 7,543 450,223
------------
8,115,223
------------
HEALTHCARE SERVICES -- 0.5%
Health Care & Retirement Corp.*.... 7,800 307,612
Health Management Associates, Inc.
Cl-A*............................ 15,550 519,953
Healthsouth Corp.*................. 7,200 192,150
Omnicare, Inc. .................... 13,300 507,062
Quintiles Transnational Corp.*..... 8,900 437,769
------------
1,964,546
------------
HOTELS & MOTELS -- 0.3%
Epic Resorts Warrants*............. 10 0
Starwood Hotels & Resorts [REIT]... 26,816 1,295,548
------------
1,295,548
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
INDUSTRIAL PRODUCTS -- 0.0%
Orbital Imaging Corp. Warrants
144A*............................ 20 $ 900
------------
INSURANCE -- 3.1%
Allstate Corp. .................... 18,510 1,694,822
American General Corp. ............ 28,591 2,035,322
AON Corp. ......................... 35,051 2,462,333
CIGNA Corp. ....................... 27,546 1,900,674
Hartford Life, Inc. Cl-A*.......... 7,700 438,419
PMI Group, Inc. ................... 5,200 381,550
Reliastar Financial Corp. ......... 9,400 451,200
The Equitable Companies, Inc. ..... 20,800 1,558,700
Travelers Group, Inc. ............. 23,775 1,441,359
------------
12,364,379
------------
MACHINERY & EQUIPMENT -- 1.7%
Caterpillar, Inc. ................. 8,180 432,517
Cooper Cameron Corp.*.............. 23,005 1,173,255
Cooper Industries, Inc. ........... 31,775 1,745,639
Danaher Corp. ..................... 11,800 432,912
Deere & Co. ....................... 27,265 1,441,637
Ingersoll-Rand Co. ................ 38,485 1,695,745
------------
6,921,705
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.4%
Baxter International, Inc. ........ 43,376 2,334,171
Johnson & Johnson Co. ............. 22,990 1,695,512
Manor Care, Inc. .................. 1,800 69,187
Schein, (Henry), Inc.*............. 10,200 470,475
Sofamor Danek Group, Inc.*......... 4,800 415,500
STERIS Corp.*...................... 7,000 445,156
Urohealth System, Inc. Warrants
144A*............................ 20 0
------------
5,430,001
------------
OFFICE EQUIPMENT -- 1.7%
Herman Miller, Inc. ............... 16,800 408,450
HON INDUSTRIES, Inc. .............. 7,800 265,200
Office Depot, Inc.*................ 15,700 495,531
Pitney Bowes, Inc. ................ 30,465 1,466,128
Xerox Corp. ....................... 43,006 4,370,485
------------
7,005,794
------------
OIL & GAS -- 4.4%
Amoco Corp. ....................... 43,544 1,812,519
Atlantic Richfield Co. ............ 20,670 1,614,844
British Petroleum Co. PLC [ADR].... 25,967 2,291,575
Coastal Corp. ..................... 20,775 1,450,355
Exxon Corp. ....................... 30,731 2,191,504
Global Industries Ltd.*............ 14,900 251,437
Kerr-McGee Corp. .................. 32,530 1,882,674
Mobil Corp. ....................... 21,666 1,660,157
Societe Nationale Elf Aquitaine SA
[ADR]............................ 25,690 1,823,990
Sonat, Inc. ....................... 30,400 1,174,200
Tosco Corp. ....................... 43,630 1,281,631
------------
17,434,886
------------
</TABLE>
13
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 0.9%
Boise Cascade Corp. ............... 40,665 $ 1,331,779
International Paper Co. ........... 21,825 938,475
Kimberly-Clark Corp. .............. 32,857 1,507,315
------------
3,777,569
------------
PHARMACEUTICALS -- 4.0%
American Home Products Corp. ...... 59,281 3,067,792
Bristol-Meyers Squibb Co. ......... 29,537 3,394,909
Centocor, Inc.*.................... 12,000 435,000
Elan Corp. PLC [ADR]*.............. 6,700 430,894
ICN Pharmaceuticals, Inc. ......... 9,600 438,600
Incyte Pharmaceuticals, Inc. ...... 9,100 310,537
McKesson Corp. .................... 6,100 495,625
Merck & Co., Inc. ................. 25,135 3,361,806
Pharmacia & Upjohn, Inc. .......... 84,497 3,897,424
Watson Pharmaceuticals, Inc.*...... 5,200 242,775
------------
16,075,362
------------
PRINTING & PUBLISHING -- 0.9%
Belo, (A.H.) Corp. Cl-A............ 14,300 348,562
McGraw-Hill Co., Inc. ............. 17,295 1,410,623
Times Mirror Co. Cl-A.............. 27,345 1,719,317
------------
3,478,502
------------
REAL ESTATE -- 0.0%
Equity Office Property Trust
Warrants 144A*................... 530 4,637
------------
RESTAURANTS -- 0.6%
AmeriKing, Inc.*................... 25 1,300
CKE Restaurants, Inc. ............. 10,310 425,287
McDonald's Corp. .................. 29,995 2,069,655
------------
2,496,242
------------
RETAIL & MERCHANDISING -- 2.8%
Bed, Bath & Beyond, Inc.*.......... 8,400 435,225
Borders Group, Inc.*............... 14,100 521,700
Costco Companies, Inc.*............ 12,700 800,894
Family Dollar Stores, Inc. ........ 34,200 632,700
Kmart Corp.*....................... 87,910 1,692,267
Kohls Corp.*....................... 11,800 612,125
Linens 'n Things, Inc.*............ 14,000 427,875
Meyer, (Fred), Inc.*............... 11,200 476,000
Payless Shoesource, Inc.*.......... 5,700 420,019
Penney, (J.C.) Co., Inc. .......... 23,295 1,684,520
Pier 1 Imports, Inc. .............. 21,850 521,669
Sears, Roebuck & Co. .............. 21,135 1,290,556
TJX Companies, Inc. ............... 25,200 607,950
Toys 'R' Us, Inc.*................. 48,930 1,152,913
------------
11,276,413
------------
TELECOMMUNICATIONS -- 4.2%
Advanced Fibre Communications,
Inc.*............................ 9,500 380,594
Allegiance Telecom, Inc. .......... 40 100
Ameritech Corp. ................... 38,100 1,709,737
Ascend Communications, Inc.*....... 6,400 317,200
AT&T Corp. ........................ 40,495 2,313,277
Cellular Communications
International, Inc.*............. 6,250 311,719
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Globalstar Telecommunications
Warrants 144A*................... 45 $ 489
GTE Corp. ......................... 29,745 1,654,566
Intercel, Inc. Warrants 144A*...... 640 6,080
McCaw International Ltd.
Warrants*........................ 10 0
MediaOne Group, Inc.*.............. 46,585 2,046,828
Nextel Communications, Inc.
Cl-A*............................ 503 12,512
SBC Communications, Inc. .......... 53,218 2,128,720
Sprint Corp. ...................... 25,476 1,796,058
TCA Cable TV, Inc. ................ 6,700 402,000
Tele-Communications Liberty Media,
Inc. Cl-A........................ 9,500 368,719
Tele-Communications TCI Ventures
Group Cl-A....................... 29,500 591,844
Telefonos de Mexico SA Cl-L
[ADR]............................ 1,313 63,106
Tellabs, Inc.*..................... 8,000 573,000
U. S. West, Inc.................... 38,006 1,786,282
UIH Australia Warrants*............ 50 0
Williams Companies, Inc. .......... 12,100 408,375
------------
16,871,206
------------
TRANSPORTATION -- 0.1%
Expeditors International of
Washington, Inc. ................ 6,300 277,200
------------
UTILITIES -- 0.9%
Duke Energy Corp. ................. 24,310 1,440,367
Texas Utilities Co. ............... 55,065 2,292,081
------------
3,732,448
------------
TOTAL COMMON STOCK
(COST $187,129,434).................. 215,107,744
------------
PREFERRED STOCK -- 0.1%
BROADCASTING -- 0.0%
Capstar Broadcasting 12.00%
[PIK]............................ 212 25,016
Citadel Broadcasting Co. 13.25%
[PIK]............................ 213 25,134
Echostar Communications Corp. Cl-B
12.125% [PIK].................... 106 11,863
Paxson Communications Private
Placement 13.25% [PIK] 144A...... 3 30,000
------------
92,013
------------
ENTERTAINMENT & LEISURE -- 0.1%
Colorado Gaming & Entertainment
Corp. 12.00% [PIK]............... 1,587 172,983
------------
INDUSTRIAL PRODUCTS -- 0.0%
Anvil Holding, Inc. 13.00% [PIK]... 13 325
Chesapeake Energy Corp. 7.00%
144A............................. 105 4,449
------------
4,774
------------
RESTAURANTS -- 0.0%
AmeriKing, Inc. 13.00%............. 1,208 31,408
------------
SEMICONDUCTORS -- 0.0%
Fairchild Semiconductor Corp. Sr.
Sub. Notes 10.125% [PIK] 144A.... 281 32,123
------------
</TABLE>
14
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TELECOMMUNICATIONS -- 0.0%
Cablevision Systems Corp. Cl-M
11.125% [PIK].................... 354 $ 40,975
NEXTLINK Communications, Inc.
14.00% [PIK]..................... 454 26,672
Winstar Communications, Inc.
14.25% [PIK]..................... 300 35,775
------------
103,422
------------
UTILITIES -- 0.0%
El Paso Electric Co. 11.40%
[PIK]............................ 12 1,326
Public Service Co. of New Hampshire
Cl-A 10.60%...................... 1,058 27,772
------------
29,098
------------
TOTAL PREFERRED STOCK (COST
$384,881)............................ 465,821
------------
FOREIGN STOCK -- 4.9%
AIRLINES -- 0.1%
British Airways PLC -- (GBP)....... 20,429 221,048
Deutsche Lufthansa AG -- (DEM)..... 5,961 149,600
------------
370,648
------------
AUTOMOBILE MANUFACTURERS -- 0.2%
Bayerische Motoren Werke
AG -- (DEM)...................... 203 204,796
Bayerische Motoren Werke AG
(New) -- (DEM)*.................. 62 61,258
Honda Motor Co. Ltd. -- (JPY)...... 3,000 106,784
Renault SA -- (FRF)*............... 1,617 91,975
Volkswagen AG -- (DEM)............. 187 179,745
Volvo AB Cl-B -- (SEK)............. 3,788 112,809
------------
757,367
------------
AUTOMOTIVE PARTS -- 0.1%
Bridgestone Corp. -- (JPY)......... 4,000 94,535
Michelin C.G.D.E. Cl-B -- (FRF).... 5,135 296,412
------------
390,947
------------
BEVERAGES -- 0.1%
Bass PLC -- (GBP).................. 14,890 279,004
------------
BUILDING MATERIALS -- 0.1%
Cimpor-Cimentos de Portugal SA --
(PTE)............................ 1,519 53,369
CRH PLC -- (IEP)................... 22,386 317,556
Lafarge SA -- (FRF)................ 613 63,368
------------
434,293
------------
CHEMICALS -- 0.2%
AKZO Nobel NV -- (NLG)............. 1,495 332,333
Bayer AG -- (DEM).................. 4,795 247,317
------------
579,650
------------
CLOTHING & APPAREL -- 0.0%
Onward Kashiyama Co.
Ltd. -- (JPY).................... 4,000 50,005
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CONGLOMERATES -- 0.3%
B.A.T. Industries PLC -- (GBP)..... 28,162 $ 281,930
BTR PLC -- (GBP)................... 47,407 134,468
Securicor PLC -- (GBP)............. 18,494 151,509
Smith Industries PLC -- (GBP)...... 9,971 138,084
Tomkins PLC -- (GBP)............... 44,307 240,445
Vivendi -- (FRF)................... 1,877 400,793
------------
1,347,229
------------
CONSTRUCTION -- 0.0%
Cemex SA de CV -- (MXP)............ 4,900 18,322
------------
CONSUMER PRODUCTS & SERVICES -- 0.2%
Bombardier, Inc. Cl-B -- (CAD)..... 5,819 158,282
Cookson Group PLC -- (GBP)......... 14,929 51,313
Fuji Photo Film Co. -- (JPY)....... 4,000 139,208
Granada Group PLC -- (GBP)......... 7,900 145,520
Kao Corp. -- (JPY)................. 12,000 185,034
Shiseido Co. Ltd. -- (JPY)......... 5,000 56,778
------------
736,135
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.2%
Omron Corp. -- (JPY)............... 9,000 137,479
Premier Farnell PLC -- (GBP)....... 3,151 16,035
Rohm Co. -- (JPY).................. 1,000 102,677
Royal Philips Electronics NV --
(NLG)............................ 3,439 289,088
Siebe PLC -- (GBP)................. 6,182 123,673
Sony Corp. -- (JPY)................ 2,600 223,871
Tokyo Electron Ltd. -- (JPY)....... 3,000 91,869
------------
984,692
------------
ENERGY SERVICES -- 0.1%
Iberdrola SA -- (ESP).............. 6,100 99,216
VA Technologie AG -- (ATS)......... 964 119,940
------------
219,156
------------
FINANCIAL-BANK & TRUST -- 0.9%
ABN AMRO Holding NV -- (NLG)....... 11,062 258,847
Allied Irish Banks PLC -- (IEP).... 23,832 344,052
Banco Comercial Portugues SA --
(PTE)............................ 714 20,274
Bank of Nova Scotia -- (CAD)....... 11,158 276,192
Banque Nationale de Paris
-- (FRF)........................ 4,616 377,157
Commonwealth Bank of Australia --
(AUD)............................ 7,932 92,540
Credit Commercial de
France -- (FRF).................. 824 69,370
Dao Heng Bank Group
Ltd. -- (HKD).................... 9,500 13,486
Deutsche Bank AG -- (DEM).......... 4,078 345,325
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD)............... 21,400 118,433
HSBC Holdings PLC -- (HKD)......... 11,392 278,604
ING Groep NV -- (NLG).............. 5,823 381,288
Julius Baer Holdings AG Cl-B --
(CHF)............................ 76 237,749
National Westminster Bank PLC --
(GBP)............................ 8,600 153,679
Royal Bank of Canada -- (CAD)...... 2,316 139,381
Svenska Handlesbanken Cl-A --
(SEK)............................ 2,842 131,855
</TABLE>
15
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
UBS AG -- (CHF)*................... 1,225 $ 455,495
United Overseas Bank
Ltd. -- (SGD).................... 5,000 15,537
------------
3,709,264
------------
FINANCIAL SERVICES -- 0.3%
Acom Co. Ltd. -- (JPY)............. 1,000 47,484
Bank of Ireland PLC -- (IEP)....... 15,971 326,357
Bayerische Vereinsbank AG --
(DEM)............................ 1,200 102,048
ForeningsSparbanken AB -- (SEK).... 1,910 57,480
Gucco Group Ltd. -- (HKD).......... 7,000 7,363
Nikko Securities Co.
Ltd. -- (JPY).................... 45,000 186,439
Nordbanken Holding Co. AB --
(SEK)*........................... 9,551 70,061
Promise Co. Ltd. -- (JPY).......... 2,400 98,743
Skandinaviska Enskilda Banken --
(SEK)............................ 4,140 70,861
Societe Generale -- (FRF).......... 1,467 304,997
Unidanmark AS Cl-A -- (DKK)........ 803 72,161
------------
1,343,994
------------
FOOD -- 0.2%
Greencore Group PLC -- (IEP)....... 29,774 161,966
Nestle SA -- (CHF)................. 288 616,325
------------
778,291
------------
INSURANCE -- 0.2%
Allianz AG -- (DEM)................ 321 105,813
Allianz AG (New) -- (DEM)*......... 13 4,249
Allianz-BCVG AGF Assurance
Warrants -- (FRF)................ 789 4,587
Assurances Generales de France --
(FRF)*........................... 2,001 113,222
Muenchener Rueckversicherung AG --
(DEM)............................ 127 62,971
Muenchener Reuckversicherungs-
Gesellschaft AG -- (DEM)......... 100 49,279
QBE Insurance Group
Ltd. -- (AUD).................... 2,788 9,841
Royal & Sun Alliance Insurance
Group PLC -- (GBP).............. 17,260 178,406
Zurich
Versicherungs-Gesellschaft --
(CHF)............................ 239 152,525
------------
680,893
------------
MACHINERY & EQUIPMENT -- 0.1%
Mannesmann AG -- (DEM)............. 3,700 376,451
Rieter Holdings AG -- (CHF)*....... 47 32,535
Sandvik AB Cl-B -- (SEK)........... 2,698 74,090
------------
483,076
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.1%
Glaxo Wellcome PLC -- (GBP)........ 6,424 192,825
Novartis AG -- (CHF)............... 160 266,243
Sankyo Co. Ltd. -- (JPY)........... 6,000 136,614
------------
595,682
------------
METALS & MINING -- 0.0%
Rio Tinto PLC -- (GBP)............. 14,307 161,131
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OFFICE EQUIPMENT -- 0.1%
Canon, Inc. -- (JPY)............... 5,000 $ 113,485
Ricoh Co. Ltd. -- (JPY)............ 9,000 94,744
------------
208,229
------------
OIL & GAS -- 0.3%
British Petroleum Co.
PLC -- (GBP)..................... 16,075 234,417
Burmah Castrol PLC -- (GBP)........ 12,617 225,882
Ente Nazionale Idrocarburi SPA --
(ITL)............................ 30,555 200,256
Societe Nationale Elf Aquitaine
SA -- (FRF)...................... 2,244 315,480
Total SA Cl-B -- (FRF)............. 2,564 333,327
------------
1,309,362
------------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK).................... 7,356 190,473
------------
PERSONAL SERVICES -- 0.0%
Vedior NV -- (NLG)................. 2,921 82,564
------------
PHARMACEUTICALS -- 0.1%
Pharmacia & Upjohn,
Inc. -- (SEK).................... 4,544 209,111
------------
PRINTING & PUBLISHING -- 0.0%
Dai Nippon Printing Co. Ltd. --
(JPY)............................ 9,000 143,639
------------
REAL ESTATE -- 0.0%
Fastighets AB Balder -- (SEK)*..... 1,879 1,885
------------
RETAIL & MERCHANDISING -- 0.1%
Dixons Group PLC -- (GBP).......... 12,424 100,434
Vendex NV -- (NLG)*................ 2,960 111,315
------------
211,749
------------
SEMICONDUCTORS -- 0.0%
Fujitsu Ltd. -- (JPY).............. 17,000 178,838
------------
TELECOMMUNICATIONS -- 0.6%
Alcatel Alsthom -- (FRF)........... 500 101,802
Deutsche Telekom AG -- (DEM)....... 5,302 143,049
Ericsson, (L.M.) Telephone Co.
Cl-B -- (SEK).................... 7,518 219,650
Hellenic Telecommunication
Organization SA -- (GRD)......... 5,198 133,250
KPN NV -- (NLG).................... 1,168 44,958
Nokia Oyj Cl-A -- (FIM)............ 4,036 296,825
Northern Telecom Ltd. -- (CAD)..... 4,318 244,890
Telecom Corp. of New Zealand --
(NZD)............................ 23,000 49,189
Telecom Corp. of New Zealand
Ltd. -- (NZD).................... 8,700 35,857
Telecom Italia SPA -- (ITL)........ 43,329 318,956
Telecomunicacoes Brasileiras SA --
(BRC)............................ 800 88,189
Telecomunicacoes de Sao Paulo SA --
(BRC)............................ 324 77,316
Telecomunicacoes de Sao Paulo SA
Rights -- (BRC)*................. 15 1
Telefonica SA -- (ESP)............. 7,714 357,256
</TABLE>
16
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Telesp Celular SA Pfd. Cl-B --
(BRC)*........................... 324 $ 27,173
Vodafone Group PLC -- (GBP)........ 17,220 218,648
------------
2,357,009
------------
TRANSPORTATION -- 0.0%
Peninsular & Oriental Steam
Navigation Co. -- (GBP).......... 8,866 127,663
TNT Post Group NV -- (NLG)*........ 1,168 29,857
------------
157,520
------------
UTILITIES -- 0.2%
Electricidade de Portugal SA --
(PTE)............................ 5,844 135,850
Scottish Power PLC -- (GBP)........ 41,151 360,468
Veba AG -- (DEM)................... 3,844 261,941
------------
758,259
------------
TOTAL FOREIGN STOCK
(COST $16,208,507)................... 19,728,417
------------
PAR
(000)
-------
CORPORATE OBLIGATIONS -- 12.7%
ADVERTISING -- 0.1%
Adams Outdoor Advertising Sr. Notes
10.75%, 03/15/06................. $ 75 82,125
Lamar Advertising Co.
Co. Guarantee Sr. Sub. Notes
9.625%, 12/01/06................. 60 64,350
Outdoor Communications Sr. Sub.
Notes
9.25%, 08/15/07.................. 50 51,500
Outdoor Systems, Inc. Sr. Sub.
Notes
8.875%, 06/15/07................. 75 78,000
------------
275,975
------------
AEROSPACE -- 0.2%
Argo-Tech Corp. Co. Guarantee Notes
8.625%, 10/01/07................. 10 10,175
Aviation Sales Co. Sr. Sub. Notes
144A
8.125%, 02/15/08................. 20 19,600
BE Aerospace, Inc. Sr. Sub. Notes
9.875%, 02/01/06................. 35 37,319
BE Aerospace, Inc. Sr. Sub. Notes
Cl-B
8.00%, 03/01/08.................. 10 9,975
Lockheed Martin Corp. Notes
7.25%, 05/15/06.................. 455 484,006
------------
561,075
------------
AIRLINES -- 0.2%
Calair LLC Co. Guarantee Notes 144A
8.125%, 04/01/08................. 10 10,100
Canadian Airlines Corp. Notes
10.00%, 05/01/05................. 20 20,225
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Continental Airlines, Inc. Series
97C1
7.42%, 04/01/07.................. $ 172 $ 175,633
Continental Airlines, Inc. Series
981C
6.541%, 09/15/09................. 760 760,251
------------
966,209
------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Consorcio Grupo Dina SA [ZCB]
6.251%, 11/15/02................. 20 18,925
------------
AUTOMOTIVE PARTS -- 0.0%
Lear Corp. Sub. Notes 9.50%,
07/15/06......................... 50 54,875
Safety Components International,
Inc. Sr. Sub. Notes Cl-B
10.125%, 07/15/07................ 10 10,400
Talon Automotive Group
Sr. Sub. Notes 144A
9.625%, 05/01/08................. 30 30,375
------------
95,650
------------
BEVERAGES -- 0.0%
Canandaigua Wine Corp. Sr. Sub.
Notes 8.75%, 12/15/03............ 55 56,306
------------
BROADCASTING -- 0.3%
Acme Television Co.
Co. Guarantee Notes Cl-B [STEP]
10.875%, 09/30/04................ 15 12,262
Capstar Broadcasting, Inc. Sr.
Disc. Notes [STEP] 12.75%,
02/01/09......................... 60 45,750
Central European Media Enterprises
Ltd. Sr. Notes 9.375%,
08/15/04......................... 10 9,525
Citadel Broadcasting Co. Sr. Sub.
Notes 10.25%, 07/01/07........... 10 11,000
Diva Systems Corp. Units [STEP]
144A 6.873%, 03/01/08............ 50 25,750
Fox Liberty Networks LLC Sr. Notes
8.875%, 08/15/07................. 30 30,450
News America Holdings, Inc. Debs.
7.70%, 10/30/25.................. 695 743,650
Spanish Broadcasting System, Inc.
Sr. Notes Cl-B 11.00%,
03/15/04......................... 25 27,125
Spanish Broadcasting System, Inc.
Sr. Notes 12.50%, 06/15/02....... 50 57,250
Sullivan Broadcasting Holdings Co.
Sr. Sub. Notes 10.25%,
12/15/05......................... 75 85,781
TCI Satellite Sr. Sub. Notes
10.875%, 02/15/07................ 20 19,950
Young Broadcasting, Inc. Sr. Sub.
Notes Cl-B 9.00%, 01/15/06....... 5 5,200
------------
1,073,693
------------
</TABLE>
17
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
BUILDING MATERIALS -- 0.0%
Atrium Companies, Inc. Sr. Sub.
Notes
10.50%, 11/15/06................. $ 10 $ 10,625
Brand Scaffold Services, Inc. Sr.
Notes 144A 10.25%, 02/15/08...... 10 10,225
Building Materials Corp. Sr. Notes
8.625%, 12/15/06................. 10 10,312
Koppers Industry, Inc. Co.
Guarantee Notes 9.875%,
12/01/07......................... 10 10,400
Polytama International Notes
11.25%, 06/15/07................. 25 11,250
------------
52,812
------------
BUSINESS SERVICES -- 0.1%
Affinity Group Holding, Inc. Sr.
Notes
11.00%, 04/01/07................. 65 69,306
Affinity Group, Inc. Sr. Sub. Notes
11.50%, 10/15/03................. 55 58,094
Iron Mountain, Inc. Sr. Sub. Notes
8.75%, 09/30/09.................. 25 25,562
Outsourcing Solutions Corp. Sr.
Sub. Notes Cl-B 11.00%,
11/01/06......................... 20 21,750
U.S. Office Products Co. Sr. Sub.
Notes 144A 9.75%, 06/15/08....... 40 40,100
------------
214,812
------------
CHEMICALS -- 0.3%
PCI Chemicals Canada, Inc. Notes
9.25%, 10/15/07.................. 50 48,750
Polymer Group Holdings, Inc. Sr.
Sub. Notes 9.00%, 07/01/07....... 15 15,300
Polymer Group, Inc. Sr. Sub. Notes
144A 8.75%, 03/01/08............. 10 10,025
Solutia, Inc. Bonds 6.72%,
10/15/37......................... 890 915,587
Sovereign Specialty Chemicals Sr.
Sub. Notes Cl-B 9.50%,
08/01/07......................... 20 20,925
Trikem SA Notes 144A 10.625%,
07/24/07......................... 15 13,012
------------
1,023,599
------------
CLOTHING & APPAREL -- 0.0%
GFSI, Inc. Sr. Sub. Notes Cl-B
9.625%, 03/01/07................. 10 10,575
Iron Age Corp. Sr. Sub. Notes 144A
9.875%, 05/01/08................. 30 30,075
Sassco Fashions Ltd. Sr. Notes
12.75%, 03/31/04................. 25 26,437
Westpoint Stevens, Inc. Sr. Notes
144A
7.875%, 06/15/08................. 20 20,000
------------
87,087
------------
COMPUTER SERVICES & SOFTWARE -- 0.2%
Concentric Network Corp. Notes
12.75%, 12/15/07................. 10 12,200
Dell Computer Corp. Debs. 7.10%,
04/15/28......................... 590 604,750
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Knology Holdings, Inc. Sr. Disc.
Notes [STEP] 11.875%, 10/15/07... $ 45 $ 26,775
Printpack, Inc. Sr. Notes 9.875%,
08/15/04......................... 25 26,781
PSINet, Inc. Sr. Notes Cl-B 10.00%,
02/15/05......................... 20 20,500
------------
691,006
------------
CONGLOMERATES -- 0.3%
Hermes Europe Railtel BV Sr. Notes
11.50%, 08/15/07................. 50 56,562
K&F Industries, Inc. Sr. Sub. Notes
Cl-B 9.25%, 10/15/07............. 10 10,125
Perez Companc SA 144A 9.00%,
01/30/04......................... 15 14,700
Philip Morris Co., Inc. Debs.
7.50%, 01/15/02.................. 425 442,000
Philip Morris Co., Inc. Notes
7.50%, 04/01/04.................. 710 749,050
------------
1,272,437
------------
CONSTRUCTION -- 0.0%
American Architechtural Co.
Guarantee Notes 11.75%,
12/01/07......................... 10 10,425
MDC Holdings, Inc. Notes Cl-B
11.125%, 12/15/03................ 25 27,312
Newport News Shipbuilding, Inc. Sr.
Notes 8.625%, 12/01/06........... 20 21,125
------------
58,862
------------
CONSUMER PRODUCTS & SERVICES -- 0.1%
Alaris Medical Systems, Inc. Sr.
Notes
9.75%, 12/01/06.................. 40 41,800
Chattem, Inc. Sr. Sub. Notes 144A
8.875%, 04/01/08................. 20 19,950
Consumers International Corp. Sr.
Notes 144A 10.25%, 04/01/05...... 10 10,962
Decora Industries, Inc. Notes 144A
11.00%, 05/01/05................. 20 19,500
French Fragrances, Inc. Sr. Notes
10.375%, 05/15/07................ 10 10,700
Glenoit Corp. Co. Guarantee Notes
11.00%, 04/15/07................. 10 10,725
Hedstrom Holdings, Inc. Sr. Disc.
Notes [STEP] 11.613%, 06/01/09... 5 3,156
Home Interiors & Gifts Sr. Sub.
Notes 144A 10.125%, 06/01/08..... 10 10,225
</TABLE>
18
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Integrated Health Services, Inc.
Sr. Sub. Notes Cl-A 9.50%,
09/15/07......................... $ 50 $ 52,500
Revlon Consumer Products Corp. Sr.
Sub. Notes 8.625%, 02/01/08...... 50 50,250
------------
229,768
------------
CONTAINERS & PACKAGING -- 0.0%
AEP Industries, Inc. Sr. Sub. Notes
9.875%, 11/15/07................. 25 26,062
Huntsman Packaging Corp. Co.
Guarantee Notes 9.125%,
10/01/07......................... 15 14,962
Owens-Illinois, Inc. Sr. Notes
8.10%, 05/15/07.................. 20 21,225
Riverwood International Co. Notes
10.25%, 04/01/06................. 50 51,375
10.625%, 08/01/07................ 50 52,125
10.875%, 04/01/08................ 10 10,150
Stone Container Corp. First Mtge.
Notes 10.75%, 10/01/02........... 5 5,325
------------
181,224
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Celestica International, Inc. Sr.
Sub. Notes 10.50%, 12/31/06...... 20 22,075
Cellnet Data Systems, Inc. Sr.
Disc. Notes [STEP] 14.00%,
10/01/07......................... 75 43,031
Details, Inc. Sr. Sub. Notes
10.00%, 11/15/05................. 15 15,187
DII Group, Inc. Sr. Sub. Notes
8.50%, 09/15/07.................. 10 9,950
Espirito Santo Centrais Sr. Notes
10.00%, 07/15/07................. 15 12,600
Flextronics International Ltd. Sr.
Sub. Notes Cl-B 8.75%,
10/15/07......................... 10 10,087
HCC Industries, Inc. Sr. Sub. Notes
10.75%, 05/15/07................. 15 15,862
Pioneer Americas Acquistics Corp.
Sr. Notes 9.25%, 06/15/07........ 10 9,850
Raytheon Co. Notes 6.45%,
08/15/02......................... 905 918,575
Samsung Electronics America Co.
Guarantee Notes 144A 9.75%,
05/01/03......................... 10 9,488
Viasystems, Inc. Sr. Sub. Notes
9.75%, 06/01/07.................. 20 19,650
Wavetek Corp. Sr. Sub. Notes
10.125%, 06/15/07................ 10 10,400
Zilog, Inc. Sr. Notes 144A 9.50%,
03/01/05......................... 30 22,500
------------
1,119,255
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 0.6%
AMC Entertainment, Inc. Sr. Sub.
Notes 9.50%, 03/15/09............ $ 20 $ 20,525
Argosy Gaming Co. Notes 13.25%,
06/01/04......................... 25 28,188
Cinemark USA, Inc. Sr. Sub. Notes
9.625%, 08/01/08................. 65 67,113
Club Regina, Inc. Notes 144A
13.00%, 12/01/04................. 20 21,400
Coast Hotels & Casino, Inc. Notes
Cl-B 13.00%, 12/15/02............ 55 62,288
Fitzgeralds Gaming Corp. Sr. Sub.
Notes 144A 12.25%, 12/15/04...... 30 29,175
Fox Family Worldwide, Inc. Sr.
Disc. Notes [STEP] 10.25%,
11/01/07......................... 40 25,850
Fox Family Worldwide, Inc. Sr.
Notes 9.25%, 11/01/07............ 50 49,875
Louisiana Casino Cruises, Inc.
First Mtge. 11.50%, 12/01/98..... 100 101,500
Mohegan Tribal Gaming Sr. Notes
Cl-B 13.50%, 11/15/02............ 30 38,738
Players International, Inc. Sr.
Notes
10.875%, 04/15/05................ 25 27,125
Premier Parks, Inc. Sr. Notes
9.25%, 04/01/06.................. 35 36,006
Premier Parks, Inc. Sr. Notes Cl-A
12.00%, 08/15/03................. 40 44,400
SFX Entertainment, Inc. Sr. Sub.
Notes 144A 9.125%, 02/01/08...... 10 9,850
Showboat Marina Casinos, Inc. First
Mtge. 13.50%, 03/15/03........... 25 29,750
Silver Cinemas, Inc. Sr. Sub. Notes
144A 10.50%, 04/15/05............ 20 20,475
Six Flags Theme Parks Corp. Sr.
Sub. Notes Cl-A [STEP] 12.25%,
06/15/05......................... 90 101,588
Time Warner Co. Entertainment Notes
8.875%, 10/01/12................. 425 519,031
Time Warner Co. Entertainment Sr.
Notes 8.375%, 07/15/33........... 590 709,475
Time Warner, Inc. Notes 7.75%,
06/15/05......................... 370 398,675
United Artist Theatre, Inc. Sr.
Sub. Notes 144A 9.75%,
04/15/08......................... 10 9,975
------------
2,351,002
------------
</TABLE>
19
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
ENVIRONMENTAL SERVICES -- 0.3%
Allied Waste Industries, Inc. Sr.
Disc. Notes [STEP] 11.30%,
06/01/07......................... $ 50 $ 36,875
Allied Waste North America, Inc.
Co. Guarantee Notes 10.25%,
12/01/06......................... 35 38,631
ATC Group Services, Inc. Sr. Sub.
Notes 144A 12.00%, 01/15/08...... 10 9,400
WMX Technologies, Inc. Notes 7.10%,
08/01/26......................... 925 948,125
------------
1,033,031
------------
EQUIPMENT SERVICES -- 0.0%
Coinmach Corp. Sr. Notes Cl-D
11.75%, 11/15/05................. 10 11,175
------------
FARMING & AGRICULTURE -- 0.0%
Purina Mills, Inc. Sr. Sub. Notes
144A
9.00%, 03/15/10.................. 20 20,600
------------
FINANCIAL-BANK & TRUST -- 1.0%
Allstate Financing II 7.83%,
12/01/45......................... 125 136,406
Banponce Corp. Medium Term Notes
7.125%, 05/02/02................. 410 422,300
Chevy Chase Savings Bank Sub. Debs.
9.25%, 12/01/05.................. 45 46,013
Dime Capital, Inc. Trust I Cl-A
Notes
9.33%, 05/06/27.................. 10 11,850
First Nationwide Holdings, Inc. Sr.
Notes 12.50%, 04/15/03........... 55 62,975
First Nationwide Holdings, Inc. Sr.
Sub. Notes 10.625%, 10/01/03..... 35 39,725
Fuji JGB LLC Pfd. 144A 9.87%,
06/30/08......................... 585 509,120
Greenpoint Bank Corp. Sr. Notes
6.70%, 07/15/02.................. 560 567,000
Greenpoint Capital Corp. Trust I
Notes
9.10%, 06/01/27.................. 10 11,313
Korea Development Bank Notes
7.125%, 09/17/01................. 25 21,969
Long Island Savings Bank, Inc.
Notes
7.00%, 06/13/02.................. 690 706,388
Merita Bank Ltd. Sub. Notes 6.50%,
01/15/06......................... 500 501,875
North Fork Bancorp Notes 8.70%,
12/15/26......................... 5 5,563
Peoples Bank-Bridgeport, Inc. Sub.
Notes 7.20%, 12/01/06............ 305 314,913
Provident Capital, Inc. Trust Notes
8.60%, 12/01/26.................. 20 22,000
Riggs Capital Corp. Trust Notes
144A
8.625%, 12/31/26................. 15 16,556
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Sovereign Capital, Inc. Trust I
Capital Securities Notes 9.00%,
04/01/27......................... $ 15 $ 17,344
St. Paul Bancorp, Inc. Sr. Notes
7.125%, 02/15/04................. 350 362,250
Swedbank, Inc. Sub. Notes 144A
7.50%, 11/29/49.................. 360 373,500
Williams Scotsman, Inc. Sr. Notes
9.875%, 06/01/07................. 15 15,675
------------
4,164,735
------------
FINANCIAL SERVICES -- 3.1%
Aames Financial Corp. Sr. Notes
9.125%, 11/01/03................. 40 39,800
AFC Capital Trust I Notes Cl-B
8.207%, 02/03/27................. 500 570,625
American General Institute Capital
Trust Co. Guarantee Notes 144A
8.125%, 03/15/46................. 765 871,144
Amvescap PLC 144A 6.60%, 05/15/05.. 530 537,288
APP Global Finance V Ltd. Notes
[CVT] 144A 2.00%, 07/25/00....... 20 17,700
AT&T Capital Corp. Medium Term
Notes 6.25%, 05/15/01............ 540 540,675
CIA Latino Americana Notes 144A
11.625%, 06/01/04................ 10 9,975
Cincinnati Financial Corp. Debs.
6.90%, 05/15/28.................. 500 512,500
Colonial Capital II Co. Guarantee
Notes Cl-A 8.92%, 01/15/27....... 15 16,894
Commercial Credit Co. Notes 7.75%,
03/01/05......................... 430 466,550
Contifinancial Corp. Sr. Notes
8.375%, 08/15/03................. 45 47,475
Delta Financial Corp. Sr. Notes
9.50%, 08/01/04.................. 15 14,850
Dine S.A. de C.V. Notes 144A 8.75%,
10/05/07......................... 10 9,213
Dollar Financial Group, Inc. Sr.
Notes
10.875%, 11/15/06................ 15 16,200
DTI Holdings, Inc. Units [STEP]
144A 11.92%, 03/01/08............ 120 63,900
Esat Holdings Ltd. Notes [STEP]
12.50%, 02/01/07................. 35 25,725
Fannie Mae Notes 5.75%, 04/15/03... 1,045 1,046,620
First Financial Caribbean Corp. Sr.
Notes 7.84%, 10/10/06............ 200 210,250
Firstar Bank Milwaukee Corp. Sr.
Notes 6.25%, 12/01/02............ 380 382,850
</TABLE>
20
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Ford Motor Credit Co. Sr. Notes
7.00%, 09/25/01.................. $ 600 $ 618,000
FRD Acquisition Sr. Notes Cl-B
12.50%, 07/15/04................. 10 11,000
General Motors Acceptance Corp.
Notes 5.80%, 04/09/01............ 865 860,675
Imperial Credit Capital Trust I
Notes
10.25%, 06/14/02................. 20 20,250
Imperial Credit Industries, Inc.
Sr. Notes 9.875%, 01/15/07....... 20 20,050
Lehman Brothers Holdings, Inc.
Notes
6.50%, 10/01/02.................. 550 556,188
Merrill Lynch & Co. Notes Cl-B
6.13%, 04/07/03.................. 1,850 1,852,313
Nationwide Credit, Inc. Sr. Notes
144A
10.25%, 01/15/08................. 10 10,075
Netia Holdings Co. Guarantee Cl-B
10.25%, 11/01/07................. 10 10,275
Ocwen Capital Corp. Trust I Notes
10.875%, 08/01/27................ 10 10,925
Paine Webber Group, Inc. Sr. Notes
6.55%, 04/15/08.................. 790 795,925
Pindo Deli Financial Mauritius Co.
Guarantee Notes 10.75%,
10/01/07......................... 25 17,375
PX Escrow Corp. Sr. Disc. Notes
[STEP] 144A 9.625%, 02/01/06..... 10 7,225
Salomon, Inc. Sr. Notes 7.30%,
05/15/02......................... 465 481,787
Southern Investments U.K. Sr. Notes
6.80%, 12/01/06.................. 790 809,750
The Money Store, Inc. Notes 8.05%,
04/15/02......................... 235 249,981
TIG Holdings, Inc. Notes 8.125%,
04/15/05......................... 450 490,500
Tjiwi Kimia Financial Mauritius
Ltd. Sr. Notes 10.00%,
08/01/04......................... 25 17,750
Tokai Preferred Capital Co. 144A
9.98%, 12/29/49.................. 10 9,275
Vicap SA Notes 144A 10.25%,
05/15/02......................... 20 20,275
Webster Capital Corp. Trust I Notes
144A 9.36%, 01/29/27............. 10 11,450
------------
12,281,278
------------
FOOD -- 0.0%
Ameriserv Food Distributor, Inc.
Co. Guarantee Sr. Sub. Notes
8.875%, 10/15/06................. 20 20,200
10.125%, 07/15/07................ 5 5,225
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Aurora Foods, Inc. Sr. Sub. Notes
Cl-B
9.875%, 02/15/07................. $ 10 $ 10,550
Aurora Foods, Inc. Sr. Sub. Notes
Cl-D
9.875%, 02/15/07................. 20 21,100
Fleming Companies, Inc. Notes Cl-B
10.50%, 12/01/04................. 20 20,700
Southern Foods Sr. Sub. Notes 144A
9.875%, 09/01/07................. 10 10,400
Windy Hill Pet Food Co. Sr. Sub.
Notes 9.75%, 05/15/07............ 75 79,500
------------
167,675
------------
FURNITURE -- 0.0%
Sealy Mattress Co. Sr. Disc. Notes
[STEP] 144A 10.875%, 12/15/07.... 15 9,975
------------
HEALTHCARE SERVICES -- 0.3%
Columbia/HCA Healthcare Corp. Notes
7.15%, 03/30/04.................. 50 49,938
Extendicare Health Services Sr.
Sub. Notes 9.35%, 12/15/07....... 25 25,750
Genesis Health Ventures, Inc. Sr.
Sub. Notes 9.25%, 10/01/06....... 45 45,450
Global Health Sciences Sr. Notes
144A
11.00%, 05/01/08................. 20 19,800
Hudson Respiratory Care, Inc. Sr.
Sub. Notes 144A 9.125%,
04/15/08......................... 20 19,925
Integrated Health Services, Inc.
Sr. Sub. Notes Cl-A 9.25%,
01/15/08......................... 15 15,600
Magellan Health Services, Inc. Sr.
Sub. Notes 144A 9.00%,
02/15/08......................... 30 29,775
Manor Care, Inc. Sr. Notes 7.50%,
06/15/06......................... 305 326,350
Multicare Co. Sr. Sub. Notes 9.00%,
08/01/07......................... 20 19,700
National Health Investors, Inc.
Notes
7.30%, 07/16/07.................. 295 311,594
Paracelsus Healthcare Corp. Sr.
Sub. Notes 10.00%, 08/15/06...... 40 39,800
Paragon Health Networks, Inc. Sr.
Sub. Notes 9.50%, 11/01/07....... 50 51,000
Sun Healthcare Group, Inc. Sr. Sub.
Notes 144A 9.50%, 07/01/07....... 50 50,750
Urohealth Systems, Inc. Sr. Sub.
Notes
12.50%, 04/01/04................. 20 8,000
------------
1,013,432
------------
</TABLE>
21
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
HOTELS & MOTELS -- 0.0%
Host Marriott Travel Plaza Corp.
Sr. Notes Cl-B 9.50%, 05/15/05... $ 40 $ 42,500
Prime Hospitality Corp. Sr. Sub.
Notes
9.75%, 04/01/07.................. 35 37,538
Sun International Hotels Co.
Guarantee Notes 8.625%,
12/15/07......................... 50 51,563
------------
131,601
------------
INDUSTRIAL PRODUCTS -- 0.2%
Consorcio Ecuatoriano Notes Cl-B
14.00%, 05/01/02................. 10 9,988
Continental Global Group, Inc. Sr.
Notes Cl-B 11.00%, 04/01/07...... 25 26,313
GS Superhighway Holdings Sr. Notes
9.875%, 08/15/04................. 30 22,013
Isle of Capri Black Hawk Corp.
Notes Cl-B 13.00%, 08/31/04...... 10 10,575
Jackson Products, Inc. Co.
Guarantee Notes 144A 9.50%,
04/15/05......................... 10 9,975
Kinetic Concepts, Inc. Sr. Sub.
Notes Cl-B 9.625%, 11/01/07...... 10 10,125
Orbital Imaging Corp. Units 144A
11.625%, 03/01/05................ 20 20,500
Paragon Corp. Holdings Sr. Notes
144A
9.625%, 04/01/08................. 10 9,200
RAB Enterprises, Inc. Sr. Notes
144A
10.50%, 05/01/05................. 30 30,338
US Filter Corp. Notes 144A 6.50%,
05/15/03......................... 535 537,006
------------
686,033
------------
INSURANCE -- 0.3%
Aegon NV Sub. Notes 8.00%,
08/15/06......................... 500 558,750
Provident Companies, Inc. Notes
7.405%, 03/15/38................. 660 683,100
------------
1,241,850
------------
MACHINERY & EQUIPMENT -- 0.3%
Day International Group, Inc. Sr.
Sub. Notes 144A 9.50%,
03/15/08......................... 25 25,188
Hertz Corp. Notes 7.00%,
01/15/28......................... 615 619,613
Johnstown America Industries, Inc.
Sr. Sub. Notes Cl-C 11.75%,
08/15/05......................... 15 16,706
Millipore Corp. Notes 7.20%,
04/01/02......................... 340 351,050
Morris Materials Handling Sr. Notes
144A 9.50%, 04/01/08............. 20 18,650
Motors and Gears, Inc. Sr. Notes
Cl-D
10.75%, 11/15/06................. 35 37,713
Navistar International Sr. Notes
Cl-B
7.00%, 02/01/03.................. 80 80,400
------------
1,149,320
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Conmed Corp. Sr. Sub. Notes 9.00%,
03/15/08......................... $ 10 $ 10,000
Fresenius Medical Capital Trust I
Co. Guarantee Notes 9.00%,
12/01/06......................... 20 20,800
Fresenius Medical Care Co.
Guarantee Notes
7.875%, 02/01/08................. 30 29,475
Graphic Controls Corp. Sr. Sub.
Notes Cl-A 12.00%, 09/15/05...... 35 39,244
MEDIQ, Inc. Units 144A 13.00%,
06/01/09......................... 20 10,800
MEDIQ/PRN Life Support Services,
Inc. Sr. Sub. Notes 144A 11.00%,
06/01/08......................... 30 30,900
Medpartners, Inc. Sr. Notes 7.375%,
10/01/06......................... 50 45,250
------------
186,469
------------
METALS & MINING -- 0.1%
Acindar Industria Argentina de
Aceros SA Notes 11.25%,
02/15/04......................... 10 10,113
AK Steel Corp. Sr. Notes 9.125%,
12/15/06......................... 30 31,425
Ameristeel Corp. Sr. Notes 144A
8.75%, 04/15/08.................. 20 20,050
Anker Coal Group, Inc. Sr. Notes
Cl-B
9.75%, 10/01/07.................. 10 9,200
Freeport-McMoRan Copper & Gold,
Inc. Sr. Notes 7.50%, 11/15/06... 125 101,719
Hylsa SA de CV Notes 144A 9.25%,
09/15/07......................... 30 27,900
Lodestar Holdings, Inc. Sr. Notes
144A
11.50%, 05/15/05................. 10 10,113
Potash Corp. Notes 7.125%,
06/15/07......................... 300 311,250
WHX Corp. Sr. Notes 10.50%,
04/15/05......................... 10 10,200
------------
531,970
------------
OFFICE EQUIPMENT -- 0.0%
United Stationers Supply Co. Sr.
Sub. Notes 12.75%, 05/01/05...... 3 3,405
8.375%, 04/15/08 144A............ 20 20,050
------------
23,455
------------
</TABLE>
22
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
OIL & GAS -- 0.6%
Abraxas Petroleum Corp. Co.
Guarantee Notes Cl-D 11.50%,
11/01/04......................... $ 25 $ 25,750
Chesapeake Energy Corp. Sr. Notes
144A 9.625%, 05/01/05............ 30 30,000
Coastal Corp. Bonds 6.95%,
06/02/28......................... 520 523,900
Dailey International, Inc. Co.
Guarantee Notes Cl-B 9.50%,
02/15/08......................... 10 9,850
Flores & Rucks, Inc. Sr. Sub. Notes
9.75%, 10/01/06.................. 40 43,800
Global Marine, Inc. Notes 7.00%,
06/01/28......................... 790 803,825
Gothic Production Corp. Sr. Notes
144A 11.125%, 05/01/05........... 10 9,575
Michael Petroleum Corp. Sr. Notes
144A 11.50%, 04/01/05............ 10 10,075
Newpark Resources, Inc. Co.
Guarantee Notes Cl-B 8.625%,
12/15/07......................... 10 10,175
Northern Offshore ASA Co. Guarantee
Notes 144A 10.00%, 05/15/05...... 20 19,200
Pacalta Resource Ltd. Sr. Notes
Cl-B
10.75%, 06/15/04................. 10 9,950
Panaco, Inc. Sr. Notes 10.625%,
10/01/04......................... 10 10,000
Panda Global Energy Co. Sr. Notes
12.50%, 04/15/04................. 10 9,613
Petroleum Geo-Services Notes 7.50%,
03/31/07......................... 175 186,594
Petsec Energy, Inc. Sr. Sub. Notes
Cl-B 9.50%, 06/15/07............. 35 35,000
Pogo Producing Co. Sr. Sub. Notes
Cl-B 8.75%, 05/15/07............. 5 5,113
Pride Petroleum Services, Inc. Sr.
Notes 9.375%, 05/01/07........... 15 15,844
Saga Petroleum ASA Debs. 7.25%,
09/23/27......................... 325 339,219
Snyder Oil Corp. Sr. Sub. Notes
8.75%, 06/15/07.................. 15 15,113
Transamerican Refining Corp. Units
144A
16.00%, 06/30/03................. 20 21,300
Transtexas Gas Corp. Sr. Sub. Notes
Cl-D 13.75%, 12/31/01............ 75 83,250
------------
2,217,146
------------
PAPER & FOREST PRODUCTS -- 0.0%
APP Finance II Mauritius Ltd. Notes
144A 3.50%, 04/30/03............. 60 48,000
Florida Coast Paper LLC First Mtge.
Notes 12.75%, 06/01/03........... 5 5,550
Maxxam Group Holdings, Inc. Sr.
Notes 12.00%, 08/01/03........... 5 5,600
------------
59,150
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
PHARMACEUTICALS -- 0.0%
Fresenius Medical Capital Trust II
Co. Guarantee Notes 7.875%,
02/01/08......................... $ 20 $ 19,650
ICN Pharmaceuticals, Inc. Sr. Notes
Cl-B 9.25%, 08/15/05............. 15 15,938
Pharmaceutical Fine Chemicals Corp.
Sr. Sub. Notes 144A 9.75%,
11/15/07......................... 10 11,325
Pharmerica, Inc. Sr. Sub. Notes
144A
8.375%, 04/01/08................. 20 19,950
------------
66,863
------------
PRINTING & PUBLISHING -- 0.0%
America Media Operation, Inc. Sr.
Sub. Notes 11.625%, 11/15/04..... 40 43,200
Garden State Newspapers, Inc. Sr.
Sub. Notes Cl-B 8.75%,
10/01/09......................... 25 25,563
Von Hoffman Press, Inc. Sr. Sub.
Notes 144A 10.375%, 05/15/07..... 10 10,738
------------
79,501
------------
RAILROADS -- 0.7%
CSX Corp. Notes 7.95%, 05/01/27.... 515 592,250
Norfolk Southern Corp. Notes 6.95%,
05/01/02......................... 425 439,344
7.80%, 05/15/27.................. 815 945,400
7.05%, 05/01/37.................. 755 808,794
TFM SA de CV Co. Guarantee Notes
10.25%, 06/15/07................. 10 9,675
Transportacion Maritima Mexicana SA
de CV Registered Notes [STEP]
11.784%, 06/15/09................ 50 33,125
------------
2,828,588
------------
REAL ESTATE -- 0.2%
Beazer Homes USA Co. Guarantee
Notes 8.875%, 04/01/08........... 10 9,750
Cathay International Ltd. Sr. Notes
144A 13.00%, 04/15/08............ 30 26,775
</TABLE>
23
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Equity Office Property Notes 144A
6.763%, 06/15/07................. $ 530 $ 531,617
Equity Residential Properties
Operating L.P. Notes 6.63%,
04/13/05......................... 355 356,775
Horton, (D.R.), Inc. Co. Guarantee
Notes 10.00%, 04/15/06........... 15 16,238
------------
941,155
------------
RETAIL & MERCHANDISING -- 0.4%
CEX Holdings, Inc. Sr. Sub. Notes
144A 9.625%, 06/01/08............ 20 20,550
Eye Care Centers of America, Inc.
Sr. Sub. Notes 144A 9.125%,
05/01/08......................... 10 9,900
Federated Department Stores, Inc.
Sr. Notes 8.50%, 06/15/03........ 720 786,600
Southland Corp. Sr. Sub. Debs. Cl-A
4.50%, 06/15/04.................. 95 76,713
Specialty Retailers, Inc. Co.
Guarantee Notes Cl-B 8.50%,
07/15/05......................... 10 10,325
Tyco International Group SA Co.
Guarantee Notes 6.375%,
06/15/05......................... 380 381,425
6.25%, 06/15/13.................. 395 394,013
William Carter Holdings Co. Sr.
Sub. Notes 144A 12.00%,
10/01/08......................... 20 21,400
Zale Corp. Sr. Notes Cl-B 8.50%,
10/01/07......................... 20 20,500
------------
1,721,426
------------
SEMICONDUCTORS -- 0.0%
Derlan Manufacturing Ltd. Sr. Notes
10.00%, 01/15/07................. 25 26,250
Fairchild Semiconductor Corp. Sr.
Sub. Notes 10.125%, 03/15/07..... 75 77,438
------------
103,688
------------
TELECOMMUNICATIONS -- 1.4%
Adelphia Communications Corp. Sr.
Notes Cl-B 10.25%, 07/15/00...... 10 10,438
AirTouch Communications, Inc.
Notes 6.65%, 05/01/08............ 530 538,613
Allbritton Communications Corp. Sr.
Sub. Notes Cl-B 8.875%,
02/01/08......................... 50 54,125
Allegiance Telecom, Inc. Units
[STEP] 11.75%, 02/15/08.......... 40 21,250
Benedek Communications Corp. Sr.
Disc. Notes [STEP] 14.474%,
05/15/06......................... 75 59,438
Bestel SA Units [STEP] 12.75%,
05/15/05......................... 20 13,500
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Birch Telecom, Inc. Units 144A
14.00%, 06/15/08................. $ 10 $ 10,050
BTI Telecom Corp. Sr. Notes 10.50%,
09/15/07......................... 70 70,700
Centennial Cellular Corp. Sr. Notes
8.875%, 11/01/01................. 25 26,031
Century Communications Corp. Sr.
Notes 9.50%, 03/01/05............ 35 37,975
Colt Telecom Group PLC Sr. Disc.
Notes 9.356%, 12/15/06........... 50 39,500
Comcast Cellular Holdings Corp. Sr.
Notes Cl-B 9.50%, 05/01/07....... 45 47,081
Comcast U.K. Cable Corp. Debs.
[STEP] 10.245%, 11/15/07......... 60 50,100
Comcast U.K. Cable Corp. Sr. Sub.
Debs. 9.50%, 01/15/08............ 75 80,250
CTI Holdings SA Sr. Notes 144A
11.50%, 04/15/08................. 10 5,700
Diamond Cable Communications PLC
Sr. Disc. Notes [STEP] 10.58%,
12/15/05......................... 100 83,000
Dobson Communications Corp. Sr.
Notes 11.75%, 04/15/07........... 40 43,300
Dobson Wireline Co. Sr. Notes 144A
12.25%, 06/15/08................. 30 29,250
e. spire Communications, Inc. Sr.
Notes
13.75%, 07/15/07................. 15 17,212
Econophone, Inc. Sr. Disc. Notes
11.00%, 02/15/08................. 40 22,900
Esprit Telecom Group PLC Sr. Notes
11.50%, 12/15/07................. 10 10,325
Facilicom International Sr. Notes
144A
10.50%, 01/15/08................. 10 9,975
Flag Ltd. Sr. Notes 144A 8.25%,
01/30/08......................... 50 50,563
Focal Communications Corp. Sr.
Disc. Notes [STEP] 144A 11.259%,
02/15/08......................... 40 24,350
Global Crossing Holdings Ltd. Sr.
Notes 144A 9.625%, 05/15/08...... 90 93,938
Globo Communicacoes e Participacoes
SA Sr. Notes 144A 10.625%,
12/05/08......................... 10 9,000
Granite Broadcasting Corp. Sr. Sub.
Notes 144A 8.875%, 05/15/08...... 10 10,100
ICG Services, Inc. Sr. Disc. Notes
[STEP] 144A 10.138%, 05/01/08.... 50 29,750
</TABLE>
24
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
IDT Corp. Sr. Notes 144A 8.75%,
02/15/06......................... $ 10 $ 9,738
Innova S de R.L. Sr. Notes 12.875%,
04/01/07......................... 10 10,150
Intercel, Inc. Sr. Disc. Notes
[STEP]
12.946%, 02/01/06................ 40 31,250
Intermedia Communications, Inc. Sr.
Notes 144A 8.60%, 06/01/08....... 70 70,875
Intermedia Communications, Inc. Sr.
Notes Cl-B 8.875%, 11/01/07...... 85 87,125
International CabelTel, Inc. Sr.
Notes Cl-B [STEP] 11.56%,
02/01/06......................... 65 53,056
IPC Information Systems Notes
[STEP] 10.207%, 05/01/08......... 40 29,500
Iridium LLC Capital Corp. Sr. Notes
Cl-B 14.00%, 07/15/05............ 25 27,875
ITC Deltacom, Inc. Sr. Notes
11.00%, 06/01/07................. 19 21,423
IXC Communications, Inc. Sr. Sub.
Notes 144A 9.00%, 04/15/08....... 20 20,000
Jacor Communications Co. Notes
9.75%, 12/15/06.................. 10 10,925
Jones Intercable, Inc. Sr. Sub.
Debs.
10.50%, 03/01/08................. 25 27,313
Kitty Hawk, Inc. Co. Guarantee
Notes
9.95%, 11/15/04.................. 20 20,750
KMC Telecom Holdings, Inc. Units
[STEP] 144A 12.50%, 02/15/08..... 35 20,825
L-3 Communications Corp. Sr. Sub.
Notes Cl-B 10.375%, 05/01/07..... 20 22,150
LCI International, Inc. Sr. Notes
7.25%, 06/15/07.................. 610 616,100
Level 3 Communications, Inc. Sr.
Notes 144A 9.125%, 05/01/08...... 5 4,875
Long Distance Direct Holdings, Inc.
144A 12.25%, 04/15/08............ 40 40,200
Marcus Cable Operating Co. Sr.
Disc. Notes [STEP] 11.281%,
08/01/04......................... 50 48,625
McCaw International Ltd. Sr. Disc.
Notes [STEP] 13.00%, 04/15/07.... 10 6,600
MetroNet Communications Corp. Sr.
Disc. Notes [STEP] 10.75%,
11/01/07......................... 10 6,663
MetroNet Communications Corp. Sr.
Disc. Notes [STEP] 144A 9.959%,
06/15/08......................... 50 30,875
Millicom International Cellular,
Inc. SA Sr. Disc. Notes [STEP]
11.037%, 06/01/06................ 80 61,200
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
MJD Communications, Inc. Notes 144A
6.231%, 05/01/08................. $ 10 $ 10,088
MJD Communications, Inc. Sr. Sub.
Notes 144A 9.50%, 05/01/08....... 10 10,263
Nextel Communications, Inc. Sr.
Disc. Notes [STEP] 13.848%,
02/15/08 144A.................... 60 38,400
9.95%, 08/15/04.................. 205 199,875
NEXTLINK Communications, Inc. Sr.
Disc. Notes [STEP] 144A 9.45%,
04/15/08......................... 50 30,750
NTL, Inc. Sr. Notes [STEP] 144A
9.77%, 04/01/08.................. 100 65,250
Omnipoint Corp. Sr. Notes 11.625%,
08/15/06......................... 25 26,438
Onepoint Communications Corp. Units
144A 14.50%, 06/01/08............ 10 9,600
Pathnet, Inc. Units 144A 12.25%,
04/15/08......................... 30 32,550
Price Communications Sr. Notes 144A
9.125%, 12/15/06................. 20 20,000
Primus Telecommunications Group Sr.
Notes 144A 9.875%, 05/15/08...... 10 9,825
Qwest Communications International,
Inc. Sr. Disc. Notes [STEP]
9.47%, 10/15/07.................. 20 15,050
Radio One, Inc. Notes 7.00%,
05/15/04......................... 10 10,200
Radnor Holdings, Inc.
Co. Guarantee Notes Cl-B 10.00%,
12/01/03......................... 10 10,450
RCN Corp. Sr. Disc. Notes [STEP]
9.80%, 02/15/08.................. 30 18,300
11.125%, 10/15/07................ 40 25,600
Rhythms Netconnections Units [STEP]
144A 6.777%, 05/15/08............ 40 19,600
RSL Communications PLC Sr. Disc.
Notes 144A 10.125%, 03/01/08..... 20 11,900
RSL Communications PLC Sr. Notes
144A 9.125%, 03/01/08............ 10 9,725
Satelites Mexicanos SA Sr. Notes
144A
10.125%, 11/01/04................ 15 14,700
Sprint Spectrum L.P. Sr. Notes
11.00%, 08/15/06................. 10 11,525
Startec Global Communications Corp.
Units 144A 12.00%, 05/15/08...... 20 19,650
</TABLE>
25
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
TCI Communications, Inc. Sr. Notes
8.65%, 09/15/04.................. $ 560 $ 624,400
Telecommunications Techniques Co.
Sr. Sub. Notes 144A 9.75%,
05/15/08......................... 10 10,063
Telesystem International Wireless,
Inc. Sr. Disc. Notes Cl-C [STEP]
10.50%, 11/01/07................. 10 6,025
Transtel SA Sr. Notes 144A 12.50%,
11/01/07......................... 15 14,100
Tri-State Outdoor Media Corp. Sr.
Notes 144A 11.00%, 05/15/08...... 10 10,125
United International Holdings, Inc.
Sr. Disc. Notes Cl-B [STEP]
10.775%, 02/15/08................ 30 18,525
Versatel Telecom BV Units 144A
13.25%, 05/15/08................. 20 21,100
Viacom, Inc. Sub. Debs. 8.00%,
07/07/06......................... 200 206,500
Winstar Communications, Inc. Sr.
Sub. Notes 15.00%, 03/01/07...... 75 99,000
WorldCom, Inc. Sr. Notes 7.75%,
01/01/07......................... 965 1,048,231
------------
5,454,315
------------
TRANSPORTATION -- 0.0%
Axiohm Transaction Solutions, Inc.
Sr. Sub. Notes 9.75%, 10/01/07... 10 10,100
MC Shipping, Inc. Sr. Notes 144A
11.25%, 03/01/08................. 10 10,150
Trico Marine Services, Inc. Co.
Guarantee Notes Cl-D 8.50%,
08/01/05......................... 10 9,800
------------
30,050
------------
UTILITIES -- 1.1%
AES China Generating Co. Ltd. Sr.
Notes 10.125%, 12/15/06.......... 10 9,663
AES Corp. Sr. Sub. Notes 8.375%,
08/15/07......................... 20 20,200
Arizona Public Service Co. Sr.
Notes
6.75%, 11/15/06.................. 415 430,563
Baltimore Gas & Electric Co. Medium
Term Notes 6.90%, 02/01/05....... 705 742,013
Cleveland Electric Illuminating Co.
First Mtge. Cl-B 9.50%,
05/15/05......................... 25 28,969
Coho Energy, Inc. Sr. Sub. Notes
8.875%, 10/15/07................. 10 9,525
Columbia Gas Systems, Inc. Debs.
6.61%, 11/28/02.................. 480 487,800
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Connecticut Light & Power Co. First
Mtge. 7.875%, 06/01/01........... $ 40 $ 41,050
El Paso Electric Co. First Mtge.
Cl-E
9.40%, 05/01/11.................. 10 11,400
Enersis SA Notes 7.40%, 12/01/16... 10 9,838
6.60%, 12/01/26.................. 220 214,500
Illinova Corp. Notes 7.125%,
02/01/04......................... 385 398,475
KN Energy, Inc. Sr. Notes 6.45%,
03/01/03......................... 500 505,000
Long Island Lighting Corp. Debs.
9.00%, 11/01/22.................. 100 114,875
Niagara Mohawk Power Corp. Notes
9.95%, 06/01/00.................. 50 50,762
Niagara Mohawk Power Corp. Sr.
Notes Cl-F 7.625%, 10/01/05...... 10 10,138
Niagara Mohawk Power Corp. Sr.
Notes Cl-G 7.75%, 10/01/08....... 20 20,550
Northeast Utilities Service Co.
Notes 8.38%, 03/01/05............ 27 26,800
8.58%, 12/01/06.................. 9 8,949
Ram Energy, Inc. Sr. Notes 11.50%,
02/15/08......................... 10 9,925
Southern California Edison Co.
Notes
5.875%, 01/15/01................. 1,000 1,001,250
Transamerican Energy Corp. Sr.
Disc. Notes Cl-B 13.00%, 06/15/02
[STEP]........................... 200 164,000
11.50%, 06/15/02................. 70 66,500
------------
4,382,745
------------
TOTAL CORPORATE OBLIGATIONS
(COST $49,506,633)................... 50,866,923
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 5.0%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.1%
9.50%, 05/01/05.................. 328 346,282
------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 2.4%
5.50%, 02/01/11-05/01/11......... 2,642 2,570,710
6.50%, 04/01/26-07/01/26......... 380 379,765
7.00%, 03/18/02-09/01/27......... 1,011 1,028,710
7.50%, 06/01/27.................. 132 135,684
8.50%, 10/15/08.................. 826 874,787
6.50%, 07/15/23-07/15/28 [TBA]... 3,679 3,695,768
7.00%, 07/15/28 [TBA]............ 1,150 1,166,531
------------
9,851,955
------------
</TABLE>
26
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOC. --
2.5%
5.50%, 09/20/27-04/15/28......... $ 629 $ 634,922
6.50%, 04/15/28.................. 533 532,650
7.00%, 11/20/21-05/15/28......... 6,250 6,359,354
8.00%, 12/15/26.................. 369 382,013
10.00%, 06/15/13................. 428 469,302
5.50%, 08/20/27 [VR]............. 201 203,745
7.00%, 09/20/23 [VR]............. 51 51,724
7.375%, 04/20/23-06/20/24 [VR]... 1,147 1,166,337
------------
9,800,047
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $19,843,085)................... 19,998,284
------------
U.S. TREASURY OBLIGATIONS -- 6.0%
U.S. TREASURY BILLS -- 0.4%
5.07%, 08/20/98#................. 1,750 1,738,340
------------
U.S. TREASURY BONDS -- 2.8%
5.50%, 03/31/03.................. 535 534,727
6.375%, 08/15/27................. 5,535 6,087,669
6.375%, 08/15/27#................ 1,045 1,149,343
6.125%, 11/15/27................. 3,035 3,253,915
------------
11,025,654
------------
U.S. TREASURY NOTES -- 2.8%
5.625%, 04/30/00................. 975 977,008
7.50%, 05/15/02.................. 1,730 1,846,550
5.50%, 05/31/03.................. 5,415 5,414,674
5.50%, 05/31/03#................. 900 899,946
6.125%, 08/15/07................. 1,140 1,186,330
5.625%, 05/15/08................. 865 877,032
------------
11,201,540
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $23,375,670)................... 23,965,534
------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 4.6%
Advanta Mtge. Loan Trust Series
1997-2 Cl-A2 7.05%, 05/25/21..... 805 817,725
Advanta Mtge. Loan Trust Series
1997-3 Cl-A3 6.69%, 04/25/17..... 655 662,520
Amresco Residential Securities
Mtge. Loan Trust Series 1997-3
Cl-A3 6.60%, 01/25/18............ 440 441,031
Capita Equipment Receivables Trust
Series 1996-1 Cl-A4 6.28%,
06/15/00......................... 600 602,866
Commercial Mtge. Acceptance Corp.
Series 1997-ML1 Cl-A3 6.57%,
10/15/07......................... 700 718,156
Commercial Mtge. Acceptance Corp.
Series 1997-ML1 Cl-A2 6.53%,
12/15/30......................... 255 260,857
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Federal National Mtge. Assoc. REMIC
Series 1989-71 Cl-J 8.50%,
10/25/19......................... $ 880 $ 940,282
Federal National Mtge. Assoc. REMIC
Series 1993-240 Cl-B 6.25%,
12/25/13......................... 548 548,658
Federal National Mtge. Assoc. REMIC
Series 1997-61 Cl-ZC 7.00%,
02/25/23......................... 329 338,845
First Union-Lehman Bros. Commercial
Mtge. Series 1997-C2 Cl-A3 6.65%,
06/18/08......................... 470 481,781
GMAC Commercial Mtge. Securities,
Inc. Series 1998-C1 Cl-A2 6.70%,
05/15/30......................... 1,480 1,527,175
Green Tree Financial Corp. Series
1997-2 Cl-A6 7.24%, 03/15/25..... 635 664,014
Green Tree Financial Corp. Series
1997-3 Cl-A4 6.93%, 07/15/28..... 1,095 1,127,300
Green Tree Financial Corp. Series
1998-2 Cl-A5 6.24%, 03/18/28..... 1,035 1,041,145
Green Tree Recreational, Equipment
& Consumer Trust Series 1997-B
Cl-A1
6.55%, 07/15/28.................. 1,110 1,118,612
Green Tree Recreational, Equipment
& Consumer Trust Series 1998-A
Cl-A1C 6.18%, 06/15/19........... 978 978,510
Independent National Mtge. Corp.
Series 1994-V Cl-A1 8.169%,
12/25/24......................... 305 314,492
Merrill Lynch Mtge. Investors, Inc.
Series 1997-C2 Cl-A2 6.54%,
12/10/29......................... 1,160 1,190,994
Merrill Lynch Mtge. Investors, Inc.
Series 1998-C2 Cl-A1 6.22%,
02/15/30......................... 1,178 1,187,823
Morgan Stanley Capital I Series
1996-WF1 Cl-A2 144A 7.218%,
01/16/06......................... 655 681,609
Mortgage Capital Funding, Inc.
Series 1998-MC1 Cl-A2 7.00%,
01/18/08......................... 790 813,206
PNC Mtge. Securities Corp. Series
1997-6 Cl-A2 6.60%, 01/01/00..... 442 446,462
Provident Bank Home Equity Loan
Trust Series 1997-4 Cl-A3 6.91%,
01/25/29......................... 455 463,673
Securitized Asset Sales, Inc.
Series 1993-J Cl-2B 6.808%,
11/28/23......................... 971 963,674
------------
(COST $18,018,029)............... 18,331,410
------------
</TABLE>
27
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
SOVEREIGN ISSUES -- 0.0%
NETHERLANDS -- 0.0%
Asia Pulp & Paper Fin II Mauritius
Ltd. 12.00%, 12/29/49............ $ 45 $ 31,275
SOUTH KOREA -- 0.0%
Republic of Korea 8.875%,
04/15/08......................... 40 36,250
------------
TOTAL SOVEREIGN ISSUES
(COST $76,372)....................... 67,525
------------
COMMERCIAL PAPER -- 8.1%
Delaware Funding Corp., 5.68%,
07/08/98......................... 5,000 4,994,478
Falcon Asset Securitization Corp.
5.53%, 07/20/98.................. 10,000 9,970,814
Merrill Lynch & Co., Inc. 5.63%,
07/08/98......................... 10,000 9,989,053
Sheffield Receivables Corp. 5.50%,
07/10/98......................... 7,500 7,490,056
------------
(COST $32,444,033)................. 32,444,401
------------
REPURCHASE AGREEMENTS -- 4.0%
J. P. Morgan Securities, Inc.,
5.75%, dated 06/30/98, maturing
07/01/98, repurchase price
$15,989,553 (Collateralized by
U.S. Treasury Bonds, par value
$15,439,000, market value
$16,409,255 due 02/15/26)
(COST $15,987,000)............... 15,987 15,987,000
------------
SHORT-TERM INVESTMENTS -- 0.3%
Temporary Investment Cash Fund..... 529,389 529,389
Temporary Investment Fund.......... 529,389 529,389
------------
(COST $1,058,778).................. 1,058,778
------------
TOTAL INVESTMENTS -- 99.5%
(COST $364,032,422).................. 398,021,837
OTHER ASSETS LESS
LIABILITIES -- 0.5%.................. 1,853,674
------------
NET ASSETS -- 100.0%................... $399,875,511
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy ESP 10,369,516 $ 67,753 $ 67,743 $ (10)
07/98 Buy GBP 14,214 23,648 23,714 66
10/98 Buy GBP 1,000,000 1,626,725 1,657,358 30,633
07/98 Buy ITL 161,163,000 90,315 90,664 349
07/98 Buy PTE 15,050,000 81,215 81,482 267
---------- ---------- --------
$1,889,656 $1,920,961 $ 31,305
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell AUD 24,479 $ 14,927 $ 15,161 $ (234)
07/98 Sell CHF 24,218 15,920 15,971 (51)
07/98 Sell GBP 1,109,598 1,833,631 1,840,193 (6,562)
07/98 Sell HKD 10,925 1,410 1,409 1
07/98 Sell JPY 233,000,000 1,662,197 1,697,822 (35,625)
07/98 Sell NZD 30,299 15,531 15,727 (196)
07/98 Sell SGD 73,117 43,493 43,269 224
---------- ---------- --------
$3,587,109 $3,629,552 $(42,443)
========== ========== ========
</TABLE>
# Securities with an aggregate market value of $3,787,629 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1998:
<TABLE>
<CAPTION>
NUMBER UNREALIZED
EXPIRATION OF APPRECIATION
DESCRIPTION MONTH CONTRACTS (DEPRECIATION)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
ASX Index......................... 09/98 211 $ 349,019
CAC Index (Shorted)............... 09/98 (15) (52,003)
DAX Index (Shorted)............... 09/98 (4) (31,812)
FTSE 100 Index (Shorted).......... 09/98 (19) (12,624)
MIB30 Index....................... 09/98 16 80,110
NASDAQ 100 (Shorted).............. 09/98 (15) (232,383)
Russell 2000 (Shorted)............ 09/98 (7) (55,384)
S&P 500........................... 09/98 7 41,983
U.S. Treasury 30 Year Notes....... 09/98 208 524,876
---------
$ 611,782
=========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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.
See Notes to Financial Statements.
28
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
CORPORATE OBLIGATIONS -- 89.7%
ADVERTISING -- 1.1%
Lamar Advertising Co.
Co. Guarantee Sr. Sub. Notes
9.625%, 12/01/06................. $ 1,700 $ 1,829,625
Outdoor Systems, Inc. Sr. Sub.
Notes
8.875%, 06/15/07................. 4,075 4,258,375
------------
6,088,000
------------
AEROSPACE -- 0.4%
Aviation Sales Co. Sr. Sub. Notes
144A
8.125%, 02/15/08................. 2,500 2,456,250
------------
AUTOMOBILE MANUFACTURERS -- 0.1%
Oshkosh Truck Corp. Co. Guarantee
Notes
8.75%, 03/01/08.................. 750 761,250
------------
AUTOMOTIVE PARTS -- 1.2%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%, 08/01/04................. 1,938 2,146,335
Lear Corp. Sub. Notes
9.50%, 07/15/06.................. 2,500 2,737,500
Lear Seating Corp. Sub. Notes
8.25%, 02/01/02.................. 550 554,125
Oxford Automotive, Inc. Notes
10.125%, 06/15/07................ 1,300 1,348,750
------------
6,786,710
------------
BROADCASTING -- 7.1%
Acme Television Co. Co. Guarantee
Notes Cl-B [STEP]
10.992%, 09/30/04................ 3,100 2,573,000
Australis Media Ltd. Sr. Disc.
Notes [STEP]
29.55%, 05/15/03................. 11 1,443
Australis Media Ltd. Units [STEP]
15.706%, 05/15/03................ 625 84,375
Big City Radio, Inc. Sr. Disc.
Notes [STEP] 144A
10.867%, 03/15/05................ 2,950 2,242,000
Capstar Broadcasting, Inc. Sr. Sub.
Notes
9.25%, 07/01/07.................. 1,400 1,473,500
Chancellor Media Corp. LA Sr. Sub.
Notes Cl-B
8.125%, 12/15/07................. 4,550 4,618,250
Chancellor Media Corp. Notes Cl-B
10.50%, 01/15/07................. 1,700 1,887,000
8.75%, 06/15/07.................. 1,750 1,828,750
Chancellor Media Corp.
Sr. Sub. Notes
9.375%, 10/01/04................. 1,150 1,213,250
Cumulus Media, Inc.
Sr. Sub. Notes
10.375%, 07/01/08................ 1,250 1,268,750
Diva Systems Corp. Units [STEP]
144A
11.896%, 03/01/08................ 2,300 1,092,500
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Echostar Satellite Broadcasting Co.
Sr. Disc. Notes [STEP]
10.35%, 03/15/04................. $ 4,525 $ 4,185,625
Fox Liberty Networks LLC Sr. Disc.
Notes [STEP]
9.534%, 08/15/07................. 5,550 3,829,500
Fox Liberty Networks LLC Sr. Notes
8.875%, 08/15/07................. 1,125 1,150,312
NWCG Holding Corp. Sr. Disc. Notes
[ZCB]
13.196%, 06/15/99................ 300 284,178
SFX Broadcasting, Inc. Sr. Sub.
Notes Cl-B
10.75%, 05/15/06................. 1,175 1,301,312
Sinclair Broadcasting Group, Inc.
Sr. Sub. Notes
10.00%, 09/30/05................. 2,500 2,693,750
9.00%, 07/15/07.................. 2,000 2,090,000
8.75%, 12/15/07.................. 2,000 2,070,000
Sullivan Broadcasting Holdings Co.
Sr. Sub. Notes
10.25%, 12/15/05................. 1,800 2,061,252
13.25%, 12/15/06................. 150 252,750
Young Broadcasting, Inc. Sr. Sub.
Notes
10.125%, 02/15/05................ 1,175 1,274,875
Young Broadcasting, Inc. Sr. Sub.
Notes Cl-B
9.00%, 01/15/06.................. 500 528,750
------------
40,005,122
------------
BUILDING MATERIALS -- 0.7%
American Builders & Contractors
Supply Co., Inc. Notes Cl-B
10.625%, 05/15/07................ 1,625 1,633,125
Falcon Building Products, Inc. Co.
Guarantee Notes Cl-B [STEP]
9.868%, 06/15/07................. 2,500 1,675,000
Falcon Building Products, Inc. Co.
Guarantee Sr. Sub. Notes Cl-B
9.50%, 06/15/07.................. 350 346,500
------------
3,654,625
------------
BUSINESS SERVICES -- 1.1%
Dialog Corp. PLC Sr. Sub. Notes
Cl-A
11.00%, 11/15/07................. 2,750 3,025,000
U.S. Office Products Co. Sr. Sub.
Notes 144A
9.75%, 06/15/08.................. 2,825 2,856,781
------------
5,881,781
------------
CAPITAL GOODS -- 0.6%
Buckeye Cellulos Corp. Sr. Sub.
Notes
8.50%, 12/15/05.................. 1,500 1,522,500
9.25%, 09/15/08.................. 1,750 1,837,500
------------
3,360,000
------------
CHEMICALS -- 1.9%
Foamex Capital Corp. Sr. Sub. Notes
13.50%, 08/15/05................. 500 580,000
</TABLE>
29
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
ISP Holdings, Inc. Sr. Notes Cl-B
9.75%, 02/15/02.................. $ 1,000 $ 1,055,000
9.00%, 10/15/03.................. 1,475 1,537,687
Polymer Group, Inc. Co. Guarantee
Notes Cl-B
9.00%, 07/01/07.................. 4,275 4,360,500
Polymer Group, Inc. Sr. Sub. Notes
144A
8.75%, 03/01/08.................. 1,350 1,353,375
RBX Corp. Notes Cl-B
11.25%, 10/15/05................. 1,000 610,000
Sterling Chemicals Holdings, Inc.
Sr. Disc. Notes [STEP]
11.611%, 08/15/08................ 2,350 1,351,250
------------
10,847,812
------------
CLOTHING & APPAREL -- 1.9%
Boyds Collection Ltd. Sr. Sub.
Notes 144A
9.00%, 05/15/08.................. 1,950 1,954,875
Brylane LP Sr. Sub. Notes Cl-B
10.00%, 09/01/03................. 1,325 1,401,187
Dyersburg Corp. Co. Guarantee Notes
Cl-B
9.75%, 09/01/07.................. 1,725 1,656,000
GFSI, Inc. Sr. Sub. Notes Cl-B
9.625%, 03/01/07................. 850 888,250
Hosiery Corp. of America, Inc. Sr.
Sub. Notes
13.75%, 08/01/02................. 500 552,500
Pillowtex Corp. Co. Guarantee Notes
Cl-B
9.00%, 12/15/07.................. 2,125 2,194,062
Pillowtex Corp. Sr. Sub. Notes
10.00%, 11/15/06................. 1,950 2,096,250
------------
10,743,124
------------
COMPUTER SERVICES & SOFTWARE -- 0.9%
Alvey Systems, Inc. Sr. Sub. Notes
11.375%, 01/31/03................ 1,750 1,903,125
American Business Information, Inc.
Sr. Sub. Notes 144A
9.50%, 06/15/08.................. 2,000 2,020,000
PSINet, Inc. Sr. Notes Cl-B
10.00%, 02/15/05................. 1,200 1,233,000
------------
5,156,125
------------
CONGLOMERATES -- 1.0%
Eagle-Picher Industries, Inc. Sr.
Sub. Notes 144A
9.375%, 03/01/08................. 2,500 2,537,500
Hermes Europe Railtel BV Sr. Notes
11.50%, 08/15/07................. 2,875 3,234,375
------------
5,771,875
------------
CONSTRUCTION -- 0.7%
American Architectural Co. Co.
Guarantee Notes
11.75%, 12/01/07................. 1,400 1,449,000
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Building Materials Corp. Sr. Notes
Cl-B
8.00%, 10/15/07.................. $ 2,250 $ 2,272,500
------------
3,721,500
------------
CONSUMER PRODUCTS & SERVICES -- 5.4%
American Safety Razor Co. Sr. Notes
9.875%, 08/01/05................. 1,250 1,334,375
Amscan Holdings, Inc. Sr. Sub.
Notes
9.875%, 12/15/07................. 1,000 1,015,000
Cabot Safety Corp. Sr. Sub. Notes
12.50%, 07/15/05................. 1,500 1,691,250
Chattem, Inc. Sr. Sub. Notes 144A
8.875%, 04/01/08................. 2,200 2,178,000
Collins & Aikman Floor Coverings
Corp. Sr. Sub. Notes
10.00%, 01/15/07................. 1,400 1,477,000
Collins & Aikman Products Corp. Sr.
Sub. Notes
11.50%, 04/15/06................. 3,750 4,195,312
Diamond Brands Operating, Inc. Sr.
Sub. Notes 144A
10.125%, 04/15/08................ 700 703,500
Diamond Brands Operating, Inc.
Debs. [STEP] 144A
12.83%, 04/15/09................. 1,500 810,000
Herff Jones, Inc. Sr. Sub. Notes
11.00%, 08/15/05................. 550 602,250
Glenoit Corp. Co. Guarantee Notes
11.00%, 04/15/07................. 2,000 2,150,000
NBTY, Inc. Sr. Sub. Notes Cl-B
8.625%, 09/15/07................. 2,350 2,397,000
Playtex Family Products Corp. Sr.
Sub. Notes
9.00%, 12/15/03.................. 2,100 2,163,000
Playtex Products, Inc. Notes Cl-B
8.875%, 07/15/04................. 850 875,500
Revlon Consumer Products Corp. Sr.
Notes
8.125%, 02/01/06................. 1,700 1,691,500
Revlon Consumer Products Corp. Sr.
Sub. Notes
8.625%, 02/01/08................. 5,000 5,025,000
Simmons Co. Sr. Sub. Notes
10.75%, 04/15/06................. 1,250 1,343,750
Westpoint Stevens, Inc. Sr. Sub.
Debs.
11.00%, 04/15/07................. 1,000 890,000
------------
30,542,437
------------
CONTAINERS & PACKAGING -- 1.8%
Container Corp. of America Sr.
Notes
11.25%, 05/01/04................. 250 271,250
Four M Corp. Sr. Notes
12.00%, 06/01/06................. 1,300 1,397,500
Owens-Illinois, Inc. Sr. Notes
8.10%, 05/15/07.................. 1,000 1,068,770
Plastic Containers, Inc. Sr. Notes
Cl-B
10.00%, 12/15/06................. 450 486,000
</TABLE>
30
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Stone Container Corp. Sr. Notes
12.58%, 08/01/16 [VR]............ $ 1,550 $ 1,736,000
11.50%, 10/01/04................. 1,200 1,293,000
Tekni-Plex, Inc. Co. Guarantee Sr.
Sub. Notes Cl-B
9.25%, 03/01/08.................. 3,750 3,768,750
------------
10,021,270
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.7%
Amphenol Corp. Sr. Sub. Notes
9.875%, 05/15/07................. 2,000 2,115,000
Electronic Retailing Systems, Inc.
Sr. Disc. Notes [STEP]
13.25%, 02/01/04................. 875 389,375
Viasystems, Inc. Sr. Sub. Notes
Cl-B
9.75%, 06/01/07.................. 1,625 1,600,625
------------
4,105,000
------------
ENTERTAINMENT & LEISURE -- 2.8%
AMF Group, Inc. Sr. Disc. Notes
[STEP]
10.188%, 03/15/06................ 3,137 2,525,285
Premier Parks, Inc. Sr. Disc. Notes
[STEP]
9.883%, 04/01/08................. 3,450 2,311,500
Premier Parks, Inc. Sr. Notes
9.25%, 04/01/06.................. 875 906,719
9.75%, 01/15/07.................. 450 491,062
Premier Parks, Inc. Sr. Notes Cl-A
12.00%, 08/15/03................. 1,600 1,780,000
Regal Cinemas, Inc. Sr. Sub. Notes
144A
9.50%, 06/01/08.................. 3,500 3,552,500
Six Flags Theme Parks Corp. Sr.
Sub. Notes Cl-A [STEP]
12.25%, 06/15/05................. 3,625 4,132,500
------------
15,699,566
------------
ENVIRONMENTAL SERVICES -- 1.2%
Allied Waste Industries, Inc. Sr.
Disc. Notes [STEP]
9.981%, 06/01/07................. 5,150 3,798,125
Allied Waste North America, Inc.
Co. Guarantee Notes
10.25%, 12/01/06................. 2,700 2,973,375
------------
6,771,500
------------
EQUIPMENT SERVICES -- 0.4%
Coinmach Corp. Sr. Notes Cl-D
11.75%, 11/15/05................. 1,981 2,218,720
------------
FARMING & AGRICULTURE -- 0.5%
Dimon, Inc. Sr. Notes
8.875%, 06/01/06................. 1,950 1,950,000
Purina Mills, Inc. Sr. Sub. Notes
144A
9.00%, 03/15/10.................. 950 978,500
------------
2,928,500
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 1.4%
First Nationwide Holdings, Inc. Sr.
Sub. Notes
9.125%, 01/15/03................. $ 525 $ 547,312
10.625%, 10/01/03................ 6,375 7,187,812
------------
7,735,124
------------
FINANCIAL SERVICES -- 0.7%
ContiFinancial Corp. Sr. Notes
8.125%, 04/01/08................. 1,400 1,419,194
PX Escrow Corp. Sr. Disc. Notes
[STEP] 144A
9.395%, 02/01/06................. 1,075 776,687
Unifrax Investment Corp. Sr. Notes
10.50%, 11/01/03................. 1,650 1,732,500
------------
3,928,381
------------
FOOD -- 4.2%
Ameriserv Food Distributor, Inc.
Co. Guarantee Sr. Sub. Notes
8.875%, 10/15/06................. 1,200 1,212,000
10.125%, 07/15/07................ 3,300 3,411,375
Aurora Foods, Inc. Sr. Sub. Notes
144A
8.75%, 07/01/08.................. 1,250 1,275,000
Aurora Foods, Inc. Sr. Sub. Notes
Cl-B
9.875%, 02/15/07................. 1,775 1,890,375
Carr-Gottstein Foods Co. Sr. Sub.
Notes
12.00%, 11/15/05................. 1,025 1,148,000
Curtice-Burns Foods, Inc. Sr. Sub.
Notes
12.25%, 02/01/05................. 1,100 1,210,000
Di Giorgio Corp. Sr. Notes Cl-B
10.00%, 06/15/07................. 1,350 1,346,625
Eagle Family Foods, Inc. Sr. Sub.
Notes 144A
8.75%, 01/15/08.................. 1,450 1,417,375
International Home Foods, Inc. Sr.
Sub. Notes
10.375%, 11/01/06................ 3,800 4,142,000
Jitney-Jungle Stores, Inc. Sr. Sub.
Notes
10.375%, 09/15/07................ 2,850 3,056,625
Nebco Evans Holding Co. Sr. Disc.
Notes [STEP]
11.645%, 07/15/07................ 1,250 868,750
Stater Brothers Holdings, Inc. Sr.
Sub. Notes
9.00%, 07/01/04.................. 1,125 1,158,750
Van de Kamps, Inc. Sr. Sub. Notes
12.00%, 09/15/05................. 1,450 1,660,250
------------
23,797,125
------------
FURNITURE -- 0.5%
Sealy Mattress Co. Sr. Disc. Notes
[STEP] 144A
10.875%, 12/15/07................ 1,000 655,000
Sealy Mattress Co. Sr. Sub. Notes
144A
9.875%, 12/15/07................. 775 794,375
</TABLE>
31
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Werner Holdings Co., Inc. Co.
Guarantee Notes Cl-A
10.00%, 11/15/07................. $ 1,100 $ 1,149,500
------------
2,598,875
------------
HEALTHCARE SERVICES -- 3.6%
Alliance Imaging, Inc. Sr. Sub.
Notes
9.625%, 12/15/05................. 1,150 1,167,250
Everest Healthcare Services, Inc.
Sr. Sub. Notes 144A
9.75%, 05/01/08.................. 1,575 1,614,375
Fisher Scientific International,
Inc. Sr. Sub. Notes
9.00%, 02/01/08.................. 1,725 1,725,000
Genesis Health Ventures, Inc. Sr.
Sub. Notes
9.75%, 06/15/05.................. 1,250 1,290,625
Hudson Respiratory Care, Inc. Sr.
Sub. Notes 144A
9.125%, 04/15/08................. 850 811,750
Icon Fitness Corp. Sr. Disc. Notes
Cl-B [STEP]
14.00%, 11/15/06................. 1,100 335,500
Icon Health & Fitness Corp. Sr.
Sub. Notes Cl-B
13.00%, 07/15/02................. 1,755 1,763,775
Oxford Health Plans, Inc. Sr. Notes
144A
11.00%, 05/15/05................. 350 358,750
Tenet Healthcare Corp. Sr. Sub.
Notes
8.00%, 01/15/05.................. 4,200 4,325,034
8.625%, 01/15/07................. 3,500 3,631,250
8.125%, 12/01/08 144A............ 3,000 3,030,000
------------
20,053,309
------------
HOTELS & MOTELS -- 0.2%
Courtyard by Marriott Sr. Notes
10.75%, 02/01/08................. 1,100 1,212,750
------------
INDUSTRIAL PRODUCTS -- 2.1%
Accuride Corp. Sr. Sub. Notes 144A
9.25%, 02/01/08.................. 1,500 1,507,500
Continental Global Group, Inc. Sr.
Notes Cl-B
11.00%, 04/01/07................. 2,100 2,194,500
Grove Worldwide, Inc. LLC Sr. Sub.
Notes 144A
9.25%, 05/01/08.................. 775 771,125
JTM Industries, Inc. Sr. Sub. Notes
144A
10.00%, 04/15/08................. 1,600 1,632,000
MMI Products, Inc. Sr. Sub. Notes
Cl-B
11.25%, 04/15/07................. 1,600 1,760,000
Wesco Distribution, Inc. Sr. Sub.
Notes 144A
10.75%, 06/01/08................. 3,050 3,034,750
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Wesco International, Inc. Sr. Disc.
Notes [STEP] 144A
11.15%, 06/01/08................. $ 1,400 $ 826,000
------------
11,725,875
------------
MACHINERY & EQUIPMENT -- 1.6%
Anchor Lamina, Inc. Sr. Sub. Notes
9.88%, 02/01/08.................. 1,225 1,200,500
Clark Materials Handling Corp. Co.
Guarantee Sr. Sub. Notes
10.75%, 11/15/06................. 2,625 2,795,625
Columbus McKinnon Corp. Sr. Sub.
Notes 144A
8.50%, 04/01/08.................. 1,050 1,042,125
Fairfield Manufacturing Co. Sr.
Sub. Notes
11.375%, 07/01/01................ 900 938,250
Hawk Corp. Sr. Notes
10.25%, 12/01/03................. 160 174,400
Johnstown America Industries, Inc.
Sr. Sub. Notes Cl-C
11.75%, 08/15/05................. 700 778,750
National Equipment Services Sr.
Sub. Notes 144A
10.00%, 11/30/04................. 1,275 1,294,125
Ryder TRS, Inc. Sr. Sub. Notes
11.50%, 08/01/06................. 672 776,160
------------
8,999,935
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.7%
CONMED Corp. Co. Guarantee Sr. Sub.
Notes
9.00%, 03/15/08.................. 1,200 1,200,000
Dade International, Inc. Sr. Sub.
Notes Cl-B
11.125%, 05/01/06................ 2,325 2,627,250
------------
3,827,250
------------
METALS & MINING -- 1.9%
AEI Holding Co. Sr. Notes 144A
10.00%, 11/15/07................. 1,400 1,403,500
Anker Coal Group, Inc. Sr. Notes
Cl-B
9.75%, 10/01/07.................. 450 411,750
Euramax International PLC Sr. Sub.
Notes
11.25%, 10/01/06................. 1,375 1,491,875
GS Technologies Operating Corp. Sr.
Notes
12.00%, 09/01/04................. 975 1,060,312
12.25%, 10/01/05................. 1,525 1,692,750
Neenah Corp. Sr. Sub. Notes Cl-B
11.125%, 05/01/07................ 1,375 1,505,625
Royal Oak Mines, Inc. Sr. Sub.
Notes
11.00%, 08/15/06................. 1,150 983,250
Ryerson Tull, Inc. Notes
8.50%, 07/15/01.................. 1,000 1,045,000
9.125%, 07/15/06................. 900 1,003,500
------------
10,597,562
------------
</TABLE>
32
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
OFFICE EQUIPMENT -- 0.4%
United Stationers Supply Co. Sr.
Sub. Notes
12.75%, 05/01/05................. $ 1,169 $ 1,338,505
8.375%, 04/15/08 144A............ 800 804,000
------------
2,142,505
------------
OIL & GAS -- 4.1%
Abraxas Petroleum Corp. Co.
Guarantee Notes Cl-D
11.50%, 11/01/04................. 1,525 1,578,375
Chiles Offshore LLC Sr. Notes 144A
10.00%, 05/01/08................. 1,875 1,818,750
Dailey International, Inc. Co.
Guarantee Notes Cl-B
9.50%, 02/15/08.................. 3,700 3,644,500
DI Industries, Inc. Sr. Notes
8.875%, 07/01/07................. 1,525 1,479,250
Forcenergy, Inc. Sr. Sub. Notes
9.50%, 11/01/06.................. 2,650 2,676,500
8.50%, 02/15/07.................. 1,450 1,377,500
Houston Exploration Co. Sr. Sub.
Notes Cl-B
8.625%, 01/01/08................. 1,000 1,000,000
KCS Energy, Inc. Sr. Sub. Notes
8.875%, 01/15/08................. 1,200 1,146,000
Nuevo Energy Co. Sr. Sub. Notes
144A
8.875%, 06/01/08................. 625 635,937
Ocean Energy, Inc. Sr. Sub. Notes
10.375%, 10/15/05................ 1,775 1,961,375
Pacalta Resource Ltd. Sr. Notes
Cl-B
10.75%, 06/15/04................. 1,050 1,050,000
Pride Petroleum Services, Inc. Sr.
Notes
9.375%, 05/01/07................. 2,500 2,643,750
Universal Compression Holdings,
Inc. Sr. Disc. Notes [STEP] 144A
11.375%, 02/15/09................ 350 215,250
9.739%, 02/15/08................. 3,175 2,016,125
------------
23,243,312
------------
PAPER & FOREST PRODUCTS -- 0.3%
S.D. Warren Co. Sr. Sub. Notes
12.00%, 12/15/04................. 1,300 1,446,250
------------
PRINTING & PUBLISHING -- 1.9%
Affiliated Newspaper Investments,
Inc. Sr. Disc. Notes [STEP]
12.733%, 07/01/06................ 2,200 2,145,000
Garden State Newspapers, Inc.
Sr. Sub. Notes
12.00%, 07/01/04................. 200 223,000
Garden State Newspapers, Inc. Sr.
Sub. Notes Cl-B
8.75%, 10/01/09.................. 2,575 2,626,500
Hollinger International Publishing
Co. Guarantee Notes
9.25%, 02/01/06.................. 800 840,000
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Hollinger International Publishing
Co. Guarantee Sr. Sub. Notes
9.25%, 03/15/07.................. $ 1,950 $ 2,047,500
K-III Communications Corp. Sr.
Notes
8.50%, 02/01/06.................. 1,000 1,027,450
Ziff-Davis, Inc. Sr. Sub. Notes
8.50%, 05/01/08.................. 1,575 1,598,625
------------
10,508,075
------------
REAL ESTATE -- 0.3%
Trizec Finance Ltd. Sr. Notes
10.875%, 10/15/05................ 1,457 1,646,410
------------
RETAIL & MERCHANDISING -- 0.4%
Community Distributors, Inc. Co.
Guarantee Notes Cl-B
10.25%, 10/15/04................. 1,000 1,015,000
Leslie's Poolmart, Inc. Sr. Notes
10.375%, 07/15/04................ 950 1,002,250
------------
2,017,250
------------
SEMICONDUCTORS -- 0.2%
Fairchild Semiconductor Corp. Sr.
Sub. Notes
10.125%, 03/15/07................ 800 820,000
------------
TELECOMMUNICATIONS -- 30.2%
American Cellular Corp. Sr. Notes
144A
10.50%, 05/15/08................. 3,150 3,157,875
Arch Communications Group, Inc. Sr.
Disc. Notes [STEP]
14.416%, 03/15/08................ 1,200 672,000
Arch Communications, Inc. Sr. Notes
144A
12.75%, 07/01/07................. 1,400 1,421,000
Call-Net Enterprises, Inc. Sr.
Disc. Notes [STEP]
8.522%, 08/15/07................. 4,100 2,890,500
Charter Communications Southeast
Holdings Capital Corp. Disc.
Notes Cl-B [STEP]
10.733%, 03/15/07................ 900 742,500
Charter Communications Southeast
Holdings Capital Corp. Sr. Notes
Cl-B
11.25%, 03/15/06................. 1,150 1,282,250
Comcast Cellular Holdings Corp. Sr.
Notes Cl-B
9.50%, 05/01/07.................. 1,975 2,073,750
Comcast Corp. Sr. Sub. Debs.
9.375%, 05/15/05................. 2,500 2,681,250
Comcast U.K. Cable Corp. Debs.
[STEP]
10.997%, 11/15/07................ 2,900 2,436,000
CSC Holdings, Inc. Sr. Notes
7.875%, 12/15/07................. 1,700 1,802,000
CSC Holdings, Inc. Sr. Sub. Debs.
9.875%, 02/15/13................. 500 553,750
</TABLE>
33
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
CSC Holdings, Inc. Sr. Sub Notes
9.25%, 11/01/05.................. $ 3,925 $ 4,219,375
9.875%, 05/15/06................. 300 330,000
Diamond Cable Communications PLC
Sr. Disc. Notes [STEP]
10.751%, 12/15/05................ 4,000 3,330,000
Diamond Holdings PLC Sr. Notes
9.125%, 02/01/08................. 1,875 1,968,750
e.spire Communications, Inc. Sr.
Disc. Notes [STEP]
10.856%, 11/01/05................ 600 489,000
13.748%, 04/01/06................ 1,400 1,085,000
e.spire Communications, Inc. Sr.
Notes
13.75%, 07/15/07................. 875 1,004,062
Esprit Telecom Group PLC Sr. Notes
11.50%, 12/15/07................. 750 775,313
HighwayMaster Communications, Inc.
Sr. Notes Cl-B
13.75%, 09/15/05................. 1,050 787,500
ICG Services, Inc. Sr. Disc. Notes
[STEP] 144A
9.875%, 05/01/08................. 850 497,250
Intelcom Group (U.S.A.), Inc. Notes
[STEP]
10.013%, 05/01/06................ 3,000 2,358,750
Intermedia Communications of
Florida, Inc. Sr. Disc. Notes
[STEP]
10.749%, 05/15/06................ 4,850 4,001,250
Intermedia Communications, Inc. Sr.
Disc. Notes Cl-B [STEP]
7.758%, 07/15/07................. 2,325 1,708,875
Intermedia Communications, Inc. Sr.
Notes 144A
8.60%, 06/01/08.................. 1,900 1,933,250
Intermedia Communications, Inc. Sr.
Notes Cl-B
8.875%, 11/01/07................. 1,000 1,025,000
International CableTel, Inc. Sr.
Notes Cl-B [STEP]
10.408%, 02/01/06................ 5,100 4,207,500
10.153%, 04/15/05................ 1,050 929,250
IXC Communications, Inc. Sr. Sub.
Notes 144A
9.00%, 04/15/08.................. 1,450 1,460,875
Lenfest Communications, Inc. Sr.
Notes
8.375%, 11/01/05................. 2,150 2,295,125
Lenfest Communications, Inc. Sr.
Sub. Notes 144A
8.25%, 02/15/08.................. 1,775 1,850,438
Level 3 Communications, Inc. Sr.
Notes 144A
9.125%, 05/01/08................. 9,500 9,310,000
McLeodUSA, Inc. Sr. Disc. Notes
[STEP]
9.976%, 03/01/07................. 3,625 2,718,750
McLeodUSA, Inc. Sr. Notes
9.25%, 07/15/07.................. 1,300 1,355,250
8.375%, 03/15/08................. 1,250 1,253,125
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
MetroNet Communications Corp. Sr.
Disc. Notes [STEP]
9.895%, 06/15/08 144A............ $ 4,550 $ 2,838,063
10.299%, 11/01/07................ 1,925 1,282,531
MetroNet Communications Corp. Sr.
Notes
12.00%, 08/15/07................. 1,525 1,723,250
Millicom International Cellular,
Inc. SA Sr. Disc. Notes [STEP]
11.01%, 06/01/06................. 4,275 3,323,813
Nextel Communications, Inc. Sr.
Disc. Notes [STEP]
9.859%, 02/15/08 144A............ 8,200 5,319,750
10.053%, 09/15/07................ 3,375 2,303,438
Nextel International, Inc. Sr.
Disc. Notes [STEP] 144A
12.125%, 04/15/08................ 1,750 1,028,125
NEXTLINK Communications, Inc. Sr.
Disc. Notes [STEP] 144A
9.45%, 04/15/08.................. 2,000 1,235,000
NEXTLINK Communications, Inc. Sr.
Notes
9.625%, 10/01/07................. 1,250 1,281,250
9.00%, 03/15/08 144A............. 1,575 1,575,000
NTL, Inc. Sr. Notes [STEP] 144A
9.602%, 04/01/08................. 5,525 3,618,875
Paging Network, Inc. Sr. Sub. Notes
10.00%, 10/15/08................. 5,100 5,323,125
Pathnet, Inc. Units 144A
12.25%, 04/15/08................. 2,350 2,502,750
Pegasus Communications Corp. Sr.
Notes Cl-B
9.625%, 10/15/05................. 2,125 2,199,375
Pegasus Media & Communications,
Inc. Notes
12.50%, 07/01/05................. 975 1,106,625
Qwest Communications International,
Inc. Sr. Disc. Notes [STEP]
8.29%, 02/01/08 144A............. 2,250 1,631,250
8.591%, 10/15/07................. 3,100 2,328,875
Qwest Communications International,
Inc. Sr. Notes Cl-B
10.875%, 04/01/07................ 1,750 2,021,250
Rogers Cablesystems of America,
Inc. Sr. Notes
10.00%, 12/01/07................. 1,350 1,505,250
11.00%, 12/01/15................. 750 866,250
Rogers Cablesystems of America,
Inc. Sr. Notes Cl-B
10.00%, 03/15/05................. 2,500 2,787,500
Rogers Cantel, Inc. Sr. Sub. Notes
8.80%, 10/01/07.................. 4,000 3,985,000
Sitel Corp. Sr. Sub. Notes 144A
9.25%, 03/15/06.................. 2,800 2,730,000
Sygnet Wireless, Inc. Sr. Notes
11.50%, 10/01/06................. 1,425 1,567,500
</TABLE>
34
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Telecommunications Techniques Co.
Sr. Sub. Notes 144A
9.75%, 05/15/08.................. $ 3,250 $ 3,339,375
Telesystem International Wireless,
Inc. Sr. Disc. Notes C1-B [STEP]
12.344%, 06/30/07................ 5,125 3,395,313
Telesystem International Wireless,
Inc. Sr. Disc. Notes C1-C [STEP]
10.50%, 11/01/07................. 800 478,000
Telewest Communications PLC Debs.
[STEP]
10.457%, 10/01/07................ 8,325 6,909,750
Teligent, Inc. Sr. Disc. Notes
[STEP] 144A
11.70%, 03/01/08................. 1,000 550,000
Teligent, Inc. Sr. Notes
11.50%, 12/01/07................. 3,250 3,290,625
Triton Communications LLC Sr. Disc.
Notes [STEP] 144A
11.00%, 05/01/08................. 4,525 2,567,938
UIH Australia Pacific, Inc. Sr.
Disc. Notes [STEP]
12.854%, 05/15/06................ 3,100 1,875,500
United International Holdings, Inc.
Sr. Disc. Notes Cl-B [STEP]
10.75%, 02/15/08................. 4,300 2,687,500
US Xchange LLC Sr. Notes 144A
15.00%, 07/01/08................. 1,425 1,471,313
USA Mobile Communications Holdings,
Inc. Sr. Notes
9.50%, 02/01/04.................. 1,050 960,750
Vanguard Cellular Systems, Inc.
Debs.
9.375%, 04/15/06................. 2,000 2,110,000
Viacom, Inc. Sub. Debs.
8.00%, 07/07/06.................. 10,000 10,362,500
Viatel, Inc. Units 144A
11.473%, 04/15/08 [STEP]......... 850 522,750
11.25%, 04/15/08................. 2,525 2,663,875
------------
169,875,597
------------
TRANSPORTATION -- 2.8%
Allied Holdings, Inc. Notes Cl-B
8.625%, 10/01/07................. 1,400 1,414,000
Ameritruck Distribution Corp. Sr.
Sub. Notes
12.25%, 11/15/05................. 1,950 1,140,750
Chemical Leaman Corp. Sr. Notes
10.375%, 06/15/05................ 1,500 1,593,750
Gearbulk Holding Ltd. Sr. Notes
11.25%, 12/01/04................. 1,400 1,536,500
Holt Group Sr. Notes 144A
9.75%, 01/15/06.................. 1,350 1,329,750
Johnstown America Industries, Inc.
Sr. Sub. Notes
11.75%, 08/15/05................. 600 667,500
Statia Terminals, Inc. First Mtge.
Cl-A
11.75%, 11/15/03................. 1,000 1,050,000
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Stena AB Sr. Notes
10.50%, 12/15/05................. $ 3,275 $ 3,577,938
8.75%, 06/15/07.................. 2,175 2,191,313
10.625%, 06/01/08................ 1,250 1,273,438
------------
15,774,939
------------
UTILITIES -- 0.7%
California Energy Co., Inc. Sr.
Notes
9.50%, 09/15/06.................. 1,000 1,083,750
El Paso Electric Co. First Mtge.
Cl-E
9.40%, 05/01/11.................. 1,075 1,242,990
International Utility Structures,
Inc. Sr. Sub. Notes 144A
10.75%, 02/01/08................. 725 743,125
Niagara Mohawk Power Corp. Sr.
Disc. Notes Cl-H [STEP]
8.419%, 07/01/10................. 1,600 1,108,832
------------
4,178,697
------------
TOTAL CORPORATE OBLIGATIONS
(COST $493,575,731).................. 503,650,388
------------
U.S. TREASURY OBLIGATIONS -- 0.7%
U.S. TREASURY NOTES
5.75%, 08/15/03
(COST $3,807,817)................ 4,000 4,043,920
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
COMMON STOCK -- 0.1%
BROADCASTING -- 0.0%
Sullivan Broadcasting Holdings
Co.* ............................ 2,400 72,000
------------
CAPITAL GOODS -- 0.0%
Australis Holdings Warrants*....... 1,000 0
------------
CHEMICALS -- 0.0%
Sterling Chemicals Holdings
Warrants*........................ 1,075 25,800
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America, Inc.* ... 400 2,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.0%
Electronic Retailing, Inc. 144A ... 875 8,750
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants*........................ 1,200 300
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Warrants
144A*............................ 250 1,250
------------
METALS & MINING -- 0.0%
Bar Technologies, Inc. Warrants
144A*............................ 300 16,500
------------
PRINTING & PUBLISHING -- 0.0%
Affiliated Newspaper Investments,
Inc.*............................ 1,000 120,000
------------
TELECOMMUNICATIONS -- 0.1%
Cellular Communications
International, Inc. Warrants*.... 1,100 44,000
HighwayMaster Communications, Inc.
Warrants*........................ 1,050 2,625
</TABLE>
35
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
MetroNet Communications Corp.
Warrants 144A*................... 1,525 $ 72,628
Pegasus Communications Corp.
144A............................. 1,128 24,534
Pegasus Communications Corp.
Warrants*........................ 1,500 49,500
UIH Australia Warrants*............ 3,100 15,888
Wireless One, Inc. Warrants*....... 1,500 0
------------
209,175
------------
TOTAL COMMON STOCK
(COST $28,237)....................... 455,775
------------
PREFERRED STOCK -- 4.6%
BROADCASTING -- 1.8%
American Radio Systems Corp. Cl-B
11.375% [PIK].................... 18,357 2,184,483
Capstar Broadcasting Corp. 12.00%
[PIK]............................ 7,335 865,554
Chancellor Broadcasting Co.
12.25% [PIK]..................... 7,500 1,080,000
Cumulus Media, Inc. Cl-A 13.75%.... 1,250 1,278,125
Echostar Communications Corp. Cl-B
12.125% [PIK].................... 628 697,558
SFX Broadcasting, Inc. Cl-E 12.625%
[PIK]............................ 16,106 1,912,588
Sinclair Broadcast Group, Inc. Cl-A
$11.625.......................... 18,500 2,051,188
------------
10,069,496
------------
FINANCIAL SERVICES -- 0.2%
California Federal Capital Corp.
Cl-A 9.125% [PIK]................ 30,000 828,750
------------
FOOD -- 0.1%
Nebco Evans Holding Co. 11.25%
[PIK]............................ 7,186 734,746
------------
HEALTHCARE SERVICES -- 0.1%
River Holding Corp. 11.50% [PIK]
144A............................. 5,000 508,750
------------
INDUSTRIAL PRODUCTS -- 0.0%
International Utility Structures,
Inc. $13.00 [PIK] 144A........... 125 136,875
------------
MACHINERY & EQUIPMENT -- 0.1%
Fairfield Manufacturing Co., Inc.
$11.25........................... 650 705,250
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PRINTING & PUBLISHING -- 1.0%
Primedia, Inc. Cl-H $8.625......... 30,500 $ 2,973,750
Primedia, Inc. Cl-D $10.00......... 10,750 1,136,813
Primedia, Inc. Cl-F $9.20.......... 15,000 1,526,250
------------
5,636,813
------------
TELECOMMUNICATIONS -- 1.1%
Bendek Communications Corp.
11.50% [PIK] 144A................ 1,600 1,616,000
Nextel Communications, Inc.
11.125% [PIK] 144A............... 771 797,985
Nextel Communications, Inc.
13.00% [PIK]..................... 932 1,048,499
Pegasus Communications Corp. Cl-A
12.75% [PIK]..................... 2,154 2,434,126
------------
5,896,610
------------
UTILITIES -- 0.2%
El Paso Electric Co.
11.40% [PIK]..................... 12,188 1,346,774
------------
TOTAL PREFERRED STOCK
(COST $23,039,346)................... 25,864,064
------------
<CAPTION>
PAR
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 3.3%
Greenwich Capital Markets, Inc.,
5.25% dated 06/30/98, maturing
07/01/98, repurchase price
$18,536,703 (Collateralized by
U.S. Treasury Bonds, par value
$11,812,000, market value
$18,955,201 due 08/15/14)
(COST $18,534,000)............... $ 18,534 18,534,000
------------
SHARES
--------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund..... 124,216 124,216
Temporary Investment Fund.......... 124,216 124,216
------------
(COST $248,432).................... 248,432
------------
TOTAL INVESTMENTS -- 98.4%
(COST $539,233,563).................. 552,796,579
OTHER ASSETS LESS
LIABILITIES -- 1.6%.................. 8,972,677
------------
NET ASSETS -- 100.0%................... $561,769,256
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 19.7% of net assets.
See Notes to Financial Statements.
36
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 47.2%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ............... 3,800 $ 189,525
------------
AEROSPACE -- 0.8%
AlliedSignal, Inc. ................ 8,200 363,875
Boeing Co. ........................ 11,768 524,411
Litton Industries, Inc.* .......... 1,000 59,000
Lockheed Martin Corp. ............. 2,800 296,450
Northrop Grumman Corp. ............ 1,100 113,437
Primex Technologies, Inc. ......... 420 21,526
Raytheon Co. Cl-A ................. 535 30,830
Raytheon Co. Cl-B ................. 2,500 147,813
Rockwell International Corp. ...... 2,800 134,576
United Technologies Corp. ......... 3,600 333,000
------------
2,024,918
------------
AIRLINES -- 0.2%
Alaska Air Group, Inc.* ........... 2,700 147,320
AMR Corp.* ........................ 3,800 316,350
Delta Air Lines, Inc. ............. 800 103,400
Southwest Airlines Co. ............ 2,500 74,063
------------
641,133
------------
AUTOMOBILE MANUFACTURERS -- 0.8%
Chrysler Corp. .................... 5,800 326,976
Ford Motor Co. .................... 14,500 855,500
General Motors Corp. .............. 9,100 607,995
Honda Motor Co. Ltd. [ADR] ........ 4,800 342,900
------------
2,133,371
------------
AUTOMOTIVE PARTS -- 0.4%
Arvin Industries, Inc. ............ 1,300 47,207
Eaton Corp. ....................... 800 62,200
Echlin, Inc. ...................... 3,100 152,095
Federal-Mogul Corp. ............... 1,000 67,500
Genuine Parts Co. ................. 5,750 198,735
Goodyear Tire & Rubber Co. ........ 2,400 154,650
Mark IV Industries, Inc. .......... 2,100 45,413
Superior Industries International,
Inc. ............................ 700 19,732
TRW, Inc. ......................... 3,400 185,725
------------
933,257
------------
BEVERAGES -- 1.4%
Anheuser-Busch Companies, Inc. .... 5,400 254,813
Cadbury Schweppes PLC [ADR] ....... 3,473 214,024
Coca-Cola Co. ..................... 26,200 2,240,100
Coca-Cola Enterprises, Inc. ....... 6,900 270,825
PepsiCo, Inc. ..................... 17,300 712,544
------------
3,692,306
------------
BROADCASTING -- 0.3%
CBS Corp. ......................... 4,500 142,875
Chris-Craft Industries, Inc.* ..... 1,379 75,414
Clear Channel Communications,
Inc.* ........................... 2,200 240,075
Gannett Co., Inc. ................. 5,200 369,525
------------
827,889
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
BUILDING MATERIALS -- 0.2%
CalMat Co. ........................ 1,700 $ 37,400
Clayton Homes, Inc. ............... 2,500 47,500
Martin Marietta Materials Corp. ... 1,400 63,000
Masco Corp. ....................... 3,600 217,800
Modine Manufacturing Co. .......... 900 31,162
Vulcan Materials Co. .............. 900 96,019
------------
492,881
------------
BUSINESS SERVICES -- 0.2%
Cognizant Corp. ................... 3,500 220,500
Dun & Bradstreet Corp. ............ 1,500 54,188
Equifax, Inc. ..................... 3,700 134,356
Manpower, Inc. .................... 1,700 48,769
Navigant International, Inc.* ..... 215 1,834
Olsten Corp. ...................... 2,000 22,375
Robert Half International,
Inc.* ........................... 2,250 125,719
------------
607,741
------------
CHEMICALS -- 1.2%
AKZO Nobel NV [ADR] ............... 1,000 110,875
Cabot Corp. ....................... 2,300 74,319
Crompton & Knowles Corp. .......... 3,800 95,712
Dexter Corp. ...................... 1,500 47,719
Dow Chemical Co. .................. 3,600 348,075
Du Pont, (E.I.) de Nemours &
Co. ............................. 13,400 999,975
FMC Corp.* ........................ 1,600 109,100
Great Lakes Chemical Corp. ........ 2,500 98,594
Hanna, (M.A.) Co. ................. 2,100 38,456
IMC Global, Inc. .................. 2,000 60,250
Lubrizol Corp. .................... 2,200 66,550
Monsanto Co. ...................... 7,600 424,650
Morton International, Inc. ........ 4,500 112,500
Olin Corp. ........................ 2,100 87,544
Pall Corp. ........................ 5,400 110,700
PPG Industries, Inc. .............. 2,800 194,775
Rohm & Haas Co. ................... 1,600 166,300
Schulman, (A.), Inc. .............. 2,000 39,125
Solutia, Inc. ..................... 1,160 33,277
Witco Corp. ....................... 3,100 90,675
------------
3,309,171
------------
CLOTHING & APPAREL -- 0.3%
Cintas Corp. ...................... 3,600 183,600
Jones Apparel Group, Inc.* ........ 5,200 190,125
Nike, Inc. Cl-B ................... 4,000 194,750
Springs Industries, Inc. Cl-A ..... 2,000 92,250
Unifi, Inc. ....................... 2,500 85,625
------------
746,350
------------
COMPUTER HARDWARE -- 1.4%
Bay Networks, Inc.* ............... 2,800 90,300
Compaq Computer Corp. ............. 18,068 512,679
Dell Computer Corp.* .............. 10,400 965,250
EMC Corp.* ........................ 6,400 286,800
Hewlett-Packard Co. ............... 10,800 646,650
International Business Machines
Corp. ........................... 9,900 1,136,644
Quantum Corp.* .................... 2,900 60,175
</TABLE>
37
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Seagate Technology, Inc.* ......... 4,500 $ 107,156
Stratus Computer, Inc.* ........... 1,100 27,844
------------
3,833,498
------------
COMPUTER SERVICES & SOFTWARE -- 2.9%
Adobe Systems, Inc. ............... 600 25,462
America Online, Inc.* ............. 4,600 487,600
Automatic Data Processing, Inc. ... 4,000 291,500
Aztec Technology Partners,
Inc.* ........................... 430 3,279
BMC Software, Inc.* ............... 4,800 249,300
Cadence Design Systems, Inc.* ..... 4,500 140,625
Ceridian Corp.* ................... 2,600 152,750
Cisco Systems, Inc.* .............. 9,750 897,609
CompUSA, Inc.* .................... 2,400 43,350
Computer Associates International,
Inc. ............................ 7,362 409,051
Compuware Corp.* .................. 4,300 219,837
DST Systems, Inc.* ................ 900 50,400
Electronic Arts, Inc.* ............ 1,500 81,000
First Data Corp. .................. 5,400 179,887
Fiserv, Inc.* ..................... 1,650 70,073
Informix Corp.* ................... 2,900 22,928
Microsoft Corp.* .................. 27,200 2,947,800
Network Associates, Inc.* ......... 1,950 93,356
Novell, Inc.* ..................... 9,500 121,125
Oracle Corp.* ..................... 12,850 315,628
Parametric Technology Corp.* ...... 5,000 135,625
Paychex, Inc. ..................... 5,400 219,712
Policy Management Systems
Corp.* .......................... 800 31,400
Sterling Commerce, Inc.* .......... 2,200 106,700
Storage Technology Corp.* ......... 3,000 130,125
Structural Dynamics Research
Corp.* .......................... 1,300 30,062
Sun Microsystems, Inc.* ........... 4,900 212,844
Sungard Data Systems, Inc.* ....... 2,100 80,587
------------
7,749,615
------------
CONGLOMERATES -- 0.7%
Hanson PLC [ADR] .................. 337 10,215
Minnesota Mining & Manufacturing
Co. ............................. 5,000 410,937
Philip Morris Companies, Inc. ..... 26,100 1,027,687
Tomkins PLC [ADR] ................. 6,000 137,250
Tyco International Ltd. ........... 4,000 252,000
------------
1,838,089
------------
CONSTRUCTION -- 0.1%
Armstrong World Industries,
Inc. ............................ 800 53,900
Granite Construction, Inc. ........ 1,100 33,687
Jacobs Engineering Group, Inc.* ... 1,700 54,612
------------
142,199
------------
CONSUMER PRODUCTS & SERVICES -- 1.7%
A.C. Nielsen Corp.* ............... 1,500 37,875
Cendant Corp.* .................... 12,168 254,007
Colgate-Palmolive Co. ............. 4,000 352,000
Corning, Inc. ..................... 5,200 180,700
Cross, (A.T.) Co. Cl-A ............ 1,400 20,825
Eastman Kodak Co. ................. 3,300 241,106
Fortune Brands, Inc. .............. 2,400 92,250
Gallaher Group PLC [ADR] .......... 2,400 52,500
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Gillette Co. ...................... 12,800 $ 725,600
Imperial Tobacco Group
PLC [ADR] ....................... 675 9,830
International Flavors &
Fragrances, Inc. ................ 3,200 139,000
Lancaster Colony Corp. ............ 1,050 39,769
National Presto Industries,
Inc. ............................ 800 31,150
Ogden Corp. ....................... 1,000 27,687
Pittston Brink Group .............. 1,300 47,937
Premark International, Inc. ....... 1,800 58,050
Procter & Gamble Co. .............. 15,200 1,384,150
Shaw Industries, Inc. ............. 2,000 35,250
Sotheby's Holdings, Inc. Cl-A ..... 1,500 33,562
Stewart Enterprises, Inc. ......... 2,200 58,575
Unilever NV ....................... 9,400 742,012
Whitman Corp. ..................... 2,500 57,344
------------
4,621,179
------------
CONTAINERS & PACKAGING -- 0.1%
Bemis Co., Inc. ................... 2,700 110,362
First Brands Corp. ................ 1,000 25,625
Owens-Illinois, Inc.* ............. 3,700 165,575
Sealed Air Corp.* ................. 2,400 88,200
------------
389,762
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.3%
AES Corp.* ........................ 3,700 194,481
Altera Corp.* ..................... 4,300 127,119
American Power Conversion
Corp.* .......................... 2,700 81,000
Analog Devices, Inc.* ............. 7,533 185,029
Applied Materials, Inc.* .......... 5,200 153,400
Arrow Electronics, Inc.* .......... 2,500 54,375
Diebold, Inc. ..................... 2,700 77,962
Emerson Electric Co. .............. 6,000 362,250
General Electric Co. .............. 34,700 3,157,700
Hitachi Ltd. [ADR] ................ 2,400 154,800
Honeywell, Inc. ................... 2,000 167,125
Hubbell, Inc. Cl-B ................ 2,000 83,250
Linear Technology Corp. ........... 1,900 114,594
Maxim Integrated Products,
Inc.* ........................... 4,000 126,750
Molex, Inc. ....................... 4,375 109,375
Royal Philips Electronics NV
[ADR] ........................... 3,600 306,000
SCI Systems, Inc.* ................ 1,400 52,675
Solectron Corp.* .................. 3,000 126,187
Sundstrand Corp. .................. 2,200 125,950
Symbol Technologies, Inc. ......... 1,575 59,456
Tandy Corp. ....................... 1,200 63,675
Teleflex, Inc. .................... 1,800 68,400
Teradyne, Inc.* ................... 2,500 66,875
Texas Instruments, Inc. ........... 3,900 227,419
Varian Associates, Inc. ........... 700 27,300
------------
6,273,147
------------
ENTERTAINMENT & LEISURE -- 0.8%
Brunswick Corp. ................... 2,000 49,500
Callaway Golf Co. ................. 2,200 43,312
Circus Circus Enterprises,
Inc.* ........................... 2,700 45,731
Disney, (Walt) Co. ................ 7,264 763,174
Harley-Davidson, Inc. ............. 3,800 147,250
</TABLE>
38
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Mattel, Inc. ...................... 2,800 $ 118,475
Mirage Resorts, Inc.* ............. 3,800 80,987
President Casinos, Inc.
Warrants* ....................... 883 44
Time Warner, Inc. ................. 6,900 589,519
Viacom, Inc. Cl-B* ................ 5,000 291,250
------------
2,129,242
------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries,
Inc. ............................ 3,240 112,590
Tetra Tech, Inc.* ................. 1,500 36,375
U.S. Filter Corp.* ................ 2,300 64,544
USA Waste Services, Inc.* ......... 5,000 246,875
Waste Management, Inc. ............ 5,323 186,305
------------
646,689
------------
EQUIPMENT SERVICES -- 0.0%
Agco Corp. ........................ 2,100 43,181
------------
FINANCIAL-BANK & TRUST -- 4.2%
Australia and New Zealand Banking
Group Ltd. [ADR] ................ 3,600 123,075
Banc One Corp. .................... 8,030 448,174
Banco Bilbao Vizcaya [ADR] ........ 9,000 459,000
Banco Frances SA [ADR] ............ 5,060 116,064
BankAmerica Corp. ................. 7,300 630,994
BankBoston Corp. .................. 3,000 166,875
Charter One Financial, Inc. ....... 2,800 94,325
Chase Manhattan Corp. ............. 9,712 733,256
Citicorp .......................... 5,200 776,100
City National Corp. ............... 1,800 66,487
Crestar Financial Corp. ........... 2,600 141,862
Dime Bancorp, Inc. ................ 2,600 77,837
Fifth Third Bancorp ............... 4,725 297,675
First Chicago NBD Corp. ........... 4,200 372,225
First Security Corp. .............. 7,087 151,706
First Tennessee National Corp. .... 5,400 170,437
First Union Corp. ................. 12,608 734,416
Firstar Corp. ..................... 3,100 117,800
Fleet Financial Group, Inc. ....... 3,600 300,600
Golden West Financial Corp. ....... 800 85,050
Hibernia Corp. Cl-A ............... 3,100 62,581
Huntington Bancshares, Inc. ....... 3,600 120,600
Keycorp ........................... 8,000 285,000
Marshall & Ilsley Corp. ........... 2,000 102,125
Mellon Bank Corp. ................. 4,400 306,350
Mercantile Bancorporation, Inc. ... 3,000 151,125
Mercantile Bankshares Corp. ....... 2,700 93,994
Morgan, (J.P.) & Co., Inc. ........ 2,600 304,525
National City Corp. ............... 2,160 153,360
NationsBank Corp. ................. 9,600 734,400
Northern Trust Corp. .............. 3,600 274,500
Norwest Corp. ..................... 10,800 403,650
Pacific Century Financial Corp. ... 3,000 72,000
PNC Bank Corp. .................... 5,520 297,045
Regions Financial Corp. ........... 2,700 110,869
Silicon Valley Bancshares* ........ 1,400 49,831
Southtrust Corp. .................. 4,500 195,750
State Street Boston Corp. ......... 2,900 201,550
Summit Bancorp .................... 3,300 156,750
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TCF Financial Corp. ............... 2,100 $ 61,950
U.S. Bancorp ...................... 13,659 587,337
Union Planters Corp. .............. 1,200 70,575
Wells Fargo & Co. ................. 1,100 405,900
Wilmington Trust Corp. ............ 900 54,787
------------
11,320,512
------------
FINANCIAL SERVICES -- 1.9%
AMBAC, Inc. ....................... 1,600 93,600
American Express Co. .............. 5,100 581,400
Associates First Capital Corp.
Cl-A ............................ 3,564 273,982
Bear Stearns Companies, Inc. ...... 2,415 137,353
Block, (H&R), Inc. ................ 2,500 105,312
Capital One Financial Corp. ....... 1,400 173,862
Comdisco, Inc. .................... 5,700 108,300
Echelon International Corp.* ...... 846 22,260
Edwards, (A.G.), Inc. ............. 2,250 96,047
Fannie Mae ........................ 12,100 735,075
FINOVA Group, Inc. ................ 2,000 113,250
Franklin Resources, Inc. .......... 5,700 307,800
Freddie Mac ....................... 9,500 447,094
Green Tree Financial Corp. ........ 2,500 107,031
Grupo Financiero Bancomer [ADR]
144A* ........................... 1,400 10,325
Household International, Inc. ..... 4,800 238,800
Merrill Lynch & Co., Inc. ......... 3,100 285,975
Morgan Stanley, Dean Witter &
Co. ............................. 5,485 501,192
Paine Webber Group, Inc. .......... 3,600 154,350
Schwab, (Charles) Corp. ........... 3,350 108,875
SunAmerica, Inc. .................. 4,200 241,237
Washington Mutual, Inc. ........... 3,750 162,891
------------
5,006,011
------------
FOOD -- 1.5%
Albertson's, Inc. ................. 4,200 217,612
American Stores Co. ............... 2,800 67,725
Archer-Daniels-Midland Co. ........ 7,782 150,776
Bestfoods, Inc. ................... 4,500 261,281
Campbell Soup Co. ................. 5,100 270,937
ConAgra, Inc. ..................... 6,800 215,475
Dean Foods Corp. .................. 900 49,444
Diageo PLC [ADR] .................. 4,147 199,834
Dole Food Co. ..................... 1,700 84,469
Earthgrains Co. ................... 296 16,539
General Mills, Inc. ............... 2,500 170,937
Heinz, (H.J.) Co. ................. 5,250 294,656
Hershey Foods Corp. ............... 1,500 103,500
IBP, Inc. ......................... 2,400 43,500
Interstate Bakeries Corp. ......... 1,800 59,737
Kellogg Co. ....................... 5,800 217,862
Kroger Co.* ....................... 5,400 231,525
McCormick & Co., Inc. ............. 3,300 .. 117,872
Ralston Purina Group .............. 2,100 245,306
Safeway, Inc.* .................... 4,560 185,535
Sara Lee Corp. .................... 6,200 346,812
Smucker, (J.M.) Co. ............... 1,600 39,700
Tyson Foods, Inc. ................. 5,300 114,944
Universal Corp. ................... 1,800 67,275
</TABLE>
39
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Universal Foods Corp. ............. 2,600 $ 57,687
Wrigley, (Wm., Jr.) Co. ........... 1,300 127,400
------------
3,958,340
------------
FURNITURE -- 0.0%
Leggett & Platt, Inc. ............. 4,800 120,000
------------
HEALTHCARE SERVICES -- 0.6%
Amgen, Inc.* ...................... 3,800 248,425
Apria Healthcare Group, Inc.* ..... 2,000 13,375
Columbia HCA Healthcare Corp. ..... 9,096 264,921
Concentra Managed Care, Inc.* ..... 1,600 41,600
Foundation Health Systems* ........ 1,800 47,475
Health Management Associates,
Inc. Cl-A* ...................... 3,500 117,031
Healthsouth Corp.* ................ 6,200 165,462
Omnicare, Inc. .................... 2,800 106,750
Oxford Health Plans, Inc.* ........ 1,300 19,906
PacifiCare Health Systems, Inc.
Cl-A ............................ 400 33,800
PacifiCare Health Systems, Inc.
Cl-B* ........................... 1,000 88,375
Quorum Health Group, Inc.* ........ 2,700 71,550
Synopsis, Inc.* ................... 1,800 82,350
Total Renal Care Holdings,
Inc.* ........................... 2,000 69,000
United Healthcare Corp. ........... 3,400 215,900
Vencor, Inc. ...................... 2,200 15,950
Ventas, Inc. ...................... 2,200 30,387
------------
1,632,257
------------
HOTELS & MOTELS -- 0.0%
Starwood Hotels & Resorts
[REIT] .......................... 2,664 128,704
------------
INDUSTRIAL PRODUCTS -- 0.0%
Harsco Corp. ...................... 2,000 91,625
------------
INSURANCE -- 2.0%
Aetna, Inc. ....................... 2,502 190,465
AFLAC, Inc. ....................... 6,300 190,969
Allstate Corp. .................... 4,700 430,344
American Financial Group, Inc. .... 1,700 73,631
American General Corp. ............ 4,300 306,106
American International Group,
Inc. ............................ 7,550 1,102,300
Chubb Corp. ....................... 2,600 208,975
CIGNA Corp. ....................... 3,900 269,100
Conseco, Inc. ..................... 2,000 93,500
General Re Corp. .................. 1,300 329,550
HSB Group, Inc. ................... 1,650 88,275
Lincoln National Corp. ............ 1,100 100,512
Loews Corp. ....................... 2,100 182,962
Progressive Corp. ................. 1,400 197,400
Provident Companies, Inc. ......... 2,800 96,600
Selective Insurance Group, Inc. ... 2,000 44,812
Torchmark Corp. ................... 4,600 210,450
Transatlantic Holdings, Inc. ...... 1,050 81,178
Travelers Group, Inc. ............. 13,470 816,619
UNUM Corp. ........................ 4,200 233,100
------------
5,246,848
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
LUMBER & WOOD PRODUCTS -- 0.0%
Deltic Timber Corp. ............... 342 $ 8,571
Rayonier, Inc. .................... 700 32,200
------------
40,771
------------
MACHINERY & EQUIPMENT -- 0.7%
Black & Decker Corp. .............. 2,700 164,700
Caterpillar, Inc. ................. 5,600 296,100
Danaher Corp. ..................... 3,600 132,075
Deere & Co. ....................... 4,000 211,500
Evi, Inc.* ........................ 1,520 56,430
Federal Signal Corp. .............. 1,700 41,331
Flowserve Corp. ................... 2,900 71,412
Gencorp, Inc. ..................... 2,800 70,700
Illinois Tool Works, Inc. ......... 4,200 280,087
Ingersoll-Rand Co. ................ 1,500 66,094
Kennametal, Inc. .................. 500 20,875
Precision Castparts Corp. ......... 500 26,687
Sequa Corp. Cl-A* ................. 700 46,725
Smith International, Inc.* ........ 2,000 69,625
Tecumseh Products Co. Cl-A ........ 1,400 73,937
Thermo Electron Corp.* ............ 3,400 116,237
------------
1,744,515
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.3%
Abbott Laboratories ............... 17,400 711,225
Allegiance Corp. .................. 1,400 71,750
Baxter International, Inc. ........ 4,800 258,300
Beckman Coulter, Inc. ............. 500 29,125
Becton Dickinson & Co. ............ 3,400 263,925
Boston Scientific Corp.* .......... 3,400 243,525
Forest Laboratories, Inc.* ........ 2,000 71,500
Genzyme Tissue Repair* ............ 63 413
Guidant Corp. ..................... 2,600 185,412
Hillenbrand Industries, Inc. ...... 1,500 90,000
Johnson & Johnson Co. ............. 14,300 1,054,625
Medtronic, Inc. ................... 5,000 318,750
Stryker Corp.* .................... 3,400 130,475
Sybron International Corp.* ....... 1,800 45,450
------------
3,474,475
------------
METALS & MINING -- 0.2%
Aluminum Co. of America ........... 3,100 204,406
Barrick Gold Corp. ................ 8,000 153,500
Brush Wellman, Inc. ............... 1,300 26,731
Carpenter Technology Corp. ........ 2,200 110,550
Nucor Corp. ....................... 1,600 73,600
Placer Dome, Inc. ................. 4,700 55,225
------------
624,012
------------
OFFICE EQUIPMENT -- 0.4%
Herman Miller, Inc. ............... 2,000 48,625
Ikon Office Solutions, Inc. ....... 2,300 33,494
Office Depot, Inc.* ............... 3,900 123,094
Pitney Bowes, Inc. ................ 4,900 235,812
Standard Register Co. ............. 1,700 60,137
Staples, Inc.* .................... 5,850 169,284
Viking Office Products, Inc.* ..... 2,100 65,887
</TABLE>
40
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Wallace Computer Service, Inc. .... 2,900 $ 68,875
Xerox Corp. ....................... 3,900 396,337
------------
1,201,545
------------
OIL & GAS -- 3.8%
Amerada Hess Corp. ................ 4,700 255,269
Amoco Corp. ....................... 8,800 366,300
Anadarko Petroleum Corp. .......... 1,300 87,344
Apache Corp. ...................... 1,600 50,400
Atlantic Richfield Co. ............ 4,000 312,500
BJ Services Co.* .................. 8,200 238,312
British Petroleum Co. PLC [ADR] ... 3,000 264,750
Chevron Corp. ..................... 7,400 614,662
El Paso Natural Gas Co. ........... 2,800 107,100
ENI Co. SPA [ADR] ................. 3,700 240,500
Ensco International, Inc. ......... 4,200 72,975
Exxon Corp. ....................... 25,400 1,811,337
Global Marine, Inc.* .............. 4,200 78,487
Halliburton Co. ................... 4,300 191,619
Helmerich & Payne, Inc. ........... 1,800 40,050
Marketspan Corp. .................. 3,000 89,812
MCN Energy Group, Inc. ............ 2,400 59,700
Mobil Corp. ....................... 8,500 651,312
Murphy Oil Corp. .................. 1,800 91,237
Nabors Industries, Inc.* .......... 2,200 43,587
National Fuel Gas Co. ............. 1,600 69,700
Noble Affiliates, Inc. ............ 1,800 68,400
Noble Drilling Corp.* ............. 2,400 57,750
Occidental Petroleum Corp. ........ 6,600 178,200
Phillips Petroleum Co. ............ 4,000 192,750
Ranger Oil Ltd.* .................. 5,400 39,487
Repsol SA [ADR] ................... 3,000 165,000
Royal Dutch Petroleum Co. ......... 26,200 1,436,087
Schlumberger Ltd. ................. 5,600 382,550
Shell Transport & Trading Co.
[ADR] ........................... 6,000 254,250
Societe Nationale Elf Aquitaine SA
[ADR] ........................... 2,000 142,000
Sonat, Inc. ....................... 3,300 127,463
Texaco, Inc. ...................... 6,200 370,063
Tidewater, Inc. ................... 2,700 89,100
Tosco Corp. ....................... 3,000 88,125
Total SA [ADR] .................... 3,900 254,963
Transocean Offshore, Inc. ......... 2,000 89,000
Ultramar Diamond Shamrock Corp. ... 1,800 56,813
Union Pacific Resources Group,
Inc. ............................ 5,509 96,752
Unocal Corp. ...................... 3,600 128,700
USX-Marathon Group................. 5,400 185,288
Valero Energy Corp. ............... 2,900 96,425
Washington Gas Light Co. .......... 2,200 58,850
------------
10,294,969
------------
PAPER & FOREST PRODUCTS -- 0.4%
Bowater, Inc. ..................... 900 42,525
Consolidated Papers, Inc. ......... 2,300 62,675
Fort James Corp. .................. 2,400 106,800
Georgia Pacific Group ............. 1,500 88,406
Georgia Pacific Timber Group ...... 1,500 34,594
Glatfelter, (P.H.) Co. ............ 2,600 41,113
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
International Paper Co. ........... 5,000 $ 215,000
Kimberly-Clark Corp. .............. 7,000 321,125
Sonoco Products.................... 2,310 69,878
Wausau-Mosinee Paper Corp. ........ 1,900 43,463
Weyerhaeuser Co. .................. 3,200 147,800
------------
1,173,379
------------
PERSONAL SERVICES -- 0.1%
Service Corp. International ....... 3,800 162,925
------------
PHARMACEUTICALS -- 3.4%
American Home Products Corp. ...... 14,400 745,200
Bergen Brunswig Corp. Cl-A ........ 1,100 51,013
Biogen, Inc.* ..................... 1,600 78,400
Bristol-Meyers Squibb Co. ......... 11,100 1,275,806
Cardinal Health, Inc. ............. 900 84,375
Carter-Wallace, Inc. .............. 3,900 70,444
Centocor, Inc.* ................... 1,200 43,500
Genzyme Corp.* .................... 2,100 53,681
Glaxo Wellcome PLC [ADR] .......... 4,800 287,100
Ivax Corp.* ....................... 3,600 33,300
Lilly, (Eli) & Co. ................ 12,200 805,963
McKesson Corp. .................... 2,600 211,250
Merck & Co., Inc. ................. 13,400 1,792,250
Perrigo Co.* ...................... 3,600 36,225
Pfizer, Inc. ...................... 14,500 1,575,969
Pharmacia & Upjohn, Inc. .......... 6,400 295,200
Scherer, (R.P.) Corp.* ............ 1,000 88,625
Schering-Plough Corp. ............. 7,600 696,350
Warner-Lambert Co. ................ 9,900 686,813
Watson Pharmaceuticals, Inc.* ..... 3,000 140,063
------------
9,051,527
------------
PRINTING & PUBLISHING -- 0.3%
Banta Corp. ....................... 2,900 89,538
Belo, (A.H.) Corp. Cl-A ........... 2,600 63,375
Lexmark International Group,
Inc. Cl-A* ...................... 1,800 109,800
McGraw-Hill Co., Inc. ............. 2,900 236,531
R.R. Donnelley & Sons Co. ......... 1,300 59,475
Washington Post Co. Cl-B .......... 200 115,200
Workflow Management, Inc.* ........ 286 2,305
------------
676,224
------------
RAILROADS -- 0.3%
Burlington Northern Santa Fe
Corp. ........................... 1,700 166,919
Kansas City Southern Industries,
Inc. ............................ 5,400 267,975
Norfolk Southern Corp. ............ 6,000 178,875
Union Pacific Corp. ............... 3,000 132,375
------------
746,144
------------
RESTAURANTS -- 0.3%
Brinker International, Inc.* ...... 7,300 140,525
Cracker Barrel Old Country Store,
Inc. ............................ 2,700 85,725
Darden Restaurants, Inc. .......... 6,500 103,188
McDonald's Corp. .................. 4,800 331,200
Outback Steakhouse, Inc.* ......... 1,900 74,100
Tricon Global Restaurants,
Inc.* ........................... 1,480 46,898
------------
781,636
------------
</TABLE>
41
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
RETAIL & MERCHANDISING -- 2.3%
Ann Taylor Stores Corp.* .......... 1,600 $ 33,900
Barnes & Noble, Inc.* ............. 2,000 74,875
Bed, Bath & Beyond, Inc.* ......... 2,200 113,988
Best Buy, Inc.* ................... 2,000 72,250
BJ's Wholesale Club, Inc.* ........ 2,000 81,250
Circuit City Stores, Inc. ......... 2,000 93,750
Costco Companies, Inc.* ........... 3,900 245,944
CVS Corp. ......................... 4,000 155,750
Dayton-Hudson Corp. ............... 7,400 358,900
Dollar General Corp. .............. 2,812 111,250
Family Dollar Stores, Inc. ........ 2,600 48,100
Fastenal Co. ...................... 1,400 65,013
Federated Department Stores,
Inc.* ........................... 3,500 188,344
Gap, Inc. ......................... 4,350 268,069
General Nutrition Companies,
Inc.* ........................... 1,900 59,138
Home Depot, Inc. .................. 9,000 747,563
Kohls Corp.* ...................... 5,600 290,500
Lands' End, Inc.* ................. 1,800 56,925
May Department Stores Co. ......... 3,900 255,450
Meyer, (Fred), Inc.* .............. 3,000 127,500
Micro Warehouse, Inc.* ............ 1,500 23,250
Nordstrom, Inc. ................... 800 61,800
Payless Shoesource, Inc.* ......... 672 49,518
Penney, (J.C.) Co., Inc. .......... 3,500 253,094
Rite Aid Corp. .................... 2,600 97,663
School Specialty, Inc.* ........... 239 3,915
Starbucks Corp.* .................. 1,700 90,844
Tiffany & Co. ..................... 1,200 57,600
TJX Companies, Inc. ............... 5,600 135,100
Toys 'R' Us, Inc.* ................ 4,620 108,859
U.S. Office Products Co. .......... 538 10,599
Wal-Mart Stores, Inc. ............. 25,900 1,573,425
Walgreen Co. ...................... 7,700 318,106
------------
6,232,232
------------
SEMICONDUCTORS -- 0.7%
Atmel Corp.* ...................... 2,700 36,788
Intel Corp. ....................... 17,400 1,289,775
Motorola, Inc. .................... 6,100 320,631
Xilinx, Inc.* ..................... 4,100 139,400
------------
1,786,594
------------
TELECOMMUNICATIONS -- 4.9%
360 Communications Co.* ........... 2,300 73,600
ADC Telecommunications, Inc.* ..... 3,400 124,206
AirTouch Communications, Inc.* .... 6,000 350,625
Aliant Communications, Inc. ....... 1,800 49,388
Ameritech Corp. ................... 13,100 587,863
AT&T Corp. ........................ 17,200 982,550
Bell Atlantic Corp. ............... 17,314 789,951
BellSouth Corp. ................... 10,500 704,813
British Telecommunications PLC
[ADR] ........................... 3,200 395,200
Century Telephone Enterprises,
Inc. ............................ 4,200 192,675
Cia de Telecomunicaciones de Chile
SA [ADR] ........................ 1,700 34,531
Comcast Corp. Cl-A ................ 7,000 284,156
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Ericsson, (L.M.) Telephone Co.
[ADR] ........................... 9,600 $ 274,800
France Telecom SA [ADR] ........... 9,700 674,756
GTE Corp. ......................... 11,100 617,438
Hong Kong Telecommunications Ltd.
[ADR] ........................... 9,245 174,499
Lucent Technologies, Inc. ......... 15,252 1,268,776
MCI Communications Corp. .......... 7,700 447,563
MediaOne Group, Inc.* ............. 8,000 351,500
MetroNet Communications Corp.
Warrants 144A* .................. 100 4,100
Nextel Communications, Inc.
Cl-A* ........................... 3,600 89,550
Nokia Corp. Cl-A [ADR] ............ 3,600 261,225
Northern Telecom Ltd. ............. 6,800 385,900
SBC Communications, Inc. .......... 18,714 748,560
Southern New England
Telecommunications Corp. ........ 2,400 157,200
Sprint Corp. ...................... 5,400 380,700
TCA Cable TV, Inc. ................ 1,600 96,000
Tele-Communications, Inc. Cl-A* ... 5,700 219,094
Telebras SA [ADR] ................. 3,300 360,319
Telefonica SA [ADR] ............... 1,600 222,500
Telefonos de Mexico SA Cl-L
[ADR] ........................... 1,800 86,513
Telephone & Data Systems, Inc. .... 2,000 78,750
Tellabs, Inc.* .................... 2,800 200,550
U. S. West, Inc. .................. 6,418 301,646
Vodafone Group PLC [ADR] .......... 3,200 403,400
Williams Companies, Inc. .......... 6,398 215,933
WorldCom, Inc.* ................... 10,900 527,969
------------
13,118,799
------------
TRANSPORTATION -- 0.1%
Alexander & Baldwin, Inc. ......... 1,800 52,425
CNF Transportation, Inc. .......... 900 38,250
CSX Corp. ......................... 2,300 104,650
------------
195,325
------------
UTILITIES -- 1.7%
Allegheny Energy, Inc. ............ 3,000 90,375
American Electric Power Co.,
Inc. ............................ 2,200 99,825
American Water Works Co., Inc. .... 2,100 65,100
Baltimore Gas & Electric Co. ...... 1,000 31,063
Calenergy, Inc.* .................. 2,400 72,150
CMS Energy Corp. .................. 2,800 123,200
Consolidated Edison, Inc. ......... 2,600 119,763
Duke Energy Corp. ................. 5,300 314,025
Edison International Co. .......... 7,800 230,588
Empresa Nacional de Electridad SA
[ADR] ........................... 2,000 28,500
Endesa SA [ADR] ................... 7,600 164,350
Energy East Corp. ................. 3,400 141,525
Enron Corp. ....................... 4,400 237,875
Entergy Corp. ..................... 6,200 178,250
FirstEnergy Corp. ................. 2,000 61,500
Florida Progress Corp. ............ 2,500 102,813
FPL Group, Inc. ................... 3,700 233,100
Idaho Power Co. ................... 2,600 90,025
</TABLE>
42
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Illinova Corp. .................... 2,700 $ 81,000
IPALCO Enterprises, Inc. .......... 2,400 106,650
MidAmerican Energy Co. ............ 3,800 82,175
New Century Energies, Inc. ........ 2,395 108,823
New England Electric Systems ...... 1,700 73,525
Niagara Mohawk Power Corp.* ....... 12,700 189,706
NIPSCO Industries, Inc. ........... 4,600 128,800
Oklahoma Gas & Electric Co. ....... 2,200 59,400
PG&E Corp. ........................ 8,200 258,813
Pinnacle West Capital Co. ......... 1,500 67,500
Potomac Electric Power Co. ........ 3,200 80,200
Public Service Co. of New
Mexico .......................... 1,000 22,688
SCANA Corp. ....................... 3,000 89,438
Southern Co. ...................... 10,500 290,719
Teco Energy, Inc. ................. 3,500 93,844
Texas Utilities Co. ............... 3,700 154,013
Unicom Corp. ...................... 4,200 147,263
UtiliCorp United, Inc. ............ 1,200 45,225
------------
4,463,809
------------
TOTAL COMMON STOCK
(COST $81,261,474)................... 126,538,321
------------
FOREIGN STOCK -- 9.1%
ADVERTISING -- 0.1%
Asahi Tsushin -- (JPY) ............ 9,000 183,197
------------
AEROSPACE -- 0.0%
Mitsubishi Heavy Industries Ltd. --
(JPY) ........................... 22,000 83,064
------------
AIRLINES -- 0.1%
KLM Royal Dutch Airlines NV --
(NLG) ........................... 3,000 121,816
Singapore Airlines
Ltd. -- (SGD) ................... 7,000 32,732
------------
154,548
------------
AUTOMOBILE MANUFACTURERS -- 0.1%
MAN AG -- (DEM)* .................. 1,000 388,913
------------
AUTOMOTIVE PARTS -- 0.1%
Bridgestone Corp. -- (JPY) ........ 15,000 354,505
------------
BEVERAGES -- 0.1%
Lion Nathan Ltd. -- (NZD) ......... 50,000 111,085
Louis Vuitton Moet
Hennessy -- (FRF) ............... 660 132,087
------------
243,172
------------
BUILDING MATERIALS -- 0.2%
Blue Circle Industries
PLC -- (GBP) .................... 26,513 149,742
Holderbank Financiere Glarus AG --
(CHF) ........................... 260 330,826
Malayan Cement BHD -- (MYR) ....... 51,250 16,682
------------
497,250
------------
CHEMICALS -- 0.5%
AKZO Nobel NV -- (NLG) ............ 400 88,919
BASF AG -- (DEM)* ................. 8,000 378,941
Bayer AG -- (DEM) ................. 7,600 391,993
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
L'Air Liquide -- (FRF) ............ 1,643 $ 271,666
Sumitomo Chemical Co. -- (JPY)* ... 26,000 80,182
------------
1,211,701
------------
CLOTHING & APPAREL -- 0.3%
Benetton Group SPA -- (ITL) ....... 96,600 200,531
Christian Dior SA -- (FRF) ........ 1,200 151,041
Kuraray Co. Ltd. -- (JPY) ......... 21,000 178,398
Yue Yuen Industrial Holdings --
(HKD) ........................... 95,000 169,805
------------
699,775
------------
CONGLOMERATES -- 0.2%
Cycle & Carriage Ltd. -- (SGD) .... 15,000 36,579
GKN PLC -- (UK) ................... 12,000 151,967
Hutchison Whampoa Ltd. -- (HKD) ... 56,000 295,590
Sime Darby BHD -- (MYR) ........... 50,000 34,479
Tomkins PLC -- (GBP) .............. 12,000 65,122
Valmet Corp. -- (FIM) ............. 4,000 68,970
------------
652,707
------------
CONSTRUCTION -- 0.2%
Compagnie Francaise d'Etudes et de
Construction Technip -- (FRF) ... 3,300 403,356
Matsushita Electric Works Ltd. --
(JPY) ........................... 15,000 121,050
------------
524,406
------------
CONSUMER PRODUCTS & SERVICES -- 0.3%
JUSCO Co. -- (JPY)................. 11,000 201,715
Kao Corp. -- (JPY)................. 26,000 400,908
Orkla ASA Cl-A -- (NOK)............ 7,600 176,789
------------
779,412
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.5%
Johnson Electric
Holdings -- (HKD) ............... 93,600 346,685
Mitsubishi Electric
Corp. -- (JPY) .................. 27,000 62,060
Omron Corp. -- (JPY) .............. 24,000 366,610
Sharp Corp. -- (JPY) .............. 9,000 72,890
Siemans AG -- (DEM) ............... 3,700 225,071
Sony Corp. -- (JPY) ............... 3,000 258,313
------------
1,331,629
------------
FINANCIAL-BANK & TRUST -- 2.2%
Abbey National PLC -- (GBP) ....... 28,000 497,547
ABN AMRO Holding NV -- (NLG) ...... 8,000 187,197
Banca Commerciale Italia NA --
(ITL) ........................... 61,000 364,789
Bank of Scotland -- (GBP) ......... 20,208 226,242
Bankgesellschaft Berlin
AG -- (DEM) ..................... 10,050 210,462
Barclays PLC -- (GBP) ............. 15,191 437,983
DCB Holdings BHD -- (MYR) ......... 33,000 13,447
DCB Sakura -- (MYR) ............... 1,650 430
Deutsche Bank AG -- (DEM) ......... 2,800 237,104
Developmental Bank of Singapore
Ltd. -- (SGD) ................... 4,400 24,351
Dresdner Bank AG -- (DEM) ......... 4,500 242,572
HSBC Holdings PLC -- (GBP) ........ 18,000 456,802
ING Groep NV -- (NLG) ............. 10,153 664,815
</TABLE>
43
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
KBC Bancassurance Holdings NV --
(BEF) ........................... 5,300 $ 474,308
Oversea-Chinese Banking Corp.
Ltd. -- (SGD) ................... 6,000 20,420
Svenska Handlesbanken
Cl-A -- (SEK) ................... 7,300 338,686
Toronto Dominion Bank -- (CAD) .... 4,100 185,408
UBS AG -- (CHF)* .................. 3,482 1,294,551
Westpac Banking Corp.
Ltd. -- (AUD) ................... 10,000 60,996
------------
5,938,110
------------
FINANCIAL SERVICES -- 0.5%
Holding Di Partecipazioni
Industriali SPA -- (ITL) ........ 45,000 34,986
Mediobanca -- (ITL)* .............. 27,200 345,059
Societe Generale -- (FRF) ......... 2,572 534,732
Unidanmark AS Cl-A -- (DKK) ....... 4,500 404,390
------------
1,319,167
------------
FOOD -- 0.6%
Cadbury Schweppes PLC -- (GBP) .... 1,400 21,665
CSM NV -- (NLG) ................... 2,400 115,268
Danisco AS -- (DKK) ............... 4,000 268,721
Eridania Beghin-Say SA -- (FRF) ... 1,800 397,451
Huhtamaki Co. -- (FIM) ............ 1,500 85,847
Nestle SA -- (CHF) ................ 380 813,207
------------
1,702,159
------------
INSURANCE -- 0.3%
AXA SA -- (FRF) ................... 4,500 506,117
CKAG Colonia Konzern AG --
(DEM) ........................... 1,500 185,731
Sumitomo Marine & Fire Insurance
Co. -- (JPY)* ................... 30,000 167,741
------------
859,589
------------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF) ................... 160 236,285
Sig Holding AG -- (CHF) ........... 280 227,978
------------
464,263
------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.3%
Novartis AG -- (CHF) .............. 180 299,523
Smith and Nephew PLC -- (GBP) ..... 38,000 94,946
Terumo Corp. -- (JPY) ............. 26,000 412,148
------------
806,617
------------
METALS & MINING -- 0.1%
Anglo American Platinum Corp.
Ltd. -- (ZAR) ................... 12,000 131,409
Rio Tinto Ltd. -- (AUD) ........... 6,000 71,337
Lonrho Africa PLC -- (GBP) ........ 9,698 11,893
Lonrho PLC -- (GBP) ............... 14,498 68,213
------------
282,852
------------
OFFICE EQUIPMENT -- 0.1%
Canon, Inc. -- (JPY) .............. 9,000 204,273
Ricoh Co. Ltd. -- (JPY) ........... 13,000 136,852
------------
341,125
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OIL & GAS -- 0.1%
Santos Ltd. -- (AUD) .............. 32,000 $ 99,080
Societe Nationale Elf Aquitaine
SA -- (FRF) ..................... 1,100 154,647
------------
253,727
------------
PAPER & FOREST PRODUCTS -- 0.2%
Bobst SA -- (CHF) ................. 160 294,302
Kimberly-Clark de Mexico SA Cl-A --
(MXP) ........................... 10,000 35,333
Svenska Cellulosa AB
Cl-B -- (SEK) ................... 3,500 90,628
------------
420,263
------------
PHARMACEUTICALS -- 0.4%
Altana AG -- (DEM) ................ 2,100 159,970
Astra AB Cl-B -- (SEK) ............ 14,666 292,402
Gehe AG -- (DEM) .................. 2,150 112,560
Novartis AG -- (CHF) .............. 160 266,455
Takeda Chemical
Industries -- (JPY) ............. 13,000 345,642
------------
1,177,029
------------
PRINTING & PUBLISHING -- 0.2%
Dai Nippon Printing Co. Ltd. --
(JPY) ........................... 12,000 191,519
Elsevier NV -- (NLG) .............. 12,000 181,101
Pearson PLC -- (GBP) .............. 11,600 212,514
------------
585,134
------------
REAL ESTATE -- 0.1%
Cheung Kong Holdings Ltd. --
(HKD) ........................... 38,000 186,847
DBS Land Ltd. -- (SGD) ............ 25,000 20,716
Fastighets AB Balder -- (SEK)* .... 7,300 7,323
------------
214,886
------------
RETAIL & MERCHANDISING -- 0.3%
Carrefour Supermarche
SA -- (FRF) ..................... 150 94,897
Mauri Co. Ltd. -- (JPY) ........... 7,000 104,406
Pinault-Printemps Redoute SA --
(FRF) ........................... 420 351,503
Tesco PLC -- (GBP) ................ 33,943 331,309
------------
882,115
------------
TELECOMMUNICATIONS -- 0.4%
Nippon Telegraph & Telephone
Corp. -- (JPY) .................. 2,800 232,013
Telecom Corp. of New Zealand
Ltd. -- (NZD) ................... 22,000 90,674
Telecom Italia Mobile
SPA -- (ITL) .................... 75,000 458,637
Telecom Italia SPA -- (ITL) ....... 41,666 306,714
Telekom Malaysia BHD -- (MYR) ..... 24,000 40,506
------------
1,128,544
------------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP) .................. 17,775 191,885
------------
</TABLE>
44
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
UTILITIES -- 0.3%
Electrabel SA -- (BEF) ............ 720 $ 204,139
Hong Kong Electric Holdings Ltd. --
(HKD) ........................... 30,000 92,920
Veba AG -- (DEM) .................. 6,500 442,929
------------
739,988
------------
TOTAL FOREIGN STOCK
(COST $19,183,085)................... 24,411,732
------------
PAR
(000)
-------
CORPORATE OBLIGATIONS -- 16.1%
AEROSPACE -- 0.3%
Boeing Co. Notes
6.35%, 06/15/03.................. $ 120 122,550
Dyncorp, Inc. Sr. Sub. Notes
9.50%, 03/01/07.................. 300 309,000
Raytheon Co. Notes
6.50%, 07/15/05.................. 350 355,688
------------
787,238
------------
AUTOMOBILE MANUFACTURERS -- 0.1%
Trident Automotive PLC
Sr. Sub. Notes 144A
10.00%, 12/15/05................. 250 269,688
------------
AUTOMOTIVE PARTS -- 0.2%
Safelite Glass Corp. Sr. Sub. Notes
144A
9.875%, 12/15/06................. 250 265,000
Federal Mogul Corp. Notes
7.75%, 07/01/06.................. 300 304,125
------------
569,125
------------
BEVERAGES -- 0.1%
Anheuser-Busch Companies, Inc.
Debs.
7.00%, 12/01/25.................. 150 153,937
------------
BROADCASTING -- 0.2%
TV Azteca SA de CV Sr. Notes Cl-B
10.50%, 02/15/07................. 250 251,250
Young Broadcasting Corp. Sr. Sub.
Notes
10.125%, 02/15/05................ 150 162,375
------------
413,625
------------
BUILDING MATERIALS -- 0.2%
American Standard, Inc. Debs.
9.25%, 12/01/16.................. 20 20,600
Associated Materials, Inc. Notes
9.25%, 03/01/08.................. 350 360,500
Koppers Industry, Inc. Co.
Guarantee Notes
9.875%, 12/01/07................. 75 78,000
------------
459,100
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
BUSINESS SERVICES -- 0.3%
APCOA, Inc. Sr. Sub. Notes 144A
9.25%, 03/15/08.................. $ 350 $ 350,000
Iron Mountain, Inc. Sr. Sub. Notes
8.75%, 09/30/09.................. 125 127,812
Muzak, Inc. L.P. Notes
10.00%, 10/01/03................. 225 234,281
------------
712,093
------------
CHEMICALS -- 0.3%
American Pacific Corp. Sr. Notes
144A
9.25%, 03/01/05.................. 300 310,500
Furon Co. Sr. Sub. Notes 144A
8.125%, 03/01/08................. 200 200,250
Scotts Co. Sr. Sub. Notes
9.875%, 08/01/04................. 100 107,500
Sovereign Specialty Chemicals, Inc.
Sr. Sub. Notes Cl-B
9.50%, 08/01/07.................. 250 261,562
------------
879,812
------------
CLOTHING & APPAREL -- 0.4%
Delta Mills, Inc. Sr. Notes
9.625%, 09/01/07................. 125 123,281
Dyersburg Corp. Co. Guarantee Notes
Cl-B
9.75%, 09/01/07.................. 300 300,750
Synthetic Industries, Inc.
Sr. Sub. Notes
9.25%, 02/15/07.................. 250 258,750
Westpoint Stevens, Inc.
Sr. Notes 144A
7.875%, 06/15/08................. 350 350,000
------------
1,032,781
------------
COMPUTER SERVICES & SOFTWARE -- 0.2%
American Business Information, Inc.
Sr. Sub. Notes 144A
9.50%, 06/15/08.................. 100 100,500
PSINet, Inc. Sr. Notes Cl-B
10.00%, 02/15/05................. 150 153,750
Verio, Inc. Sr. Notes 144A
10.375%, 04/01/05................ 150 154,125
------------
408,375
------------
CONSTRUCTION -- 0.1%
Newport News Shipbuilding, Inc. Sr.
Notes
8.625%, 12/01/06................. 150 158,437
------------
CONSUMER PRODUCTS & SERVICES -- 0.8%
American Safety Razor Co. Sr. Notes
9.875%, 08/01/05................. 150 161,813
Bally Total Fitness Holding Corp.
Sr. Sub. Notes Cl-B
9.875%, 10/15/07................. 350 361,375
Chattem, Inc. Notes
12.75%, 06/15/04................. 350 395,500
</TABLE>
45
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Diamond Triumph Autoglass, Inc.
Sr. Notes 144A
9.25%, 04/01/08.................. $ 200 $ 204,000
Doane Products Co. Sr. Notes
10.625%, 03/01/06................ 150 162,000
Herff Jones, Inc. Sr. Sub. Notes
11.00%, 08/15/05................. 250 275,938
Holmes Products Corp. Sr. Sub.
Notes Series B
9.875%, 11/15/07................. 250 258,750
Protection One Alarm, Inc. Sr.
Disc. Notes [STEP]
13.625%, 06/30/05................ 130 139,912
Rural Metro Corp. Sr. Notes 144A
7.875%, 03/15/08................. 225 217,125
------------
2,176,413
------------
CONTAINERS & PACKAGING -- 0.3%
Amtrol, Inc. Sr. Sub. Notes
10.625%, 12/31/06................ 50 50,125
Container Corp. of America Sr.
Notes
9.75%, 04/01/03.................. 150 161,625
11.25%, 05/01/04................. 100 109,000
Plastic Containers, Inc. Sr. Notes
Cl-B
10.00%, 12/15/06................. 250 269,375
U.S. Can Corp. Sr. Sub. Notes
10.125%, 10/15/06................ 150 158,812
------------
748,937
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Ametek, Inc. Sr. Notes
9.75%, 03/15/04.................. 100 107,250
Celestica International, Inc. Sr.
Sub. Notes
10.50%, 12/31/06................. 125 137,969
DII Group, Inc. Sr. Sub. Notes
8.50%, 09/15/07.................. 150 149,250
HCC Industries, Inc. Sr. Sub. Notes
10.75%, 05/15/07................. 250 264,375
Viasystems, Inc. Sr. Sub. Notes
9.75%, 06/01/07.................. 125 122,812
------------
781,656
------------
ENTERTAINMENT & LEISURE -- 0.7%
AMC Entertainment, Inc. Sr. Sub.
Notes
9.50%, 03/15/09.................. 250 256,562
Empress Entertainment, Inc. Sr.
Sub. Notes 144A
8.125%, 07/01/06................. 250 251,250
Grand Casinos, Inc. First Mtge.
10.125%, 12/01/03................ 150 163,875
Premier Parks, Inc. Sr. Disc. Notes
[STEP]
9.922%, 04/01/08................. 125 83,125
Rio Hotel & Casino, Inc. Notes
9.50%, 04/15/07.................. 100 105,750
Rio Hotel & Casino, Inc. Sr. Sub.
Notes
10.625%, 07/15/05................ 150 163,500
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Six Flags Entertainment Corp.
Sr. Notes
8.875%, 04/01/06................. $ 175 $ 178,938
Six Flags Theme Parks Corp. Sr.
Sub. Notes Cl-A [STEP]
8.131%, 06/15/05................. 150 169,312
Time Warner Entertainment Co. Debs.
7.25%, 09/01/08.................. 500 535,000
------------
1,907,312
------------
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste North America, Inc.
Co. Guarantee Notes
10.25%, 12/01/06................. 200 220,750
------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes Cl-D
11.75%, 11/15/05................. 125 139,688
------------
FARMING & AGRICULTURE -- 0.1%
Purina Mills, Inc. Sr. Sub. Notes
144A
9.00%, 03/15/10.................. 325 334,750
------------
FINANCIAL-BANK & TRUST -- 2.2%
Advanta Home Equity Loan Trust
1993-1 Cl-A2
5.95%, 05/25/09.................. 2,281 2,243,326
Airplanes Pass Through Trust
10.875%, 03/15/19................ 250 282,387
Aristar, Inc. Sr. Notes
8.875%, 08/15/98................. 200 200,522
7.875%, 02/15/99................. 200 202,250
Banesto Delaware Sub. Notes
8.25%, 07/28/02.................. 50 53,625
Bank of Nova Scotia Sub. Notes
6.25%, 09/15/08.................. 50 49,937
BankAmerica Corp. Sub. Notes
6.85%, 03/01/03.................. 150 155,063
BankUnited Capital Trust Corp. Cl-B
10.25%, 12/31/26................. 250 270,000
CoreStates Home Equity Trust Corp.
Cl-A
6.65%, 05/15/09.................. 53 52,855
First Federal Financial, Inc. Notes
11.75%, 10/01/04................. 125 136,250
Freddie Mac Corp. Debs.
5.97%, 03/02/01.................. 1,500 1,500,240
MBNA Corp. Sr. Medium Term Notes
6.15%, 10/01/03.................. 450 448,313
NationsBank Texas Corp. Sr. Notes
6.75%, 08/15/00.................. 150 152,438
Provident Bank Corp. Sub. Notes
7.125%, 03/15/03................. 175 181,781
------------
5,928,987
------------
FINANCIAL SERVICES -- 2.4%
Ahmanson, (H.F.) & Co. Sr. Notes
9.875%, 11/15/99................. 100 104,563
American Express Master Trust
7.60%, 08/15/02.................. 500 525,362
</TABLE>
46
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Associates Corp. of North America
Sr. Notes
7.70%, 03/15/00.................. $ 50 $ 51,438
Banque Paribas-NY Sub. Notes
6.875%, 03/01/09................. 1,500 1,537,500
Bay View Capital Corp. Sub. Notes
9.125%, 08/15/07................. 150 154,500
Chrysler Financial Corp. Notes
8.46%, 01/19/00.................. 200 207,500
Ciesco L.P. Notes
7.38%, 04/19/00.................. 250 255,313
Enhance Financial Services Group,
Inc. Debs.
6.75%, 03/01/03.................. 300 307,125
Intertek Finance PLC Sr. Sub. Notes
Cl-B
10.25%, 11/01/06................. 250 265,625
Loomis Fargo & Co. Notes
10.00%, 01/15/04................. 100 100,250
Ocwen Capital Corp. Trust I Notes
10.875%, 08/01/27................ 200 218,500
Ocwen Financial Corp. Notes
11.875%, 10/01/03................ 150 168,750
Salomon Smith Barney Holding, Inc.
Notes
6.625%, 06/01/00................. 200 202,750
Salomon, Inc. Sr. Notes
6.75%, 02/15/03.................. 500 508,125
Simon Debartolo Group, Inc. L.P.
Notes
7.00%, 07/15/09.................. 525 525,656
USF&G Capital II Cl-B
8.47%, 01/10/27.................. 500 574,375
Wells Fargo & Co. Sub. Notes
6.25%, 04/15/08.................. 700 698,250
------------
6,405,582
------------
FOOD -- 0.4%
Archibald Candy Corp. Notes
10.25%, 07/01/04................. 250 266,250
Keebler Corp. Sr. Sub. Notes
10.75%, 07/01/06................. 250 281,875
Mrs. Fields Original Cookies, Inc.
Notes
10.125%, 12/01/04................ 100 97,250
Shoppers Food Warehouse Corp. Notes
9.75%, 06/15/04.................. 100 111,500
Windy Hill Pet Food Co. Sr. Sub.
Notes
9.75%, 05/15/07.................. 250 265,000
------------
1,021,875
------------
HEALTHCARE SERVICES -- 0.0%
Quest Diagnostics, Inc. Sr. Sub.
Notes
10.75%, 12/15/06................. 125 139,687
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
HOTELS & MOTELS -- 0.1%
Courtyard by Marriott Sr. Notes
10.75%, 02/01/08................. $ 150 $ 165,375
Host Marriott Travel Plaza Corp.
Sr. Notes Cl-B
9.50%, 05/15/05.................. 150 159,375
------------
324,750
------------
INDUSTRIAL PRODUCTS -- 0.8%
Eop Operating L.P. 144A
6.75%, 02/15/08.................. 1,000 1,012,500
Fico Strip Coupon Notes [ZCB]
13.226%, 04/06/03................ 1,000 765,100
MCMS, Inc. Sr. Sub. Notes 144A
9.75%, 03/01/08.................. 250 235,625
MTS, Inc. Sr. Sub. Notes 144A
9.375%, 05/01/05................. 100 98,875
Paragon Corp. Holdings Sr. Notes
144A
9.625%, 04/01/08................. 175 161,000
------------
2,273,100
------------
INSURANCE -- 0.2%
New York Life Insurance Co. Notes
144A
7.50%, 12/15/23.................. 420 426,300
------------
MACHINERY & EQUIPMENT -- 0.1%
Columbus McKinnon Corp. Sr. Sub.
Notes 144A
8.50%, 04/01/08.................. 200 197,500
Hawk Corp. Sr. Notes
10.25%, 12/01/03................. 200 215,000
------------
412,500
------------
METALS & MINING -- 0.2%
AEI Holding Co. Sr. Notes 144A
10.00%, 11/15/07................. 350 346,500
Freeport-McMoRan Resource Partners,
Inc. L.P. Sr. Notes
7.00%, 02/15/08.................. 150 153,375
------------
499,875
------------
OIL & GAS -- 0.2%
Ferrellgas L.P. Financial Corp. Sr.
Notes
10.00%, 08/01/01................. 100 105,625
Flores & Rucks, Inc. Sr. Sub. Notes
9.75%, 10/01/06.................. 50 54,750
Pride Petroleum Services, Inc. Sr.
Notes
9.375%, 05/01/07................. 250 264,062
Tenneco, Inc. Notes
8.20%, 11/15/99.................. 55 56,581
8.075, 10/01/02.................. 150 160,125
------------
641,143
------------
PHARMACEUTICALS -- 0.0%
Owens & Minor, Inc. Sr. Sub. Notes
10.875%, 06/01/06................ 75 81,938
------------
</TABLE>
47
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
PRINTING & PUBLISHING -- 0.1%
Sun Media Corp. Sr. Sub. Notes
9.50%, 05/15/07.................. $ 163 $ 173,187
------------
REAL ESTATE -- 0.1%
HMC Acquisition Properties Sr.
Notes Cl-B
9.00%, 12/15/07.................. 150 162,750
------------
RESTAURANTS -- 0.0%
McDonald's Corp. Notes
6.625%, 09/01/05................. 100 104,000
------------
RETAIL & MERCHANDISING -- 0.2%
Meyer, (Fred), Inc. Sr. Notes
7.45%, 03/01/08.................. 250 251,563
Specialty Retailers, Inc. Co.
Guarantee Notes Cl-B
8.50%, 07/15/05.................. 250 258,125
Wal-Mart Stores, Inc. Debs.
7.25%, 06/01/13.................. 85 93,925
------------
603,613
------------
SEMICONDUCTORS -- 0.1%
Fairchild Semiconductor Corp. Sr.
Sub. Notes
10.125%, 03/15/07................ 250 258,125
------------
TELECOMMUNICATIONS -- 2.7%
Comcast Cable Communication, Inc.
Notes
8.125%, 05/01/04................. 400 434,500
Communication & Power Industries,
Inc. Sr. Sub. Notes
12.00%, 08/01/05................. 250 279,063
Flag Ltd. Sr. Notes 144A
8.25%, 01/30/08.................. 200 202,250
Frontiervision Sr. Sub. Notes
11.00%, 10/15/06................. 150 166,500
Fundy Cable Ltd., Inc. Sr. Notes
11.00%, 11/15/05................. 250 275,000
ICG Holding, Inc. [STEP]
10.621%, 09/15/05................ 250 213,750
Intermedia Communications, Inc. Sr.
Notes Cl-B
8.50%, 01/15/08.................. 350 350,875
International Wire Group, Inc.
Notes Cl-B
11.75%, 06/01/05................. 350 385,875
IXC Communications, Inc. Sr. Sub.
Notes 144A
9.00%, 04/15/08.................. 125 125,000
L-3 Communications Corp. Sr. Sub.
Notes Cl-B
10.375%, 05/01/07................ 175 193,812
Lucent Technologies, Inc. Notes
6.90%, 07/15/01.................. 500 514,375
Marcus Cable Operating Co. Sr.
Disc. Notes [STEP]
11.302%, 08/01/04................ 250 243,125
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Metronet Communications Corp. Sr.
Notes
12.00%, 08/15/07................. $ 100 $ 116,000
Microcell Telecommunications, Inc.
Notes [STEP]
11.144%, 06/01/06................ 125 92,969
Nextel Communications, Inc. Sr.
Disc. Notes [STEP]
10.098%, 10/31/07................ 500 326,250
NEXTLINK Communications, Inc. Sr.
Notes
12.50%, 04/15/06................. 125 145,000
Pegasus Communications Corp. Sr.
Notes Cl-B
9.625%, 10/15/05................. 250 258,125
Price Communications Sr. Notes 144A
9.125%, 12/15/06................. 350 350,000
Qwest Communications International,
Inc. Sr. Disc. Notes [STEP]
8.297%, 10/15/07................. 350 263,375
Rogers Cablesystems of America,
Inc. Sr. Notes Cl-B
10.00%, 03/15/05................. 125 138,750
Sitel Corp. Sr. Sub. Notes 144A
9.25%, 03/15/06.................. 100 97,000
Sprint Spectrum L.P. Sr. Notes
11.00%, 08/15/06................. 250 288,125
United Telecommunications, Inc.
Debs.
9.75%, 04/01/00.................. 250 265,313
WorldCom, Inc. Sr. Notes
7.75%, 04/01/07.................. 1,500 1,629,375
------------
7,354,407
------------
TRANSPORTATION -- 0.3%
Allied Holdings, Inc. Notes Cl-B
8.625%, 10/01/07................. 250 256,250
Coach USA, Inc. Notes Cl-B
9.375%, 07/01/07................. 175 182,875
Sea Containers Ltd. Sr. Sub. Notes
12.50%, 12/01/04................. 70 79,013
Stena AB Sr. Notes
10.50%, 12/15/05................. 250 273,125
Union Tank Car Co. Notes
7.125%, 02/01/07................. 150 158,437
------------
949,700
------------
UTILITIES -- 1.2%
Citizens Utilities Co. Debs.
8.45%, 09/01/01.................. 335 358,869
Commonwealth Edison Co. Notes
9.00%, 10/15/99.................. 250 258,125
Consumers Energy Co. First Mtge.
6.625%, 10/01/98................. 50 50,000
Energy Corp. of America Sr. Sub.
Notes Cl-A
9.50%, 05/15/07.................. 250 246,875
Entergy Louisiana, Inc. First Mtge.
6.50%, 03/01/08.................. 1,000 1,007,500
</TABLE>
48
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Niagara Mohawk Power Corp. Sr.
Disc. Notes Cl-H [STEP]
8.539%, 07/01/10................. $ 400 $ 278,000
Niagara Mohawk Power Corp. Sr.
Notes Cl-G
7.75%, 10/01/08.................. 150 154,125
Northland Cable Television, Inc.
Sr. Sub. Notes
10.25%, 11/15/07................. 250 267,500
Pacific Gas & Electric Co. First
Mtge.
6.75%, 12/01/00.................. 200 201,000
Public Service Electric & Gas First
Mtge.
7.00%, 09/01/24.................. 300 301,125
Southern California Co. Edison
Notes
6.50%, 06/01/01.................. 100 101,500
------------
3,224,619
------------
TOTAL CORPORATE OBLIGATIONS
(COST $42,242,758)................... 43,139,855
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.2%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.0%
7.50%, 07/15/20.................. 8 7,710
------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 6.2%
6.00%, 10/15/23-05/15/26......... 2,629 2,570,731
6.50%, 02/15/24-05/15/24......... 1,456 1,453,738
7.00%, 09/15/23-02/15/27......... 7,882 8,019,418
7.50%, 06/15/24-06/15/26......... 1,407 1,446,807
8.00%, 05/15/16-06/15/26......... 1,014 1,049,980
8.50%, 06/15/16-10/15/26......... 1,578 1,665,264
9.00%, 07/15/16-05/15/17......... 78 83,431
9.50%, 10/15/09-06/15/20......... 45 48,522
10.00%, 11/15/09................. 9 10,274
10.50%, 08/15/15................. 6 6,933
11.50%, 06/15/10-11/15/15........ 126 143,799
12.00%, 09/15/13-01/15/14........ 4 4,594
------------
16,503,491
------------
TENNESSEE VALLEY AUTHORITY NOTES -- 0.0%
7.25%, 07/15/43.................. 20 21,075
6.875%, 12/15/43................. 40 40,850
------------
61,925
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $15,979,391)................... 16,573,126
------------
U.S. TREASURY OBLIGATIONS -- 17.0%
U.S. TREASURY BONDS -- 6.6%
11.625%, 11/15/02................ 100 123,284
6.125%, 08/15/07................. 2,000 2,081,280
7.125%, 02/15/23................. 240 283,867
7.625%, 02/15/25................. 300 377,619
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
6.875%, 08/15/25................. $ 300 $ 347,427
6.00%, 02/15/26.................. 100 104,140
6.75%, 08/15/26.................. 9,325 10,673,861
6.625%, 02/15/27................. 3,250 3,671,557
------------
17,663,035
------------
U.S. TREASURY NOTES -- 10.4%
5.125%, 12/31/98................. 50 49,960
6.375%, 05/15/99................. 1,950 1,964,002
6.75%, 05/31/99.................. 460 465,125
6.00%, 06/30/99.................. 3,500 3,517,395
6.875%, 03/31/00................. 250 255,590
6.25%, 05/31/00.................. 100 101,323
6.125%, 09/30/00................. 150 151,909
5.625%, 11/30/00................. 275 275,627
5.625%, 02/28/01................. 1,100 1,102,728
5.625%, 05/15/01................. 4,500 4,516,784
5.75%, 08/15/03.................. 665 672,282
7.50%, 02/15/05.................. 250 276,685
5.875%, 11/15/05................. 425 432,973
5.625%, 02/15/06................. 500 501,960
6.50%, 10/15/06.................. 1,350 1,433,214
6.25%, 02/15/07.................. 2,000 2,094,740
5.625%, 05/15/08................. 10,000 10,139,099
------------
27,951,396
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $44,072,990)................... 45,614,431
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C>
FOREIGN BONDS -- 1.9%
AUSTRALIA -- 0.0%
Australian Government
9.50%, 08/15/03................ 20 14,643
------------
BELGIUM -- 0.0%
Belgium Kingdom Government
7.25%, 04/29/04................ 1,550 47,108
------------
CANADA -- 0.2%
Canadian Government
8.50%, 04/01/02................ 380 285,748
6.50%, 06/01/04................ 110 79,332
9.75%, 06/01/21................ 10 10,508
------------
375,588
------------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%, 12/15/04................ 275 44,787
------------
</TABLE>
49
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
FRANCE -- 0.3%
French O.A.T
8.50%, 11/25/02................ 1,406 $ 271,548
8.25%, 02/27/04................ 264 51,699
5.50%, 04/25/07................ 3,000 522,194
8.50%, 04/25/23................ 50 11,898
------------
857,339
------------
GERMANY -- 0.4%
Deutscheland Republic
8.50%, 08/21/00................ 375 226,305
8.375%, 05/21/01............... 410 252,628
6.50%, 07/15/03................ 110 66,499
6.00%, 07/04/07................ 838 505,103
------------
1,050,535
------------
ITALY -- 0.1%
Italian Government
11.50%, 03/01/03............... 275,000 197,793
8.50%, 08/01/04................ 45,000 30,111
------------
227,904
------------
JAPAN -- 0.6%
European Investment Bank
4.625%, 02/26/03............... 53,000 442,987
3.00%, 09/20/06................ 102,000 816,713
International Bank Recovery & De-
velopment Global Bonds
6.75%, 03/15/00................ 14,000 111,404
Japanese Government
4.50%, 06/20/03................ 33,500 281,184
------------
1,652,288
------------
NETHERLANDS -- 0.0%
Netherlands Government
5.75%, 01/15/04................ 115 59,868
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
SPAIN -- 0.0%
Spanish Government
8.00%, 05/30/04................ 6,400 $ 48,806
------------
UNITED KINGDOM -- 0.3%
United Kingdom Treasury
9.00%, 03/03/00................ 85 145,900
8.00%, 06/10/03................ 91 162,320
7.50%, 12/07/06................ 164 300,741
------------
608,961
------------
TOTAL FOREIGN BONDS
(COST $5,184,270).................. 4,987,827
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
COMMERCIAL PAPER -- 1.8%
Delaware Funding Corp.+
5.55%, 09/01/98................ $ 407 403,047
Du Pont, (E.I.) de Nemours & Co.+
5.52%, 07/20/98................ 4,155 4,142,895
Toys 'R' Us, Inc.
5.55%, 07/16/98................ 422 421,024
------------
(COST $4,967,029)................ 4,966,966
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.1%
Temporary Investment Fund
(COST $300,867).................... 300,867 300,867
------------
TOTAL INVESTMENTS -- 99.3%
(COST $213,179,873).................. 266,533,125
OTHER ASSETS LESS
LIABILITIES -- 0.7%.................. 1,775,684
------------
NET ASSETS -- 100.0%................... $268,308,809
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
+ 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
1.7% of net assets.
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 2.3% of net assets.
See Notes to Financial Statements
50
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 47.5%
FEDERAL HOME LOAN MORTGAGE CORP. -- 10.1%
6.00%, 04/01/28-06/01/28......... $ 2,988 $ 2,914,090
8.25%, 08/01/17.................. 465 483,622
7.00%, 04/25/19 [IO]............. 175 14,329
6.50%, 07/14/28-08/13/28 [TBA]... 65,500 65,305,550
7.68%, 02/01/24 [VR]............. 1,563 1,614,976
------------
70,332,567
------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 13.8%
6.90%, 05/25/23.................. 213 216,462
7.50%, 04/01/24.................. 3,233 3,319,681
9.40%, 07/25/03.................. 187 194,221
6.25%, 05/25/08 [IO]............. 236 65,519
6.50%, 06/25/14 [IO]............. 478 9,679
6.00%, 07/20/13 [TBA]............ 42,000 41,540,520
6.50%, 08/13/28 [TBA]............ 48,500 48,272,535
6.22%, 10/01/27-06/01/28 [VR].... 2,681 2,699,382
7.79%, 01/01/24 [VR]............. 251 260,066
------------
96,578,065
------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 20.7%
6.50%, 09/15/23-12/15/25......... 22,940 22,873,150
6.875%, 01/20/26-02/20/27........ 39,298 40,177,998
7.00%, 11/20/26-12/20/26......... 27,647 28,239,588
7.50%, 12/20/23.................. 362 370,179
6.50%, 08/19/28 [TBA]............ 8,420 8,396,340
6.875%, 03/20/17-03/20/24 [VR]... 12,140 12,381,931
7.00%, 08/20/23-12/20/25 [VR].... 27,179 27,722,504
7.375%, 06/20/22-04/20/23 [VR]... 3,885 3,956,952
------------
144,118,642
------------
STUDENT LOAN MARKETING ASSOC. -- 2.9%
Series 1998-2 Cl-A1 [VR]
5.92%, 04/25/07.................. 20,000 19,993,750
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $328,041,805).................. 331,023,024
------------
CORPORATE OBLIGATIONS -- 38.3%
AIRLINES -- 1.8%
American Airlines, Inc. Notes
10.19%, 05/26/15................. 250 331,270
United Air Lines, Inc. Notes
10.36%, 11/13/12................. 6,925 9,033,593
10.36%, 11/27/12................. 500 651,845
10.02%, 03/22/14................. 2,000 2,508,140
------------
12,524,848
------------
CHEMICALS -- 2.9%
Imperial Chemical, Inc. Euro Medium
Term Notes [FRN]
5.75%, 12/05/98.................. 10,000 10,013,050
Indspec Chemical Corp. Sr. Sub.
Notes Cl-B [STEP]
9.74%, 12/01/03.................. 10,000 10,275,000
------------
20,288,050
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
CONGLOMERATES -- 1.7%
Philip Morris Companies, Inc. Notes
[VR]
6.15%, 03/15/00.................. $11,600 $ 11,614,500
------------
ENTERTAINMENT & LEISURE -- 0.2%
Time Warner, Inc. Notes
7.98%, 08/15/04.................. 262 283,943
8.11%, 08/15/06.................. 525 577,500
8.18%, 08/15/07.................. 525 584,063
------------
1,445,506
------------
FINANCIAL-BANK & TRUST -- 2.9%
Citicorp Medium Term Sr. Notes
[FRN]
6.09%, 11/30/00.................. 6,000 6,042,720
First of America Bank Notes
6.00%, 10/01/99.................. 13,750 13,750,000
------------
19,792,720
------------
FINANCIAL SERVICES -- 16.8%
Avco Financial Services, Inc.
Medium Term Notes
5.75%, 01/23/01.................. 7,850 7,810,750
Beneficial Corp. Medium Term Notes
Cl-H [FRN]
5.81%, 01/09/02.................. 10,000 9,985,698
Chrysler Financial Corp. Notes
[FRN]
5.77%, 01/30/02.................. 10,000 9,978,699
Ford Motor Credit Co. Notes [FRN]
5.83%, 09/03/01.................. 10,000 10,004,550
Goldman Sachs Group Notes
[FRN] 144A
5.91%, 11/24/00.................. 20,000 20,015,400
Lehman Brother Holdings Medium Term
Notes Cl-E [FRN]
5.90%, 01/18/00.................. 10,000 9,986,800
Merrill Lynch & Co. Notes [FRN]
5.77%, 01/23/01.................. 2,650 2,654,982
New England Educational Loan
Marketing Assoc. Medium Term
Notes [FRN]
5.86%, 06/11/01.................. 10,000 9,991,800
PNC Bank Corp. NA Notes [FRN]
5.60%, 06/01/00.................. 20,000 19,969,394
Salomon, Inc. Notes [FRN]
6.20%, 02/15/99.................. 2,000 2,006,800
Salomon, Inc. Sr. Notes [VR]
5.80%, 08/04/98.................. 15,000 15,003,150
------------
117,408,023
------------
FOOD -- 1.0%
RJR Nabisco, Inc. Notes
8.625%, 12/01/02................. 6,500 6,776,250
------------
INSURANCE -- 0.7%
Residential Reinsurance Notes
[FRN] 144A
9.85%, 09/01/98.................. 5,000 4,984,375
------------
</TABLE>
51
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
PETROLEUM EXPLORATION & PRODUCTION -- 0.7%
Connecticut Light & Power Co./
West Massachusetts Electric Co.
Notes 144A
8.59%, 06/05/03.................. $ 5,000 $ 5,005,000
------------
RAILROADS -- 0.8%
Union Pacific Co. Notes
7.875%, 02/15/02................. 5,000 5,250,000
------------
REAL ESTATE -- 0.7%
Spieker Properties, Inc. LP Notes
6.95%, 12/15/02.................. 5,000 5,093,750
------------
TELECOMMUNICATIONS -- 5.6%
AT&T Capital Corp. Notes
5.94%, 01/15/99 [VR]............. 10,000 9,998,000
6.05%, 04/01/99 [FRN] 144A....... 10,000 10,007,400
TCI Communications, Inc. Sr. Notes
[FRN]
5.95%, 09/11/00.................. 10,000 10,089,800
WorldCom, Inc. Sr. Notes
9.38%, 01/15/04.................. 8,632 9,139,130
------------
39,234,330
------------
UTILITIES -- 2.5%
Cleveland Electric
Illuminating Co. Notes
8.75%, 11/15/05.................. 100 100,680
CMS Energy Corp. Sr. Notes
8.13%, 05/15/02.................. 5,000 5,156,250
Long Island Lighting Corp. Notes
8.90%, 07/15/19.................. 6,000 6,358,560
Louisiana Power & Light Corp. Notes
7.74%, 07/01/02.................. 6,000 6,097,500
------------
17,712,990
------------
TOTAL CORPORATE OBLIGATIONS
(COST $264,760,033).................. 267,130,342
------------
COMMERCIAL PAPER -- 20.7%
American Express Credit Corp.
5.53%, 08/26/98.................. 35,000 34,698,922
Du Pont, (E.I.) de Nemours & Co.
5.51%, 07/14/98.................. 2,400 2,395,225
General Electric Capital Corp.
5.52%, 07/23/98.................. 11,400 11,363,700
5.53%, 09/18/98.................. 14,000 13,827,956
KFW International Financial Corp.
5.50%, 07/01/98.................. 800 800,000
5.49%, 07/24/98.................. 3,300 3,288,425
National Rural Utility Corp.
5.50%, 07/28/98.................. 1,700 1,692,988
5.51%, 08/20/98.................. 1,800 1,786,225
5.50%, 09/03/98.................. 2,500 2,473,646
New Center Asset Trust
5.55%, 08/20/98.................. 7,400 7,342,958
5.54%, 08/27/98.................. 14,800 14,675,794
Oesterreichische Kontbk
5.49%, 07/13/98.................. 5,000 4,990,850
5.50%, 09/22/98.................. 10,000 9,859,444
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Procter & Gamble Co.
5.51%, 08/06/98.................. $14,300 $ 14,221,207
Coca-Cola Co.
5.49%, 09/01/98.................. 10,000 9,905,277
Washington Post+
5.53%, 08/12/98.................. 11,100 11,028,387
------------
(COST $144,361,216)................ 144,351,004
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.6%
California Infrastructure SDG&E-1
Mtge.
5.97%, 12/25/00.................. 6,677 6,676,699
Citicorp Mtge. Securities, Inc.
[VR]
7.50%, 10/25/22.................. 438 448,073
Collateralized Mtge. Securities
Corp. [VR]
7.99%, 05/01/17.................. 444 457,261
Contimortgage Home Equity Loan
Trust Cl-A2
5.83%, 10/15/12.................. 19,414 19,404,443
Countrywide Adjustable Rate Mtge.
[VR]
7.77%, 03/25/24.................. 399 411,945
8.20%, 11/25/24.................. 341 352,467
MBNA Master Credit Card Trust Cl-A
[VR]
5.59%, 01/15/02.................. 15,000 14,982,000
Mortgage Capital Trust VI
9.50%, 02/01/18.................. 342 341,896
Prudential Home Mtge. Securities
6.50%, 01/25/00.................. 5,102 5,095,338
Prudential-Bache Trust
8.40%, 03/20/21.................. 2,802 2,909,987
Resolution Trust Corp.
8.00%, 09/25/21.................. 49 49,142
Rothschild, (L.F.) Mtge. Trust
9.95%, 08/01/17.................. 1,768 1,914,163
------------
(COST $52,734,375)................. 53,043,414
------------
U.S. TREASURY OBLIGATIONS -- 0.7%
U.S. Treasury Bills
4.96%, 07/23/98#................. 105 104,698
4.98%, 07/23/98#................. 1,715 1,710,067
4.98%, 07/23/98#................. 65 64,813
5.01%, 07/23/98#................. 885 882,455
4.84%, 08/20/98.................. 415 412,235
5.02%, 08/20/98#................. 405 402,301
5.06%. 08/20/98#................. 210 208,601
4.99%, 10/15/98#................. 600 591,167
5.02%, 10/15/98#................. 250 246,319
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $4,621,964).................... 4,622,656
------------
SOVEREIGN ISSUES -- 3.9%
ARGENTINA -- 1.3%
Republic of Argentina [BRB, FRB]
6.63%, 03/31/05.................. 10,450 9,235,189
------------
</TABLE>
52
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
BRAZIL -- 0.5%
Republic of Brazil-IDU Cl-A [VR]
6.88%, 01/01/01.................. $ 3,500 $ 3,322,715
------------
MEXICO -- 1.4%
United Mexican States Sr. Notes
[FRN]
7.00%, 06/27/02.................. 10,000 9,800,000
------------
PHILIPPINES -- 0.7%
Bangko Sentral Pilipinas
8.60%, 06/15/27.................. 6,000 5,197,500
------------
TOTAL SOVEREIGN ISSUES
(COST $27,318,761)................... 27,555,404
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C>
FOREIGN BONDS -- 1.4%
CANADA -- 0.6%
Canadian Government
4.25%, 12/01/26................. 5,186 3,759,845
------------
NEW ZEALAND -- 0.8%
New Zealand Government
10.00%, 03/15/02................ 10,000 5,703,508
------------
TOTAL FOREIGN BONDS
(COST $9,639,772)................... 9,463,353
------------
PAR
(000) VALUE
--------- ------------
CERTIFICATES OF DEPOSIT -- 2.9%
Bankers Trust Corp.
5.90%, 07/07/98 (COST
$19,999,937)...................... $20,000 $ 20,000,118
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.6%
Temporary Investment Cash Fund.... 2,278,680 2,278,680
Temporary Investment Fund......... 2,278,680 2,278,680
------------
(COST $4,557,360)................. 4,557,360
------------
TOTAL INVESTMENTS -- 123.6%
(COST $856,035,223)................. 861,746,675
------------
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
(000)
--------
<S> <C> <C>
WRITTEN CALL OPTIONS -- 0.0%
30 Year U.S. Treasury Bond
Futures, Strike Price 132,
Expires 08/22/98
(COST ($143,336)).............. $95,000 (14,844)
-------------
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (23.6%)............ (164,643,701)
-------------
NET ASSETS -- 100.0%................. $ 697,088,130
=============
</TABLE>
53
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
08/98 Sell CAD 5,236,000 $3,561,905 $3,565,567 $ 3,662
========== ========== ==========
</TABLE>
# Securities with an aggregate market value of $4,210,421 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1998:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 10 Year
Note....................... 09/98 $71,300 $ (13,453)
U.S. Treasury 10 Year
Note....................... 12/98 28,200 224,991
U.S. Treasury 30 Year
Note....................... 09/98 158,800 1,668,523
LIBOR....................... 12/98 GBP 25,000 (301,589)
----------
$1,578,472
==========
</TABLE>
Interest rate swap agreements outstanding at June 30, 1998:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
EXPIRATION AMOUNT APPRECIATION
DESCRIPTION MONTH (000) (DEPRECIATION)
- -------------------------------------------------------------------------
<S> <C> <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 Notes with
a spread of: 36.25......... 04/02 $ 5,000 $ 36,046
36.50...................... 04/02 7,500 53,348
37.00...................... 04/02 3,000 20,763
37.00...................... 05/02 10,000 69,209
35.75...................... 06/02 6,000 44,409
36.50...................... 06/02 12,000 85,357
Receive variable rate
payments on the six month
LIBOR-BBA floating rate and
pay fixed rate payments on
the then current Japanese
10 Year Government Bonds
with a spread of: 2.305.... 04/02 JPY 377,000 (87,540)
2.295...................... 04/08 JPY 580,000 (130,957)
---------
$ 90,635
=========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
+ 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
1.6% of net assets.
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 5.7% of net assets.
See Notes to Financial Statements.
54
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 73.0%
AEROSPACE -- 2.4%
AlliedSignal, Inc. ................ 200,000 $ 8,875,000
General Motors Corp. Cl-H.......... 20,000 942,500
Lockheed Martin Corp. ............. 20,000 2,117,500
Northrop Grumman Corp. ............ 55,000 5,671,875
------------
17,606,875
------------
AUTOMOBILE MANUFACTURERS -- 0.8%
Ford Motor Co. .................... 100,000 5,900,000
------------
AUTOMOTIVE PARTS -- 0.3%
Borg Warner Automotive, Inc. ...... 50,000 2,403,125
------------
BEVERAGES -- 1.6%
Anheuser-Busch Companies, Inc. .... 140,000 6,606,250
Coors, (Adolph) Co. Cl-B........... 150,000 5,100,000
------------
11,706,250
------------
CHEMICALS -- 2.0%
Agrium, Inc. ...................... 250,000 3,156,250
Lawter International, Inc. ........ 100,000 1,087,500
Monsanto Co. ...................... 134,000 7,487,250
Olin Corp. ........................ 80,000 3,335,000
------------
15,066,000
------------
COMPUTER HARDWARE -- 1.9%
Hewlett-Packard Co. ............... 50,000 2,993,750
International Business Machines
Corp. ........................... 100,100 11,492,731
------------
14,486,481
------------
COMPUTER SERVICES & SOFTWARE -- 2.2%
Ceridian Corp.*.................... 150,000 8,812,500
First Data Corp. .................. 220,000 7,328,750
------------
16,141,250
------------
CONGLOMERATES -- 1.1%
Textron, Inc. ..................... 110,000 7,885,625
------------
CONSUMER PRODUCTS & SERVICES -- 1.7%
Colgate-Palmolive Co. ............. 83,000 7,304,000
Procter & Gamble Co. .............. 62,400 5,682,300
------------
12,986,300
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.1%
Applied Materials, Inc.*........... 188,400 5,557,800
Emerson Electric Co................ 120,000 7,245,000
General Electric Co. .............. 150,000 13,650,000
Tandy Corp. ....................... 205,200 10,888,425
Texas Instruments, Inc. ........... 140,000 8,163,750
------------
45,504,975
------------
ENVIRONMENTAL SERVICES -- 0.8%
Republic Services, Inc. Cl-A*...... 250,000 6,000,000
------------
FINANCIAL-BANK & TRUST -- 7.5%
Bank of New York Co., Inc. ........ 200,000 12,137,500
Charter One Financial, Inc. ....... 200,000 6,737,500
Citicorp. ......................... 50,000 7,462,500
Fleet Financial Group, Inc. ....... 110,000 9,185,000
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Mellon Bank Corp. ................. 140,000 $ 9,747,500
NationsBank Corp. ................. 140,000 10,710,000
------------
55,980,000
------------
FINANCIAL SERVICES -- 1.8%
Ahmanson, (H.F.) & Co. ............ 90,000 6,390,000
Morgan Stanley, Dean Witter &
Co. ............................. 81,000 7,401,375
------------
13,791,375
------------
FOOD -- 4.7%
General Mills, Inc. ............... 80,000 5,470,000
Heinz, (H.J.) Co. ................. 93,000 5,219,625
Kellogg Co. ....................... 140,000 5,258,750
Quaker Oats Co. ................... 190,000 10,438,125
Ralston Purina Group............... 75,000 8,760,937
------------
35,147,437
------------
HOTELS & MOTELS -- 1.7%
Hilton Hotels Corp. ............... 320,000 9,120,000
Patriot American Hospitality,
Inc. ............................ 160,002 3,830,048
------------
12,950,048
------------
INSURANCE -- 5.5%
Allmerica Financial Corp. ......... 156,363 10,163,595
Chubb Corp. ....................... 100,000 8,037,500
Lincoln National Corp. ............ 80,000 7,310,000
Ohio Casualty Corp. ............... 100,000 4,425,000
Travelers Property Casualty Corp.
Cl-A............................. 255,000 10,933,125
------------
40,869,220
------------
MACHINERY & EQUIPMENT -- 0.3%
Albany International Corp. Cl-A.... 100,500 2,405,719
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.9%
Abbott Laboratories................ 200,000 8,175,000
Becton Dickinson & Co. ............ 75,000 5,821,875
------------
13,996,875
------------
METALS & MINING -- 0.3%
Newmont Mining Corp. .............. 100,994 2,385,983
------------
OIL & GAS -- 5.5%
Apache Corp. ...................... 100,000 3,150,000
Atlantic Richfield Co. ............ 60,000 4,687,500
Chevron Corp. ..................... 70,000 5,814,375
EEX Corp.* ........................ 400,000 3,750,000
Enron Oil & Gas Co. ............... 100,000 2,025,000
Exxon Corp. ....................... 100,000 7,131,250
Phillips Petroleum Co. ............ 60,000 2,891,250
Royal Dutch Petroleum Co. ......... 60,000 3,288,750
Union Pacific Resources Group,
Inc. ............................ 121,173 2,128,101
Unocal Corp. ...................... 100,000 3,575,000
USX-Marathon Group................. 80,000 2,745,000
------------
41,186,226
------------
PAPER & FOREST PRODUCTS -- 0.9%
Fort James Corp. .................. 150,000 6,675,000
------------
</TABLE>
55
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PERSONAL SERVICES -- 1.0%
Galileo International, Inc. ....... 99,000 $ 4,461,187
Service Corp. International........ 72,000 3,087,000
------------
7,548,187
------------
PHARMACEUTICALS -- 5.5%
American Home Products Corp. ...... 80,000 4,140,000
Bristol-Meyers Squibb Co. ......... 80,000 9,195,000
Merck & Co., Inc. ................. 100,000 13,375,000
Novo Nordisk AS [ADR].............. 15,000 1,032,187
Pfizer, Inc. ...................... 30,000 3,260,625
SmithKline Beecham PLC [ADR]....... 70,000 4,235,000
Warner-Lambert Co. ................ 90,000 6,243,750
------------
41,481,562
------------
RAILROADS -- 2.6%
Kansas City Southern Industries,
Inc. ............................ 296,000 14,689,000
Norfolk Southern Corp. ............ 150,000 4,471,875
------------
19,160,875
------------
REAL ESTATE -- 0.2%
Boston Properties, Inc. ........... 40,000 1,380,000
------------
RETAIL & MERCHANDISING -- 4.9%
Dayton-Hudson Corp. ............... 230,600 11,184,100
Federated Department Stores,
Inc.*............................ 120,000 6,457,500
May Department Stores Co. ......... 70,000 4,585,000
Penney, (J.C.) Co., Inc. .......... 70,000 5,061,875
Proffitt's, Inc.*.................. 230,000 9,286,250
------------
36,574,725
------------
SEMICONDUCTORS -- 0.7%
Motorola, Inc. .................... 100,000 5,256,250
------------
TELECOMMUNICATIONS -- 6.0%
Ameritech Corp. ................... 100,000 4,487,500
AT&T Corp. ........................ 60,000 3,427,500
Bell Atlantic Corp. ............... 200,000 9,125,000
BellSouth Corp. ................... 80,000 5,370,000
GTE Corp. ......................... 100,000 5,562,500
SBC Communications, Inc. .......... 180,000 7,200,000
Sprint Corp. ...................... 42,700 3,010,350
U. S. West, Inc. .................. 140,000 6,580,000
------------
44,762,850
------------
TRANSPORTATION -- 0.8%
CNF Transportation, Inc. .......... 142,300 6,047,750
------------
UTILITIES -- 0.3%
Interstate Energy Corp. ........... 68,400 2,223,000
------------
TOTAL COMMON STOCK
(COST $425,059,688)........................ 545,509,963
------------
PREFERRED STOCK -- 0.1%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575).................... 20,000 883,750
------------
PAR
(000) VALUE
----- ----
CORPORATE OBLIGATIONS -- 18.8%
AUTOMOTIVE -- 0.2%
Auburn Hills Trust Debs.
12.00%, 05/01/20................. $ 1,000 $ 1,627,500
------------
BROADCASTING -- 1.0%
Allbritton Communications Co. Sr.
Sub. Debs. 9.75%, 11/30/07....... 1,500 1,653,750
American Radio Systems Co. Co.
Guarantee Notes 9.00%,
02/01/06......................... 1,500 1,597,500
CBS, Inc. Debs. 8.875%, 06/01/22... 2,000 2,232,500
Heritage Media Corp. Sr. Sub. Notes
8.75%, 02/15/06.................. 1,500 1,605,000
------------
7,088,750
------------
BUILDING MATERIALS -- 0.5%
USG Corp. Sr. Notes 8.50%,
08/01/05......................... 3,500 3,908,800
------------
ENTERTAINMENT & LEISURE -- 0.3%
GCI, Inc. Sr. Notes 9.75%,
08/01/07......................... 1,000 1,050,000
Time Warner, Inc. Notes 6.85%,
01/15/03......................... 1,000 1,032,500
------------
2,082,500
------------
FINANCIAL SERVICES -- 1.1%
CEI Citicorp Holdings Notes 9.75%,
02/14/07......................... 2,000 1,950,000
Donaldson Lufkin & Jenrette, Inc.
Notes 5.625%, 02/15/16........... 1,000 992,500
DQU II Funding Corp. Debs. 8.70%,
06/01/16......................... 2,000 2,307,500
General Motors Acceptance Corp.
Notes 6.70%, 04/25/01............ 1,000 1,017,500
Lehman Brothers Holdings, Inc. Sr.
Notes 8.80%, 03/01/15............ 1,850 2,208,438
------------
8,475,938
------------
HEALTHCARE SERVICES -- 0.1%
FHP International Corp. Sr. Notes
7.00%, 09/15/03.................. 1,000 1,017,500
------------
HOTELS & MOTELS -- 0.3%
Hilton Hotels Corp. Sr. Notes
7.20%, 12/15/09.................. 2,000 1,975,000
------------
INSURANCE -- 0.6%
Equitable Companies, Inc. Sr. Notes
9.00%, 12/15/04.................. 4,035 4,604,944
------------
MACHINERY & EQUIPMENT -- 0.1%
Agco Corp. Sr. Sub. Notes 8.50%,
03/15/06......................... 1,000 1,031,250
------------
</TABLE>
56
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
------- ------------
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.1%
U.S. Surgical Corp. Sr. Notes
7.25%, 03/15/08.................. $ 1,000 $ 1,060,000
------------
METALS & MINING -- 1.0%
Glencore Nickel Property Ltd. Co.
Co. Guarantee Notes 9.00%,
12/01/14......................... 2,000 1,940,000
Haynes International, Inc. Sr.
Notes 11.625%, 09/01/04.......... 1,500 1,665,000
Inland Steel Co. First Mtge. Cl-R
7.90%, 01/15/07.................. 2,000 2,025,000
National Steel Corp. First Mtge.
8.375%, 08/01/06................. 1,500 1,498,125
------------
7,128,125
------------
OIL & GAS -- 2.8%
Atlantic Richfield Co. Debs.
9.875%, 03/01/16................. 1,505 2,063,731
10.875%, 07/15/05................ 3,000 3,836,250
Belco Oil & Gas Corp. Sr. Sub.
Notes Cl-B 8.875%, 09/15/07...... 1,500 1,470,000
Canadian Forest Oil Ltd. Co.
Guarantee Notes 8.75%,
09/15/07......................... 1,500 1,477,500
Cliffs Drilling Co. Cl-B 10.25%,
05/15/03......................... 1,000 1,060,000
Gulf Canada Resources Ltd. Sr.
Notes 8.35%, 08/01/06............ 1,000 1,080,000
8.25%, 03/15/17.................. 1,000 1,088,750
Navigator Gas Transport Notes 144A
10.50%, 06/30/07................. 1,000 1,047,500
Noram Energy Corp. Sub. Debs.
6.00%, 03/15/12.................. 1,613 1,584,773
Northern Offshore ASA Co. Guarantee
Notes 144A 10.00%, 05/15/05...... 1,000 960,000
Pacific Gas & Electric First Mtge.
7.25%, 08/01/26.................. 1,500 1,560,000
Sun Co., Inc. Debs. 9.375%,
06/01/16......................... 2,000 2,390,000
Veritas Holdings Sr. Notes 9.625%,
12/15/03......................... 1,300 1,386,125
------------
21,004,629
------------
PAPER & FOREST PRODUCTS -- 0.3%
Quno Corp. Sr. Notes 9.125%,
05/15/05......................... 2,150 2,311,250
------------
PHARMACEUTICALS -- 0.4%
McKesson Corp. Sub. Debs. 4.50%,
03/01/04......................... 2,875 2,616,250
------------
PRINTING & PUBLISHING -- 0.3%
Affiliated Newspaper Investments,
Inc. Sr. Disc. Notes [STEP]
11.129%, 07/01/06................ 2,000 1,995,000
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
------- ------------
<S> <C> <C>
RETAIL & MERCHANDISING -- 0.2%
Federated Department Stores, Inc.
Notes 6.79%, 07/15/27............ $ 1,500 $ 1,554,375
------------
TELECOMMUNICATIONS -- 4.8%
360 Communications Co. Notes 6.65%,
01/15/08......................... 2,000 2,025,000
360 Communications Co. Sr. Notes
7.60%, 04/01/09.................. 1,000 1,081,250
Centel Capital Corp. Debs. 9.00%,
10/15/19......................... 2,500 3,100,000
Centennial Cellular Corp. Sr. Notes
8.875%, 11/01/01................. 2,500 2,603,125
CF Cable TV, Inc. Sr. Notes
11.625%, 02/15/05................ 2,000 2,275,000
Clear Channel Communications, Inc.
6.625%, 06/15/08................. 2,000 1,992,500
Continental Cablevision Debs.
9.50%, 08/01/13.................. 2,000 2,390,700
Frontier Corp. Notes 7.25%,
05/15/04......................... 2,000 2,102,500
Intermedia Communications, Inc. Sr.
Notes 144A 8.60%, 06/01/08....... 1,500 1,518,750
Intermedia Communications, Inc. Sr.
Notes Cl-B 8.50%, 01/15/08....... 1,000 1,002,500
JCAC, Inc. Sr. Sub. Notes 10.125%,
06/15/06......................... 1,000 1,096,250
Level 3 Communications, Inc. Sr.
Notes 144A 9.125%, 05/01/08...... 1,500 1,462,500
MetroNet Communications Corp. Sr.
Notes 12.00%, 08/15/07........... 1,500 1,740,000
Nextel Communications, Inc. Sr.
Disc. Notes [STEP] 144A 10.004%,
08/15/04......................... 2,000 1,950,000
NEXTLINK Communications, Inc. Sr.
Notes 9.625%, 10/01/07........... 2,000 2,065,000
RCN Corp. Sr. Disc. Notes [STEP]
18.217%, 02/15/08................ 3,000 1,830,000
RSL Communications PLC Sr. Disc.
Notes [STEP] 10.125%, 03/01/08... 2,000 1,190,000
RSL Communications PLC Sr. Notes
144A 9.125%, 03/01/08............ 1,000 972,500
Teligent, Inc. Sr. Disc. Notes
[STEP] 144A 11.50%, 03/01/08..... 2,000 1,105,000
WorldCom, Inc. 7.75%, 04/01/27..... 2,000 2,292,500
------------
35,795,075
------------
</TABLE>
57
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
------- ------------
<S> <C> <C>
UTILITIES -- 4.7%
Boston Edison Co. Debs. 7.80%,
05/15/10......................... $ 1,000 $ 1,105,112
7.80%, 03/15/23.................. 1,640 1,719,950
Carolina Power & Light First Mtge.
8.625%, 09/15/21................. 1,000 1,273,200
6.875%, 08/15/23................. 1,000 1,006,250
Cleveland Electric Illuminating Co.
First Mtge. C1-B 9.50%,
05/15/05......................... 3,000 3,476,250
Coda Energy, Inc. Co. Guarantee
Notes 10.50%, 04/01/06........... 1,000 1,040,000
Consumers Energy Co. First Mtge.
7.375%, 09/15/23................. 2,500 2,487,500
Detroit Edison Medium Term Notes
8.30%, 08/01/22.................. 1,000 1,086,250
Illinois Power Co. Mtge. 7.50%,
07/12/25......................... 1,900 1,952,250
Jersey Central Power & Light Co.
First Mtge. 7.50%, 05/01/23...... 1,500 1,548,750
6.75%, 11/01/25.................. 1,000 973,750
Metropolitan Edison Co. First Mtge.
Medium Term Notes C1-B 8.15%,
01/30/23......................... 2,975 3,253,987
New York State Electric & Gas Corp.
First Mtge. 8.30%, 12/15/22...... 1,400 1,529,500
New York State Electric & Gas First
Mtge. 8.30%, 12/15/22............ 475 524,875
Niagara Mohawk Power First Mtge.
9.75%, 11/01/05.................. 1,000 1,172,500
PECO Energy First Mtge. 7.25%,
11/01/24......................... 2,000 2,055,000
Penn Power and Light First Mtge.
7.875%, 02/01/23................. 1,000 1,062,500
Potomac Electric Power Co. First
Mtge. 6.25%, 10/15/04............ 1,900 1,945,125
PSI Energy, Inc. Debs. 6.35%,
11/15/00......................... 1,500 1,515,000
South Carolina Electric & Gas Co.
Mtge. 8.875%, 08/15/21........... 2,000 2,200,000
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
------- ------------
<S> <C> <C>
Western Massachusetts Electric Co.
First Mtge. 7.75%, 12/01/02...... $ 2,000 $ 2,046,318
------------
34,974,067
------------
TOTAL CORPORATE OBLIGATIONS
(COST $138,043,439)........................ 140,250,953
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.7%
Federal Home Loan Mtge. Corp.
6.50%, 09/01/11.................. 8,276 8,338,221
6.50%, 01/01/12.................. 4,416 4,449,441
------------
(COST $12,398,153)................. 12,787,662
------------
U.S. TREASURY OBLIGATIONS -- 1.5%
U.S. Treasury Notes 5.50%,
05/31/03......................... 5,000 4,999,700
6.125%, 08/15/07................. 6,000 6,243,840
------------
(COST $11,197,603)................. 11,243,540
------------
COMMERCIAL PAPER -- 4.3%
American Express Credit Corp.
5.575%, 07/01/98................. 10,000 10,000,000
Heller Financial, Inc. 5.686%,
07/07/98......................... 15,500 15,500,000
Hertz Corp. 5.786%, 07/02/98....... 7,051 7,051,000
------------
(COST $32,551,000)................. 32,551,000
------------
SHARES
-------
SHORT-TERM INVESTMENTS -- 1.6%
Temporary Investment Cash Fund..... 5,845,854 5,845,854
Temporary Investment Fund.......... 5,845,854 5,845,854
------------
(COST $11,691,708)................. 11,691,708
------------
TOTAL INVESTMENTS -- 101.0%
(COST $631,938,166).................. 754,918,576
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (1.0%)..................... (7,692,057)
------------
NET ASSETS -- 100.0%................... $747,226,519
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 1.1% of net assets.
See Notes to Financial Statements.
58
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 92.1%
AEROSPACE -- 0.5%
REMEC, Inc.*....................... 114,825 $ 1,306,134
------------
BROADCASTING -- 0.1%
Citadel Communications Corp.*...... 9,400 150,400
------------
BUSINESS SERVICES -- 4.4%
Metzler Group, Inc.*............... 43,762 1,602,783
PAREXEL International Corp.*....... 72,750 2,646,281
Pegasus Systems, Inc.*............. 45,175 1,157,609
Personnel Group of America,
Inc.*............................ 108,300 2,166,000
Renaissance Worldwide, Inc.*....... 85,875 1,867,781
StaffMark, Inc.*................... 27,775 1,017,259
Wackenhut Corrections Corp.*....... 65,775 1,537,491
------------
11,995,204
------------
CHEMICALS -- 0.7%
O.M. Group, Inc. .................. 48,575 2,003,719
------------
CLOTHING & APPAREL -- 2.9%
The Mens Warehouse, Inc.*.......... 54,525 1,799,325
The Warnaco Group, Inc. Cl-A ...... 75,325 3,196,605
The Wet Seal, Inc. Cl-A*........... 89,000 2,848,000
------------
7,843,930
------------
COMPUTER HARDWARE -- 1.1%
Insight Enterprises, Inc.*......... 73,737 2,949,480
------------
COMPUTER SERVICES & SOFTWARE -- 15.2%
Aspen Technologies, Inc.*.......... 51,600 2,605,800
Brooktrout Technologies, Inc.*..... 75,975 1,054,153
CDW Computer Centers, Inc.*........ 78,275 3,913,750
CheckFree Holdings Corp.*.......... 143,075 4,211,770
EarthLink Network, Inc.*........... 12,350 947,862
Electronic Arts, Inc.*............. 33,875 1,829,250
Harbinger Corp.*................... 132,562 3,206,343
HNC Software, Inc.*................ 156,825 6,400,420
JDA Software Group, Inc.*.......... 28,575 1,250,156
Keane, Inc.*....................... 16,675 933,800
Mastech Corp.*..................... 92,125 2,591,016
MMC Networks, Inc.*................ 86,225 2,748,422
SIPEX Corp.*....................... 66,775 1,435,662
Software AG Systems, Inc.*......... 9,950 291,037
Summit Design, Inc.*............... 126,150 1,852,828
Sykes Enterprises, Inc.*........... 131,800 2,644,237
Transaction Systems Architects,
Inc.*............................ 32,900 1,266,650
USWeb Corp.*....................... 46,575 1,103,245
Wind River Systems*................ 20,450 733,644
------------
41,020,045
------------
CONSUMER PRODUCTS & SERVICES -- 7.2%
Action Performance Companies,
Inc.*............................ 142,475 4,585,914
Helen of Troy Ltd.*................ 264,225 5,812,950
Pre-Paid Legal Services, Inc.*..... 51,600 1,628,625
Windmere-Durable Holdings, Inc.*... 80,550 2,884,697
Wolverine World Wide, Inc.......... 203,455 4,412,430
------------
19,324,616
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
ELECTRONIC COMPONENTS & EQUIPMENT -- 4.7%
Advanced Lighting Technologies,
Inc.*............................ 124,825 $ 2,902,181
Berg Electronics Corp.*............ 139,325 2,725,545
Brooks Automation, Inc.*........... 147,325 1,915,225
Concord EFS, Inc.*................. 141,825 3,705,178
PRI Automation, Inc.*.............. 80,800 1,378,650
------------
12,626,779
------------
ENTERTAINMENT & LEISURE -- 1.2%
Silverleaf Resorts, Inc.*.......... 132,025 2,013,381
Vistana, Inc.*..................... 70,500 1,295,437
------------
3,308,818
------------
ENVIRONMENTAL SERVICES -- 2.0%
American Disposal Services,
Inc.*............................ 86,000 4,031,250
Eastern Environmental Services,
Inc.*............................ 42,225 1,435,650
------------
5,466,900
------------
EQUIPMENT SERVICES -- 2.9%
Gemstar International Group
Ltd.*............................ 61,700 2,309,894
Rental Service Corp.*.............. 97,875 3,291,047
United Rentals, Inc.*.............. 53,350 2,240,700
------------
7,841,641
------------
FINANCIAL SERVICES -- 2.5%
Affiliated Managers Group, Inc.*... 46,975 1,743,947
UniCapital Corp.*.................. 177,000 3,385,125
United Panam Financial Corp.*...... 164,925 1,690,481
------------
6,819,553
------------
FOOD -- 1.7%
American Italian Pasta Co. Cl-A*... 50,975 1,898,819
U.S. Foodservice, Inc.*............ 74,975 2,628,811
------------
4,527,630
------------
HEALTHCARE SERVICES -- 7.4%
Access Health, Inc.*............... 38,975 993,863
Capital Senior Living Corp.*....... 288,400 3,460,800
Cerner Corp.*...................... 141,850 4,016,128
First Health Group Corp.*.......... 52,100 1,484,850
IDEXX Laboratories, Inc.*.......... 29,850 742,519
Medical Manager Corp.*............. 117,875 3,256,297
NCS Healthcare, Inc. Cl-A*......... 53,000 1,510,500
Orthodontic Centers of America,
Inc.*............................ 145,150 3,039,078
Sunrise Assisted Living, Inc.*..... 45,125 1,551,172
------------
20,055,207
------------
HOTELS & MOTELS -- 0.9%
Capstar Hotel Co.*................. 82,475 2,309,300
------------
INSURANCE -- 2.8%
Annuity and Life
Re Holdings, Ltd.*............... 121,500 2,688,188
HCC Insurance Holdings, Inc. ...... 63,625 1,399,750
Reliastar Financial Corp........... 70,000 3,360,000
------------
7,447,938
------------
MEDICAL SUPPLIES & EQUIPMENT -- 6.1%
ESC Medical Systems Ltd.*.......... 81,600 2,754,000
HBO & Co........................... 205,290 7,236,473
</TABLE>
59
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Schein, (Henry), Inc.*............. 104,650 $ 4,826,981
Trex Medical Corp.*................ 106,700 1,760,550
------------
16,578,004
------------
METALS & MINING -- 0.4%
IMCO Recycling, Inc................ 55,350 1,023,975
------------
OFFICE EQUIPMENT -- 1.2%
Global Imaging Systems, Inc.*...... 234,800 3,287,200
------------
OIL & GAS -- 1.6%
Cal Dive International, Inc........ 40,900 1,127,306
Offshore Logistics, Inc.*.......... 179,000 3,177,250
------------
4,304,556
------------
PERSONAL SERVICES -- 1.2%
Sylvan Learning Systems, Inc.*..... 101,250 3,315,938
------------
PHARMACEUTICALS -- 8.4%
Andrx Corp.*....................... 86,300 3,171,525
Dura Pharmaceutical, Inc.*......... 84,425 1,889,009
Jones Medical Industries, Inc. .... 61,075 2,023,109
King Pharmaceuticals, Inc.*........ 227,400 3,183,600
Medicis Pharmaceutical Corp.
Cl-A*............................ 106,550 3,889,075
Scherer, (R.P.) Corp.*............. 20,075 1,779,147
Watson Pharmaceuticals, Inc.*...... 140,925 6,579,436
------------
22,514,901
------------
PRINTING & PUBLISHING -- 2.2%
Mail-Well, Inc.*................... 279,400 6,059,488
------------
REAL ESTATE -- 1.0%
Fairfield Communities, Inc.*....... 144,599 2,774,493
------------
RESTAURANTS -- 2.0%
CKE Restaurants, Inc............... 128,350 5,294,438
------------
RETAIL & MERCHANDISING -- 2.3%
Proffitt's, Inc.*.................. 60,300 2,434,613
Stage Stores, Inc.*................ 81,075 3,668,644
------------
6,103,257
------------
SEMICONDUCTORS -- 2.1%
Amkor Technology, Inc.*............ 303,225 2,833,259
ATMI, Inc.*........................ 84,975 1,274,625
Vitesse Semiconductor, Inc.*....... 47,124 1,454,954
------------
5,562,838
------------
TELECOMMUNICATIONS -- 5.0%
Allegiance Telecom, Inc.*.......... 148,125 2,221,875
Digital Microwave Corp.*........... 181,250 1,314,063
e. spire Communications, Inc.*..... 95,000 2,143,438
Echostar Communications Corp.*..... 53,450 1,286,141
Intermedia Communications, Inc.*... 36,200 1,518,138
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
NEXTLINK Communications, Inc.
Cl-A*............................ 53,600 $ 2,030,100
Pacific Gateway Exchange, Inc.*.... 13,000 520,813
Powerwave Technologies, Inc.*...... 14,825 186,239
US LEC Corp. Cl-A*................. 31,175 650,778
Westell Technologies, Inc. Cl-A*... 181,300 1,677,025
------------
13,548,610
------------
TRANSPORTATION -- 0.4%
Expeditors International of
Washington, Inc.................. 24,125 1,061,500
------------
TOTAL COMMON STOCK
(COST $204,092,747).................. 248,426,492
------------
FOREIGN STOCK -- 2.2%
BROADCASTING -- 0.6%
Flextech PLC -- (GBP)*............. 167,000 1,539,485
------------
BUILDING MATERIALS -- 0.3%
Hunter Douglas NV -- (NLG)......... 16,012 869,781
------------
RESTAURANTS -- 0.5%
Wetherspoon, (J.D.) PLC -- (GBP)... 260,165 1,269,701
------------
TRANSPORTATION -- 0.8%
IHC Caland NV -- (NLG)............. 39,525 2,224,741
------------
TOTAL FOREIGN STOCK
(COST $3,770,655).................... 5,903,708
------------
PAR
(000)
-------
<S> <C> <C>
COMMERCIAL PAPER -- 6.8%
American Express Credit Corp.
5.95%, 07/02/98.................. $ 8,289 8,287,630
Merrill Lynch & Co.
6.00%, 07/01/98.................. 10,024 10,024,000
------------
(COST $18,311,630)................. 18,311,630
------------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund..... 284 284
Temporary Investment Fund.......... 284 284
------------
(COST $568)........................ 568
------------
TOTAL INVESTMENTS -- 101.1%
(COST $226,175,600).................. 272,642,398
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (1.1%)............... (3,020,804)
------------
NET ASSETS -- 100.0%................... $269,621,594
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
60
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FOREIGN STOCK -- 94.6%
ARGENTINA -- 0.8%
Banco de Galicia y Buenos Aires
SA de CV [ADR] ................ 16,764 $ 305,943
Banco Frances SA [ADR] .......... 16,411 376,427
Perez Companc SA ................ 106,095 531,600
Telefonica de Argentina SA Cl-B
[ADR] ......................... 29,080 943,283
YPF SA [ADR] .................... 57,127 1,717,380
------------
3,874,633
------------
AUSTRALIA -- 2.4%
AMP Ltd.* ....................... 45,000 526,671
Australian Gas Light Co. Ltd. ... 128,022 800,702
Brambles Industries Ltd. ........ 31,000 608,344
Broken Hill Proprietary Co.
Ltd. .......................... 95,300 805,547
Colonial Ltd. Rights* ........... 1,000 229
Colonial Ltd. ................... 138,000 417,027
Commonwealth Bank of
Australia ..................... 80,459 938,687
Fosters Brewing Group Ltd. ...... 113,000 265,905
GIO Australia Holdings Ltd. ..... 69,000 177,066
Goodman Fielder Ltd. ............ 252,000 366,719
John Fairfax Holdings Ltd. ...... 260,000 451,940
Lend Lease Corp. Ltd. ........... 33,350 674,286
National Australia Bank Ltd. .... 36,185 477,280
News Corp. Ltd. ................. 125,593 1,025,052
News Corp. Ltd. Pfd. ............ 101,189 716,844
Publishing & Broadcasting
Ltd. .......................... 116,300 500,529
Sydney Harbour Casino Holdings
Ltd.* ......................... 391,000 227,599
TABCORP Holdings Ltd. ........... 99,000 505,771
Telstra Corp. Ltd.* ............. 264,838 678,962
Westpac Banking Corp. Ltd. ...... 145,000 884,442
Woodside Petroleum Ltd. ......... 104,000 519,079
------------
11,568,681
------------
BELGIUM -- 2.1%
Credit Communal Holding Dexia
SA ............................ 3,940 592,959
Generale de Banque SA ........... 2,994 2,222,769
Generale de Banque SA Strip* .... 214 6
KBC Bancassurance Holdings NV ... 74,000 6,622,412
UCB SA .......................... 101 524,000
------------
9,962,146
------------
BRAZIL -- 2.6%
Banco Bradesco SA ............... 62,664,000 525,537
Banco Itau SA ................... 710,000 402,080
Brasmotor SA .................... 906,000 83,024
Centrais Electrobras Brasileiras
SA [ADR] ...................... 3,628 52,541
Centrais Eletricas Brasileiras
SA ............................ 16,860,000 488,332
Centrais Geradoras do Sul do
Brasil SA [ADR] ............... 363 2,462
Centrais Geradoras do Sul do
Brasil SA ..................... 16,860,000 22,886
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [ADR] .................. 16,260 367,883
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [GDR] .................. 5,160 116,745
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Companhia Cervejaria Brahma ..... 834,000 $ 515,928
Companhia Cimento Portland
Itau .......................... 865,000 158,520
Companhia Energetica de Minas
Geras ......................... 14,496,779 448,712
Companhia Energetica de Minas
Geras [ADR] ................... 16,971 525,302
Petroleo Brasileiro SA .......... 7,401,508 1,375,852
Telebras SA [ADR] ............... 50,707 5,536,571
Telecomunicacoes do Rio de
Janeiro SA Rights* ............ 18,155 0
Telecomunicacoes de Minas Gerais-
Telemig Cl-B .................. 1,935,000 137,185
Telecomunicacoes de Minas
Rights*........................ 1,190 0
Telecomunicacoes de Sao Paulo
SA ............................ 4,494,000 1,072,396
Telecomunicacoes de Sao Paulo SA
Rights* ....................... 211,207 17,577
Telecomunicacoes do Rio de
Janeiro SA .................... 2,013,000 153,158
Telemig Celular SA Pfd. Cl-B .... 1,935,000 100,380
Telerj Celullar SA Pfd. Cl-B .... 2,013,000 118,349
Telesp Celular SA Pfd. Cl-B* .... 4,494,000 376,893
------------
12,598,313
------------
CANADA -- 0.3%
Alcan Aluminium Ltd. ............ 23,310 641,978
Royal Bank of Canada ............ 8,470 509,741
------------
1,151,719
------------
CHILE -- 0.1%
Chilectra SA [ADR] 144A ......... 14,905 319,507
Compania Cervecerias Unidas SA
[ADR] ......................... 7,712 162,916
Enersis SA [ADR] ................ 8,801 215,074
------------
697,497
------------
CHINA -- 0.1%
Huaneng Power International, Inc.
[ADR]* ........................ 51,000 685,313
------------
CZECH REPUBLIC -- 0.0%
SPT Telecom AS .................. 13,600 188,157
------------
DENMARK -- 0.3%
Den Danske Bank ................. 6,380 765,375
Tele Danmark AS Cl-B* ........... 2,030 194,823
Unidanmark AS Cl-A .............. 6,110 549,072
------------
1,509,270
------------
FINLAND -- 0.4%
Nokia Oyj Cl-A................... 27,368 2,012,764
------------
FRANCE -- 10.4%
Accor SA ........................ 2,920 817,171
Alcatel Alsthom ................. 15,552 3,166,460
AXA SA .......................... 22,492 2,529,686
Canal Plus ...................... 4,060 758,812
Carrefour Supermarche SA ........ 2,459 1,555,678
Compagnie de Saint-Gobain ....... 11,880 2,202,682
Credit Commercial de France ..... 17,210 1,448,866
</TABLE>
61
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Dexia France .................... 5,200 $ 700,096
Dexia France SA ................. 5,023 676,266
Groupe Danone ................... 5,700 1,571,593
GTM Entrepose SA ................ 4,510 468,453
L'Oreal ......................... 1,607 893,866
Lafarge SA ...................... 7,843 810,759
Lapeyre SA ...................... 8,065 751,004
Legrand SA ...................... 3,823 1,011,705
Pathe SA ........................ 2,331 456,868
Pinault-Printemps Redoute SA .... 6,171 5,164,589
Sanofi SA ....................... 19,997 2,351,604
Schneider SA .................... 33,928 2,705,360
Societe Generale ................ 9,236 1,920,211
Societe Nationale Elf Aquitaine
SA ............................ 13,350 1,876,851
Societe Television Francaise .... 11,080 1,717,153
Sodexho SA ...................... 14,610 2,762,016
STMicroelectronics NV* .......... 5,400 382,714
Total SA Cl-B ................... 34,824 4,527,213
Vivendi ......................... 29,440 6,286,280
------------
49,513,956
------------
GERMANY -- 7.5%
Allianz AG ...................... 7,360 2,426,109
Bayer AG ........................ 39,225 2,023,151
Bayerische Hypotheken-und
Wechsel-Bank AG ............... 31,332 1,985,774
Bayerische Vereinsbank AG ....... 23,415 1,991,215
Bilfinger & Berger Bau AG ....... 10,700 363,379
Buderus AG ...................... 807 402,376
Commerzbank AG .................. 15,850 605,890
Deutsche Bank AG ................ 35,434 3,000,552
Deutsche Telekom AG ............. 62,491 1,686,017
Dresdner Bank AG ................ 31,893 1,719,190
Dresdner Bank AG Warrants* ...... 27,736 723,736
Fielmann AG Pfd. ................ 5,723 198,479
Fresenius AG Pfd. ............... 2,660 495,150
Gehe AG ......................... 42,681 2,293,622
Hoechst AG ...................... 12,980 647,911
Hornbach Baumarkt AG ............ 1,300 63,739
Hornbach Holdings AG Pfd. ....... 5,870 538,210
Mannesmann AG ................... 32,550 3,301,832
Rhoen-Klinikum AG ............... 8,250 799,848
SAP AG .......................... 6,080 3,688,360
SAP AG Pfd. ..................... 3,207 2,180,013
Siemens AG ...................... 15,410 937,391
Veba AG ......................... 41,654 2,838,425
Volkswagen AG ................... 907 871,811
------------
35,782,180
------------
HONG KONG -- 1.1%
China Light & Power Co. Ltd. .... 227,000 1,034,138
Hang Seng Bank Ltd. ............. 81,000 457,865
Henderson Land Development Co.
Ltd. .......................... 214,000 705,639
Hong Kong & China Gas Co.
Ltd. .......................... 453,100 514,582
Hong Kong Telecommunications
Ltd. .......................... 399,200 749,603
Hutchison Whampoa Ltd. .......... 342,000 1,805,208
------------
5,267,035
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
INDIA -- 0.1%
Mahanagar Telephone Nigam Ltd.
[GDR]* ........................ 44,000 $ 448,800
------------
ITALY -- 5.0%
Assicurazioni Generali .......... 51,960 1,689,566
Banca Commerciale Italia NA ..... 104,000 621,935
Banca di Roma* .................. 1,066,000 2,218,897
Credito Italiano SPA ............ 590,996 3,093,706
Ente Nazionale Idrocarburi
SPA ........................... 439,100 2,877,846
Industrie Natuzzi SPA [ADR] ..... 15,260 396,760
Istituto Mobiliare Italiano
SPA ........................... 93,710 1,476,122
Istituto Nazionale delle
Assicurazioni ................. 339,000 963,095
Italgas SPA ..................... 112,936 459,991
La Rinascente SPA ............... 22,800 227,032
Mediolanum SPA .................. 46,344 1,470,452
Telecom Italia Mobile SPA ....... 624,805 3,820,781
Telecom Italia SPA .............. 632,518 4,656,126
------------
23,972,309
------------
JAPAN -- 14.9%
Advantest Corp. ................. 7,700 413,892
Alps Electric Co. Ltd. .......... 72,000 856,000
Amada Co. Ltd. .................. 109,000 530,136
Canon, Inc. ..................... 178,000 4,040,061
Citizen Watch Co. Ltd. .......... 68,000 561,012
Dai Nippon Screen Manufacturing
Co. Ltd. ...................... 122,000 499,305
Daifuku Co. Ltd. ................ 18,000 67,053
Daiichi Pharmaceutical Co.
Ltd. .......................... 87,000 1,147,170
Daiwa House Industry Co. Ltd. ... 110,000 970,926
DDI Corp. ....................... 221 769,125
Denso Corp. ..................... 181,000 2,999,603
East Japan Railway Co. Ltd. ..... 313 1,470,447
Fanuc Co. ....................... 24,800 857,729
Fujitsu Ltd. .................... 42,000 441,834
Hitachi Ltd. .................... 206,000 1,343,301
Hitachi Zosen Corp. ............. 181,000 292,135
Honda Motor Co. Ltd. ............ 15,000 533,919
Inax Corp. ...................... 46,000 158,101
Ito-Yokado Co. Ltd. ............. 50,000 2,352,559
Kao Corp. ....................... 95,000 1,464,856
Kokuyo Co. Ltd. ................. 58,000 982,094
Komatsu Ltd. .................... 116,000 563,346
Komori Corp. .................... 49,000 930,324
Kuraray Co. Ltd. ................ 128,000 1,087,380
Kyocera Corp. ................... 45,000 2,198,364
Makita Corp. .................... 84,000 967,799
Matsushita Electric Industrial
Co. ........................... 181,000 2,908,311
Mauri Co. Ltd. .................. 131,000 1,953,885
Mitsubishi Corp. ................ 132,000 817,956
Mitsubishi Heavy Industries
Ltd. .......................... 570,000 2,152,105
Mitsui Fudosan Co. Ltd. ......... 263,000 2,076,939
Murata Manufacturing Co. Ltd. ... 56,000 1,815,758
National House Industrial Co.
Ltd. .......................... 26,000 199,143
NEC Corp. ....................... 290,000 2,701,805
Nippon Telegraph & Telephone
Corp. ......................... 1,570 1,300,933
Nomura Securities Co. Ltd. ...... 194,000 2,257,520
Pioneer Electronic Corp. ........ 36,000 687,394
</TABLE>
62
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Sangetsu Co. Ltd. ............... 11,000 $ 141,874
Sankyo Co. Ltd. ................. 123,000 2,800,590
Sega Enterprises Ltd. ........... 19,400 334,784
Sekisui Chemical Co. Ltd. ....... 180,000 920,849
Sekisui House Ltd. .............. 107,000 828,800
Seven-Eleven Japan .............. 16,000 952,264
Sharp Corp. ..................... 37,000 299,658
Shin-Etsu Chemical Co. .......... 103,000 1,781,172
Shiseido Co. Ltd. ............... 73,000 828,966
Sony Corp. ...................... 44,600 3,840,256
Sumitomo Corp. .................. 223,000 1,071,737
Sumitomo Electric Industries .... 262,000 2,648,600
Sumitomo Forestry Co. ........... 73,000 409,749
TDK Corp. ....................... 43,000 3,175,775
Tokio Marine & Fire Insurance
Co. ........................... 60,000 616,493
Tokyo Electron Ltd. ............. 18,000 551,212
Tokyo Steel Manufacturing ....... 56,500 290,673
Toppan Printing Co. Ltd. ........ 111,000 1,186,900
UNY Co. Ltd. .................... 57,000 924,091
------------
70,974,663
------------
KOREA -- 0.1%
Samsung Electronics Co. ......... 13,043 403,734
------------
MEXICO -- 1.7%
Cementos de Mexico SA de CV
[ADR] ......................... 44,090 332,053
Cemex SA de CV [ADS] 144A* ...... 50,068 377,075
Cemex SA de CV .................. 2,037 7,617
Cemex SA de CV Cl-B* ............ 67,925 299,334
Cemex SA de CV Rights* .......... 25 0
Cifra SA [ADR]* ................. 7,196 100,737
Fomento Economico Mexicano SA de
CV UBD Units .................. 19,282 600,810
Gruma SA Cl-B* .................. 114,730 252,798
Gruma SA [ADR] 144A* ............ 24,714 217,819
Grupo Financiero Banamex SA
Cl-B* ......................... 146,200 276,910
Grupo Financiero Banamex SA
Cl-L* ......................... 4,184 6,593
Grupo Financiero Bancomer SA Cl-B
[GDR]* ........................ 2,330 16,450
Grupo Financiero Bancomer SA
Cl-L* ......................... 1,725 421
Grupo Industrial Maseca SA de CV
Cl-B .......................... 306,095 216,643
Grupo Modelo SA Cl-C ............ 67,506 559,668
Grupo Televisa SA [GDR]* ........ 20,634 776,354
Kimberly-Clark de Mexico SA
Cl-A .......................... 166,630 578,548
Panamerican Beverages, Inc.
Cl-A .......................... 31,540 991,539
Telefonos de Mexico SA Cl-L
[ADR] ......................... 42,014 2,019,298
TV Azteca SA de CV [ADR]* ....... 26,200 283,288
------------
7,913,955
------------
NETHERLANDS -- 10.7%
ABN AMRO Holding NV ............. 94,446 2,210,002
AKZO Nobel NV ................... 2,852 633,990
ASM Lithography Holding NV ...... 51,340 1,519,338
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Baan Co. NV* .................... 18,040 $ 644,930
CSM NV .......................... 37,361 1,794,383
Elsevier NV ..................... 224,402 3,386,626
Fortis Amev NV .................. 38,702 2,265,934
Gucci Group NV .................. 13,205 699,865
ING Groep NV .................... 115,182 7,542,076
ING Groep NV Warrants* .......... 39,906 735,651
Koninklijke Ahold NV ............ 39,953 1,282,522
Koninklijke Numico NV ........... 27,170 850,807
KPN NV .......................... 16,029 616,979
PolyGram NV ..................... 43,347 2,211,864
Royal Dutch Petroleum Co. ....... 174,504 9,676,461
Royal Philips Electronics NV .... 24,850 2,088,933
TNT Post Group NV* .............. 16,029 409,743
Unilever NV ..................... 56,850 4,510,618
Wolters Kluwer NV ............... 56,961 7,817,990
------------
50,898,712
------------
NEW ZEALAND -- 0.2%
Fletcher Challenge Building
Ltd. .......................... 88,752 110,568
Fletcher Challenge Energy
Ltd. .......................... 102,095 243,782
Telecom Corp. of New Zealand .... 47,000 100,516
Telecom Corp. of New Zealand
Ltd. .......................... 136,000 560,531
------------
1,015,397
------------
NORWAY -- 1.5%
Bergesen D.Y. AS Cl-A ........... 9,560 181,893
Norsk Hydro AS .................. 65,500 2,880,841
Orkla ASA Cl-A .................. 170,600 3,968,455
Saga Petroleum ASA Cl-B ......... 15,160 214,355
------------
7,245,544
------------
PANAMA -- 0.0%
Banco Latinoamericano de
Exportaciones SA Cl-E ......... 4,035 124,076
------------
PERU -- 0.1%
Credicorp Ltd. .................. 11,682 171,579
Telefonica del Peru SA Cl-B ..... 26,690 53,479
Telefonica del Peru SA Cl-B
[ADR] ......................... 11,383 232,640
------------
457,698
------------
PORTUGAL -- 0.5%
Jeronimo Martins, SGPS, SA ...... 46,778 2,247,203
------------
RUSSIA -- 0.1%
Gazprom [ADR] ................... 20,040 224,047
LUKoil Holding [ADR] ............ 3,620 121,270
------------
345,317
------------
SINGAPORE -- 0.1%
Singapore Press Holdings Ltd. ... 53,840 360,106
Singapore Telecommunications
Ltd. .......................... 235,000 333,831
------------
693,937
------------
SPAIN -- 2.9%
Banco Bilbao Vizcaya SA ......... 18,820 967,492
Banco Popular Espanol SA ........ 13,317 1,137,803
Banco Santander SA .............. 107,336 2,751,935
Corporacion Bancaria de Espana
SA ............................ 51,256 1,151,745
Endesa SA ....................... 69,492 1,522,932
</TABLE>
63
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Gas Natural SDG SA .............. 14,051 $ 1,016,951
Iberdrola SA .................... 79,173 1,287,744
Repsol SA ....................... 17,975 992,153
Telefonica SA ................... 58,647 2,716,096
Telefonica SA Rights* ........... 5,331 245,500
------------
13,790,351
------------
SWEDEN -- 3.6%
ABB AB Cl-A ..................... 87,930 1,245,913
Astra AB Cl-B ................... 202,086 4,029,074
Atlas Copco AB Cl-B ............. 40,130 1,094,461
Electrolux AB Cl-B .............. 124,650 2,141,336
Esselte AB ...................... 14,410 334,278
Granges AB* ..................... 14,385 263,351
Hennes & Mauritz AB Cl-B ........ 57,350 3,660,355
Nordbanken Holding Co. AB* ...... 419,598 3,077,948
Sandvik AB Cl-A ................. 6,140 169,765
Sandvik AB Cl-B ................. 44,020 1,208,833
Scribona AB Cl-B ................ 5,500 66,207
------------
17,291,521
------------
SWITZERLAND -- 6.5%
ABB AG .......................... 1,469 2,169,395
Adecco SA ....................... 6,060 2,732,735
Credit Suisse Group ............. 11,820 2,630,026
Nestle SA ....................... 3,868 8,277,588
Novartis AG ..................... 3,379 5,622,719
Roche Holding AG ................ 405 3,977,080
UBS AG* ......................... 14,960 5,562,595
------------
30,972,138
------------
THAILAND -- 0.1%
Thai Farmers Bank PLC ........... 358,000 315,260
------------
UNITED KINGDOM -- 18.3%
Abbey National PLC .............. 158,000 2,807,588
Argos PLC ....................... 159,749 1,687,208
ASDA Group PLC .................. 508,450 1,745,480
BG PLC .......................... 169,597 980,502
British Petroleum Co. PLC ....... 132,840 1,937,167
Cable & Wireless PLC ............ 297,000 3,607,568
Cadbury Schweppes PLC ........... 214,456 3,318,783
Caradon PLC ..................... 387,530 1,202,666
Centrica PLC .................... 126,210 212,687
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Compass Group PLC ............... 204,000 $ 2,348,583
Diageo PLC ...................... 568,436 6,733,900
Electrocomponents PLC ........... 126,000 1,016,468
GKN PLC ......................... 52,000 658,524
Glaxo Wellcome PLC .............. 223,000 6,693,646
Heywood Williams Group PLC ...... 32,010 140,198
Hillsdown Holdings PLC .......... 95,160 257,215
Kingfisher PLC .................. 315,950 5,118,755
Ladbroke Group PLC .............. 229,000 1,263,753
Laing, (John) PLC Cl-A .......... 70,000 463,093
National Westminster Bank PLC ... 592,670 10,590,809
Rank Group PLC .................. 251,120 1,378,491
Reed International PLC .......... 528,740 4,781,544
Rio Tinto PLC ................... 163,600 1,842,527
Rolls-Royce PLC ................. 139,140 574,585
Safeway PLC ..................... 286,660 1,877,299
Shell Transport & Trading Co.
PLC ........................... 798,000 5,618,781
Smith, (David S.) Holdings
PLC ........................... 197,900 629,024
SmithKline Beecham PLC .......... 719,240 8,754,389
Tesco PLC ....................... 250,000 2,440,184
Tomkins PLC ..................... 631,220 3,425,506
United News & Media PLC ......... 231,470 3,236,423
------------
87,343,346
------------
VENEZUELA -- 0.1%
Cia Anonima Nacional Telefonos de
Venezuela [ADR] ............... 13,427 335,675
------------
TOTAL FOREIGN STOCK
(COST $359,252,994)................ 451,601,300
------------
TOTAL INVESTMENTS -- 94.6%
(COST $359,252,994)................ 451,601,300
OTHER ASSETS LESS
LIABILITIES -- 5.4%................ 25,829,874
------------
NET ASSETS -- 100.0%................. $477,431,174
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell NLG 1,250,855 $ 613,375 $ 614,982 $ 1,607
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 0.2% of net assets.
See Notes to Financial Statements.
64
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
FOREIGN BONDS -- 85.4%
AUSTRALIA -- 2.1%
Australian Government
8.75%, 08/15/08................. 2,200 $ 1,692,880
Federal National Mtge. Assoc.
Global Bond
6.375%, 08/15/07................ 2,000 1,278,749
------------
2,971,629
------------
CANADA -- 3.6%
Canadian Government
7.00%, 12/01/06................. 1,500 1,134,991
8.00%, 06/01/23................. 3,185 2,893,604
8.00%, 06/01/27................. 780 720,041
Province of Ontario
8.25%, 12/01/05................. 200 158,306
Province of Quebec
7.75%, 03/30/06................. 200 153,877
------------
5,060,819
------------
DENMARK -- 1.3%
Nykredit
6.00%, 10/01/29................. 12,975 1,831,060
------------
EUROPEAN CURRENCY UNIT -- 2.2%
European Bank Reconstruction &
Development
6.00%, 05/06/99................. 970 1,080,381
French Treasury Bill
4.50%, 07/12/02................. 1,792 1,973,606
------------
3,053,987
------------
FRANCE -- 10.7%
Caisse Nationale Des Autoroutes
5.85%, 03/24/13................. 11,000 1,928,538
French O.A.T
5.50%, 04/25/04................. 7,000 1,215,674
6.50%, 10/25/06................. 6,500 1,202,053
5.50%, 10/25/07................. 18,000 3,120,660
6.00%, 10/25/25................. 7,000 1,265,690
French Treasury Bill
7.75%, 04/12/00................. 16,000 2,812,556
4.50%, 07/12/02................. 11,000 1,829,928
Hydro-Quebec Government Guaranteed
Note
5.875%, 03/13/08................ 5,000 864,720
Province of British Columbia
5.875%, 07/15/09................ 3,500 615,435
Province of Ontario
5.875%, 07/21/09................ 1,400 245,740
------------
15,100,994
------------
GERMANY -- 21.4%
Bank Nederlandse Gemeenten
6.25%, 08/10/00................. 1,000 574,229
5.25%, 10/01/01................. 4,300 2,446,254
Colt Telecom Group PLC Sr. Notes
8.875%, 11/30/07................ 600 366,268
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
Federal National Mtge. Assoc.
Global Bond
5.00%, 02/16/01................. 3,500 $ 1,973,735
Federal Republic of Germany
7.25%, 10/21/02................. 1,960 1,206,602
7.50%, 11/11/04................. 2,250 1,442,487
6.875%, 05/12/05................ 3,600 2,251,907
6.50%, 07/04/27................. 3,500 2,262,843
5.625%, 01/04/28................ 3,200 1,840,191
Federal Republic of Germany
Principal Strip [ZCB]
5.499%, 07/04/07................ 8,500 3,080,250
6.179%, 07/04/27................ 8,400 972,615
Ford Motor Credit Corp. Global
Bonds
5.25%, 06/16/08................. 1,400 773,671
Hydro-Quebec Government Guaranteed
Note
5.375%, 03/18/08................ 1,300 727,862
Institut Credito de Oficial
Government Guaranteed
5.00%, 12/18/08................. 1,400 776,460
Inter-America Development Bank
7.00%, 06/08/05................. 4,500 2,805,909
KFW International Finance, Inc.
6.75%, 06/20/05................. 4,500 2,779,732
Minnesota Mining &
Manufacturing Co.
5.00%, 10/15/01................. 900 507,740
Sunamerica Institutional Funding
5.125%, 04/15/08................ 2,800 1,564,273
Tennessee Valley Authority Global
Bond
6.375%, 09/18/06................ 3,000 1,820,953
------------
30,173,981
------------
GREECE -- 4.7%
Greek Government
9.20%, 03/21/02................. 500,000 1,632,542
8.90%, 03/21/04................. 1,130,000 3,767,532
8.60%, 03/26/08................. 350,000 1,213,520
------------
6,613,594
------------
HUNGARY -- 0.1%
Hungarian Government
16.00%, 02/12/01................ 45,000 206,378
------------
ITALY -- 8.2%
Italian Government
9.50%, 02/01/01................. 6,150,000 3,874,650
8.25%, 07/01/01................. 3,715,000 2,305,847
9.00%, 10/01/03................. 1,880,000 1,263,557
8.75%, 07/01/06................. 2,895,000 2,031,899
7.25%, 11/01/26................. 3,000,000 2,097,494
------------
11,573,447
------------
</TABLE>
65
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
JAPAN -- 7.3%
Asian Development Bank
3.125%, 06/29/05................ 200,000 $ 1,592,391
Central Bank of Tunisia
4.95%, 09/27/11................. 65,000 512,258
European Investment Bank
4.625%, 02/26/03................ 80,000 668,660
3.00%, 09/20/06................. 50,000 400,349
Export-Import Bank of Japan
4.375%, 10/01/03................ 360,000 3,002,486
International Bank Reconstruction
& Development Global Bond
4.75%, 12/20/04................. 260,000 2,269,157
Korea Industrial Leasing
2.20%, 08/07/02................. 70,000 419,894
Republic of Austria
4.50%, 09/28/05................. 100,000 870,951
Republic of Italy
3.75%, 06/08/05................. 70,000 580,664
------------
10,316,810
------------
NETHERLANDS -- 1.7%
Netherlands Government
7.50%, 11/15/99................. 1,950 1,002,215
9.00%, 01/15/01................. 2,500 1,367,846
------------
2,370,061
------------
PHILIPPINES -- 0.1%
Philippines Government
12.50%, 04/25/01................ 8,000 166,476
------------
POLAND -- 0.6%
Government of Poland
14.00%, 02/12/00................ 3,000 797,099
------------
PORTUGAL -- 0.8%
European Investment Bank
5.25%, 03/23/02................. 200,000 1,107,081
------------
RUSSIA -- 1.1%
GKO Pass-Through Notes
19.00%, 07/01/98................ 4,060,539 649,929
47.372%, 11/18/98............... 3,700 452,525
33.729%, 03/24/99............... 5,021 510,519
------------
1,612,973
------------
SOUTH AFRICA -- 1.1%
Republic of South Africa
13.00%, 08/31/10................ 10,000 1,497,250
------------
SPAIN -- 2.8%
Spanish Government
10.90%, 08/30/03................ 341,000 2,856,145
10.00%, 02/28/05................ 136,000 1,147,769
------------
4,003,914
------------
SWEDEN -- 1.7%
Swedish Government
5.50%, 04/12/02................. 19,000 2,464,352
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000) VALUE
--------- -----
<S> <C> <C>
UNITED KINGDOM -- 13.9%
Alliance & Leicester BLD
8.75%, 12/07/06................. 1,500 $ 2,788,793
Annington Finance
7.75%, 10/02/11................. 500 948,961
Bank of Scotland
8.375%, 12/29/49................ 450 802,914
Federal National Mtge. Assoc.
Global Bond
6.875%, 06/07/02................ 990 1,651,817
Guaranteed Export Finance Corp.
10.625%, 09/15/01............... 1,550 2,831,865
Halifax Building Society
8.75%, 07/10/06................. 600 1,120,608
9.375%, 05/15/21................ 840 1,845,655
National Power Co. PLC
8.375%, 08/02/06................ 870 1,569,539
Republic of Austria
9.00%, 07/22/04................. 660 1,231,373
Swiss Bank Corp. Jersey
8.75%, 12/18/25................. 520 1,129,534
United Kingdom Treasury
8.00%, 06/07/21................. 1,690 3,667,461
------------
19,588,520
------------
TOTAL FOREIGN BONDS
(COST $121,440,697)............................ 120,510,425
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
SOVEREIGN ISSUES -- 8.3%
ARGENTINA -- 0.8%
Republic of Argentina Debs. [FRB,
BRB]
6.625%, 03/31/05.................. $ 436 385,795
Republic of Argentina Unsub. Debs.
[FRB, BRB]
11.375%, 01/30/17................. 250 265,625
Republic of Argentina, Par
Government Guaranteed Bond [FRB,
BRB]
5.75%, 03/31/23................... 575 425,859
------------
1,077,279
------------
BRAZIL -- 1.3%
Republic of Brazil Debs., EI Bond
[FRB, BRB]
6.625%, 04/15/06.................. 49 39,937
Republic of Brazil Debs., IDU Bond
[FRB, BRB]
6.875%, 01/01/01.................. 363 344,330
Republic of Brazil Capitalization
Z-Bond [FRB, BRB]
5.00%, 04/15/14................... 1,247 918,270
Republic of Brazil Disc. Bond [FRN,
BRB]
6.688%, 04/15/12.................. 200 139,500
</TABLE>
66
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Republic of Brazil Global Bond
10.125%, 05/15/27................. $ 250 $ 215,781
Republic of Brazil New Money Bond
[FRB, BRB]
6.688%, 04/15/09.................. 155 117,180
------------
1,774,998
------------
BULGARIA -- 1.1%
National Republic of Bulgaria Debs.
[FRN, BRB]
6.563%, 07/28/11.................. 1,025 777,078
2.25%, 07/28/12................... 1,270 789,781
------------
1,566,859
------------
KOREA -- 0.7%
Republic of Korea
8.875%, 04/15/08.................. 850 781,469
Samsung Electronics America 144A
9.75%, 05/01/03................... 250 230,625
------------
1,012,094
------------
MEXICO -- 1.3%
Banco Nacional de Comercio Exterier
Debs.
7.25%, 02/02/04................... 120 112,275
United Mexican States [BRB]
6.25%, 12/31/19................... 500 412,244
United Mexican States Global Bond
9.875%, 01/15/07.................. 100 104,125
11.375%, 09/15/16................. 1,125 1,260,000
------------
1,888,644
------------
POLAND -- 0.6%
Government of Poland PDI [STEP, BRB]
4.00%, 10/27/14................... 375 339,375
Government of Poland REG -- PAR
[STEP, BRB]
3.00%, 10/27/24................... 250 166,250
Poland Communications, Inc. Sr.
Notes
9.875%, 11/01/03.................. 300 292,500
------------
798,125
------------
RUSSIA -- 1.5%
City of Moscow Unsub. Debs.
9.50%, 05/31/00................... 100 87,750
Russia Interest Note -- US [FRN]
6.625%, 12/15/15.................. 1,540 856,390
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Russia Ministry of Finance Unsub.
Debs.
10.00%, 06/26/07.................. $ 330 $ 251,212
Russia Principal Loans [FRN]
3.313%, 12/15/20.................. 1,800 857,250
------------
2,052,602
------------
SOUTH AFRICA -- 0.2%
Ivory Coast [FLIRB]
2.00%, 03/29/18................... 1,000 321,250
------------
VENEZUELA -- 0.8%
Republic of Venezuela Debs. [FRN,
BRB]
6.625%, 12/18/07.................. 1,357 1,127,379
------------
TOTAL SOVEREIGN ISSUES
(COST $12,038,925)............................ 11,619,230
------------
TOTAL INVESTMENTS -- 93.7%
(COST $133,479,622)........................... 132,129,655
OTHER ASSETS LESS LIABILITIES -- 6.3%........... 8,943,858
------------
NET ASSETS -- 100.0%............................ $141,073,513
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy CAD 2,460,000 $ 1,673,469 $ 1,673,925 $ 456
07/98 Buy DEM 2,661,000 1,500,000 1,474,957 (25,043)
07/98 Buy JPY 1,082,541,250 7,776,877 7,831,874 54,997
----------- ----------- --------
$10,950,346 $10,980,756 $ 30,410
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE APPRECIATION
MONTH TYPE RECEIVE FOR (DEPRECIATION)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy CAD 740,854 AUD 795,334 $ 11,000
07/98 Buy CAD 407,322 DEM 500,000 (74)
07/98 Buy CAD 855,750 GBP 350,000 (1,037)
09/98 Buy CAD 2,245,023 ZAR 8,683,750 122,154
07/98 Buy DEM 3,288,783 AUD 3,088,059 (90,556)
07/98 Buy DEM 3,000,000 GBP 1,034,060 (61,576)
07/98 Buy JPY 183,585,000 NZD 2,500,000 30,574
07/98 Buy JPY 525,966,238 GBP 2,271,011 20,099
07/98 Buy NZD 2,500,000 JPY 176,500,000 20,464
--------
$ 51,048
========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
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 year, these securities
amounted to 0.2% of net assets.
See Notes to Financial Statements.
67
<PAGE>
NEUBERGER&BERMAN MID-CAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 93.9%
ADVERTISING -- 1.4%
Outdoor Systems, Inc.* ........... 106,850 $ 2,991,800
------------
AIRLINES -- 2.3%
Southwest Airlines Co. ........... 92,600 2,743,275
US Airways Group, Inc.* .......... 29,000 2,298,250
------------
5,041,525
------------
AUTOMOTIVE PARTS -- 1.6%
Hayes Lemmerz International,
Inc.* .......................... 84,700 3,366,825
------------
BROADCASTING -- 3.1%
Capstar Broadcasting Corp.
Cl-A* .......................... 94,100 2,364,262
Chancellor Media Corp.* .......... 90,000 4,469,062
------------
6,833,324
------------
BUSINESS SERVICES -- 3.1%
Robert Half International,
Inc.* .......................... 55,000 3,073,125
Staff Leasing, Inc.* ............. 75,300 2,221,350
StaffMark, Inc.* ................. 41,600 1,523,600
------------
6,818,075
------------
CHEMICALS -- 0.4%
Cytec Industries, Inc.* .......... 20,400 902,700
------------
CLOTHING & APPAREL -- 0.9%
Abercrombie & Fitch Co. Cl-A* .... 43,300 1,905,200
------------
COMPUTER SERVICES & SOFTWARE -- 15.2%
BMC Software, Inc.* .............. 56,400 2,929,275
Cadence Design Systems, Inc.* .... 80,900 2,528,125
Cambridge Technology Partners,
Inc.* .......................... 34,800 1,900,950
CBT Group PLC [ADR]* ............. 63,700 3,407,950
Citrix Systems, Inc.* ............ 61,700 4,218,737
Edwards, (J.D.) & Co.* ........... 81,300 3,490,819
Excite, Inc.* .................... 12,700 1,187,450
Network Appliance, Inc.* ......... 85,500 3,329,156
Network Associates, Inc.* ........ 86,900 4,160,337
Saville Systems Ireland PLC
[ADR]* ......................... 54,000 2,706,750
Sterling Commerce, Inc.* ......... 65,000 3,152,500
------------
33,012,049
------------
CONSUMER PRODUCTS & SERVICES -- 2.0%
Estee Lauder Companies, Inc.
Cl-A ........................... 42,700 2,975,656
Rexall Sundown, Inc.* ............ 39,300 1,385,325
------------
4,360,981
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 4.3%
AES Corp.* ....................... 76,500 4,021,031
Analog Devices, Inc.* ............ 68,500 1,682,531
Sanmina Corp.* ................... 84,600 3,669,525
------------
9,373,087
------------
ENVIRONMENTAL SERVICES -- 2.1%
Eastern Environmental Services,
Inc.* .......................... 53,600 1,822,400
USA Waste Services, Inc.* ........ 57,500 2,839,062
------------
4,661,462
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 4.3%
GreenPoint Financial Corp. ....... 81,200 $ 3,055,150
Northern Trust Corp. ............. 41,500 3,164,375
State Street Boston Corp. ........ 45,900 3,190,050
------------
9,409,575
------------
FINANCIAL SERVICES -- 4.8%
Bear Stearns Companies, Inc. ..... 32,200 1,831,375
FINOVA Group, Inc. ............... 60,800 3,442,800
FIRSTPLUS Financial Group,
Inc.* .......................... 58,600 2,109,600
SunAmerica, Inc. ................. 54,900 3,153,319
------------
10,537,094
------------
FOOD -- 2.3%
American Italian Pasta Co.
Cl-A* .......................... 46,200 1,720,950
Suiza Foods Corp.* ............... 54,200 3,235,063
------------
4,956,013
------------
HEALTHCARE SERVICES -- 3.9%
Alternative Living Services,
Inc.* .......................... 78,300 2,114,100
Omnicare, Inc. ................... 89,300 3,404,563
Quintiles Transnational Corp.* ... 61,000 3,000,438
------------
8,519,101
------------
HOTELS & MOTELS -- 1.1%
Promus Hotel Corp.* .............. 59,277 2,282,165
------------
INSURANCE -- 3.1%
Ace Ltd. ......................... 53,500 2,086,500
EXEL Ltd. ........................ 33,500 2,606,719
The Equitable Companies, Inc. .... 27,700 2,075,769
------------
6,768,988
------------
MACHINERY & EQUIPMENT -- 1.1%
Cooper Cameron Corp.* ............ 47,600 2,427,600
------------
MEDICAL SUPPLIES & EQUIPMENT -- 2.9%
HBO & Co. ........................ 84,600 2,982,150
Sofamor Danek Group, Inc.* ....... 20,900 1,809,156
STERIS Corp.* .................... 24,300 1,545,328
------------
6,336,634
------------
OFFICE EQUIPMENT -- 4.1%
HON INDUSTRIES, Inc. ............. 107,400 3,651,600
Staples, Inc.* ................... 180,000 5,208,750
------------
8,860,350
------------
OIL & GAS -- 2.0%
BJ Services Co.* ................. 71,700 2,083,781
Noble Drilling Corp.* ............ 97,400 2,343,688
------------
4,427,469
------------
PERSONAL SERVICES -- 1.4%
Sylvan Learning Systems, Inc.* ... 95,800 3,137,450
------------
PHARMACEUTICALS -- 5.6%
Biogen, Inc.* .................... 62,500 3,062,500
Cardinal Health, Inc. ............ 30,600 2,868,750
Elan Corp. PLC [ADR]* ............ 59,200 3,807,300
Watson Pharmaceuticals, Inc.*..... 51,700 2,413,744
------------
12,152,294
------------
</TABLE>
68
<PAGE>
NEUBERGER&BERMAN MID-CAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PRINTING & PUBLISHING -- 0.7%
Valassis Communications, Inc.* ... 39,900 $ 1,538,644
------------
RESTAURANTS -- 3.0%
Brinker International, Inc.* ..... 125,500 2,415,875
CKE Restaurants, Inc. ............ 101,700 4,195,125
------------
6,611,000
------------
RETAIL & MERCHANDISING -- 7.6%
Costco Companies, Inc.* .......... 54,500 3,436,906
General Nutrition Companies,
Inc.* .......................... 105,800 3,293,025
Linens 'n Things, Inc.* .......... 111,900 3,419,944
PETsMART, Inc.* .................. 152,400 1,524,000
TJX Companies, Inc. .............. 197,400 4,762,275
------------
16,436,150
------------
TELECOMMUNICATIONS -- 8.5%
Advanced Fibre Communications,
Inc.* .......................... 53,900 2,159,369
CIENA Corp.* ..................... 48,000 3,342,000
Comcast Corp. Cl-A ............... 51,000 2,070,281
ICG Communications, Inc.* ........ 37,900 1,385,719
Intermedia Communications,
Inc.* .......................... 36,700 1,539,106
International Network
Services* ...................... 37,900 1,553,900
NEXTLINK Communications, Inc.
Cl-A* .......................... 58,400 2,211,900
RSL Communications Ltd. Cl-A* .... 95,900 2,877,000
SmarTalk TeleServices, Inc.* ..... 87,600 1,275,675
------------
18,414,950
------------
TRANSPORTATION -- 1.1%
Avis Rent A Car, Inc.* ........... 100,300 2,482,425
------------
TOTAL COMMON STOCK
(COST $198,788,109)................. 204,564,930
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
COMMERCIAL PAPER -- 6.0%
Bell Atlantic Network Funding
5.56%, 07/28/98.................. $2,000 $ 1,991,660
Goldman, Sachs & Co.
5.60%, 07/02/98.................. 3,000 2,999,533
Koch Industries, Inc.+
5.60%, 07/01/98.................. 3,000 3,000,000
Merrill Lynch & Co.
5.82%, 07/06/98.................. 4,000 3,996,767
Met Life Funding Corp.
5.53%, 07/10/98.................. 1,000 998,618
------------
(COST $12,986,578)................. 12,986,578
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 3.6%
Temporary Investment Cash Fund ... 3,903,998 3,903,998
Temporary Investment Fund ........ 3,903,997 3,903,997
------------
(COST $7,807,995)................. 7,807,995
------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
TOTAL INVESTMENTS -- 103.5%
(COST $219,582,682).................. 225,359,503
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (3.5%)..................... (7,580,481)
------------
NET ASSETS -- 100.0%................... $217,779,022
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
+ 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
1.4% of net assets.
See Notes to Financial Statements.
69
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FOREIGN STOCK -- 81.9%
AUSTRIA -- 0.6%
KTM -- Motorradholding AG........ 11,250 $ 877,037
-----------
CANADA -- 2.4%
Cinar Films, Inc. Cl-B*.......... 117,450 2,290,275
Dorel Industries, Inc. Cl-B*..... 28,200 910,890
-----------
3,201,165
-----------
CHILE -- 0.8%
Compania Cervecerias Unidas SA
[ADR].......................... 33,575 709,272
Distribucion y Servicio D&S SA
[ADR]*......................... 23,300 349,500
-----------
1,058,772
-----------
DENMARK -- 2.0%
Kobenhavns Lufthavne AS.......... 16,950 2,056,201
Vestas Wind Systems AS 144A*..... 15,650 617,851
-----------
2,674,052
-----------
FINLAND -- 4.8%
KCI Konecranes International
PLC............................ 33,200 1,682,244
Raision Tehtaat Oy............... 258,500 4,692,736
-----------
6,374,980
-----------
FRANCE -- 7.3%
Altran Technologies SA........... 22,600 5,132,260
Coflexip SA [ADR]................ 28,850 1,763,456
Dassault Systemes SA............. 60,650 2,858,942
-----------
9,754,658
-----------
GERMANY -- 13.9%
Douglas Holding AG............... 30,725 1,625,589
Marschollek, Lautenschlaeger und
Partner AG Non-Voting Pfd...... 8,050 3,946,887
Porsche AG Pfd................... 1,500 4,346,188
Schmalbach Lubeca AG............. 14,935 3,681,975
Schwarz Pharma AG................ 33,750 2,627,034
Sixt AG.......................... 9,075 1,395,164
Turbon International AG.......... 48,775 1,068,709
-----------
18,691,546
-----------
HONG KONG -- 2.4%
VTech Holdings Ltd............... 854,000 3,179,666
-----------
IRELAND -- 1.3%
Ryanair Holdings PLC [ADR]*...... 47,325 1,685,953
-----------
ISRAEL -- 0.5%
NICE Systems Ltd. [ADR]*......... 18,000 675,000
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
ITALY -- 3.0%
Bulgari SPA...................... 338,325 $ 1,773,896
Gruppo Editoriale L'Espresso
SPA............................ 71,100 589,983
Industrie Natuzzi SPA [ADR]...... 65,775 1,710,150
-----------
4,074,029
-----------
JAPAN -- 2.2%
Doutor Coffee Co. Ltd. .......... 35,000 892,748
Fuji Soft ABC, Inc............... 24,500 833,231
Meitec........................... 10,000 345,859
Nippon System Development........ 38,000 903,556
-----------
2,975,394
-----------
MALAYSIA -- 0.0%
Kentucky Fried Chicken Holdings
Warrants*...................... 21,333 1,594
-----------
MEXICO -- 1.9%
Grupo Iusacell SA [ADR]*......... 106,275 1,461,281
Grupo Posadas SA Cl-A*........... 1,750,325 1,059,618
-----------
2,520,899
-----------
NETHERLANDS -- 6.4%
Beter Bed Holding NV............. 21,700 789,393
Brunel International NV.......... 31,025 1,288,756
Ceteco Holding NV................ 5,675 308,269
Hunter Douglas NV................ 41,700 2,265,168
IHC Caland NV.................... 22,925 1,290,378
Nutreco Holding NV............... 37,575 1,315,167
Toolex International NV*......... 74,250 1,383,368
-----------
8,640,499
-----------
NORWAY -- 2.9%
Kverneland AS.................... 17,150 446,991
Narvesen ASA..................... 16,000 333,614
Petroleum Geo-Services [ADR]*.... 38,250 1,166,625
Tomra Systems ASA................ 67,000 2,008,200
-----------
3,955,430
-----------
SPAIN -- 5.0%
Tele Pizza SA*................... 627,500 6,660,705
-----------
SWEDEN -- 3.3%
Haldex AB........................ 49,410 892,174
NetCom Systems AB Cl-B*.......... 66,600 2,551,276
Ortivus AB Cl-B*................. 50,200 786,839
Semcom AB........................ 21,000 206,710
-----------
4,436,999
-----------
</TABLE>
70
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
UNITED KINGDOM -- 21.2%
British-Borneo Petroleum
Syndicate PLC.................. 271,023 $ 1,349,824
BTG PLC.......................... 77,050 1,073,460
Cairn Energy PLC*................ 212,575 968,281
Capital Radio PLC................ 131,650 1,556,279
Eidos PLC [ADR]*................. 47,175 630,966
Energis PLC*..................... 94,575 1,439,912
Flextech PLC*.................... 198,150 1,826,641
ICON PLC [ADR]................... 13,375 337,719
JBA Holdings PLC................. 197,450 2,009,619
Misys PLC........................ 36,142 2,055,729
Parity PLC....................... 213,800 2,802,081
PizzaExpress PLC................. 286,150 4,091,677
Psion PLC........................ 324,400 3,518,203
Select Appointments Holdings
PLC............................ 127,475 1,807,885
Smallworldwide PLC [ADR]*........ 23,725 690,991
Virgin Express Holdings PLC
[ADR]*......................... 32,150 415,941
Wetherspoon, (J.D.) PLC.......... 378,400 1,846,731
-----------
28,421,939
-----------
TOTAL FOREIGN STOCK
(COST $76,459,789)................. 109,860,317
-----------
COMMON STOCK -- 3.9%
CLOTHING & APPAREL -- 0.9%
Tefron Ltd.*..................... 55,450 1,219,900
-----------
COMPUTER SERVICES & SOFTWARE -- 0.2%
New Dimension Software Ltd.*..... 9,500 318,844
-----------
ENTERTAINMENT & LEISURE -- 0.7%
Metromedia International Group,
Inc.*.......................... 75,225 897,998
-----------
EQUIPMENT SERVICES -- 0.9%
Rofin-Sinar Technologies,
Inc.*.......................... 64,975 1,153,306
-----------
TELECOMMUNICATIONS -- 1.2%
Global TeleSystems Group,
Inc.*.......................... 32,500 1,584,375
-----------
TOTAL COMMON STOCK
(COST $4,669,387).................. 5,174,423
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
COMMERCIAL PAPER -- 13.9%
American Express Credit Corp.
5.95%, 07/02/98................... $6,268 $ 6,266,964
Merrill Lynch & Co.
6.00%, 07/01/98................... 5,175 5,175,000
PHH Corp.
6.45%, 07/01/98................... 1,000 1,000,000
Prudential Funding Corp.
5.50%, 07/01/98................... 6,209 6,209,000
------------
(COST $18,650,964).................. 18,650,964
------------
TOTAL INVESTMENTS -- 99.7%
(COST $99,780,140)............................ 133,685,704
OTHER ASSETS LESS LIABILITIES -- 0.3%........... 376,210
------------
NET ASSETS -- 100.0%............................ $134,061,914
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy ATS 941,371 $74,197 $ 74,130 $(67)
07/98 Buy GBP 123,834 206,611 206,572 (39)
07/98 Buy MXP 414,123 46,056 46,072 16
07/98 Buy NOK 1,296,004 169,457 168,893 (564)
-------- -------- -----
$496,321 $495,667 $(654)
======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell GBP 668,194 $1,113,364 $1,114,810 $1,446
========== ========== ======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 0.5% of net assets.
See Notes to Financial Statements.
71
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 81.0%
BUILDING & REAL ESTATE -- 4.0%
Apartment Investment & Management
Co. Cl-A [REIT]................. 10,700 $ 422,650
Camden Property Trust............. 20,600 612,850
Equity Office Properties Trust
[REIT].......................... 15,735 446,481
Post Properties, Inc. [REIT]...... 16,000 616,000
Security Capital Group, Inc.
Warrants*....................... 1,804 620
Security Capital Pacific Trust
[REIT].......................... 25,285 568,912
United Dominion Realty Trust...... 50,000 693,750
Weeks Corp. ...................... 21,000 664,125
------------
4,025,388
------------
CHEMICALS -- 3.2%
Great Lakes Chemical Corp. ....... 30,300 1,194,956
Hercules, Inc. ................... 16,000 658,000
Millennium Chemicals, Inc. ....... 30,500 1,033,187
Octel Corp. ...................... 15,575 309,553
------------
3,195,696
------------
DIVERSIFIED METALS -- 3.9%
Allegheny Teledyne, Inc. ......... 25,000 571,875
Nucor Corp. ...................... 28,500 1,311,000
Reynolds Metals Co. .............. 35,300 1,974,594
------------
3,857,469
------------
DIVERSIFIED RESOURCES -- 4.6%
Burlington Northern Santa Fe
Corp. .......................... 10,800 1,060,425
IMC Global, Inc. ................. 15,300 460,912
Imperial Holly Corp. ............. 120,000 1,087,500
Penn Virginia Corp. .............. 25,700 664,987
Waste Management, Inc. ........... 30,900 1,081,500
Western Water Co.*................ 28,000 266,000
------------
4,621,324
------------
ENERGY SERVICES -- 10.6%
BJ Services Co.*.................. 27,000 784,687
Camco International, Inc. ........ 21,600 1,682,100
Carbo Ceramics, Inc. ............. 30,750 1,049,344
Coflexip SA [ADR]................. 15,600 953,550
Cooper Cameron Corp.*............. 22,800 1,162,800
Halliburton Co. .................. 23,600 1,051,675
Hanover Compressor Co.*........... 37,400 1,012,137
McDermott International, Inc. .... 34,300 1,181,206
Smith International, Inc.*........ 11,800 410,788
Western Atlas, Inc.*.............. 16,000 1,358,000
------------
10,646,287
------------
FOREST PRODUCTS -- 8.3%
Asia Pulp & Paper Co. Ltd.
[ADR]*.......................... 35,000 393,750
Champion International Corp. ..... 9,000 442,688
Domtar, Inc. ..................... 232,300 1,568,025
Fort James Corp. ................. 25,100 1,116,950
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Georgia Pacific Group............. 20,300 $ 1,196,431
Jefferson Smurfit Corp.*.......... 90,600 1,424,119
Kimberly-Clark Corp. ............. 19,700 903,738
Louisiana Pacific Corp. .......... 73,000 1,332,250
------------
8,377,951
------------
INTEGRATED PETROLEUM -- 21.7%
Amerada Hess Corp. ............... 54,000 2,932,875
Atlantic Richfield Co. ........... 13,000 1,015,625
British Petroleum Co. PLC [ADR]... 25,600 2,259,200
Chevron Corp. .................... 7,000 581,438
Exxon Corp. ...................... 9,000 641,813
Mobil Corp. ...................... 49,200 3,769,950
Petroleo Brasileiro SA [ADR]
144A............................ 58,600 1,089,304
Royal Dutch Petroleum Co. ........ 40,000 2,192,500
Societe Nationale Elf Aquitaine SA
[ADR]........................... 14,500 1,029,500
Texaco, Inc. ..................... 22,000 1,313,125
Total SA [ADR].................... 38,000 2,484,250
USX-Marathon Group................ 73,500 2,521,969
------------
21,831,549
------------
MISCELLANEOUS ENERGY -- 2.0%
Niagara Mohawk Power Corp.*....... 137,000 2,046,438
------------
NON-FERROUS METALS -- 2.8%
Inco Ltd. ........................ 137,800 1,877,525
Phelps Dodge Corp. ............... 16,600 949,313
------------
2,826,838
------------
OIL & GAS -- 1.8%
Burlington Resources, Inc. ....... 19,200 826,800
Union Pacific Resources Group,
Inc. ........................... 53,000 930,813
------------
1,757,613
------------
PETROLEUM EXPLORATION & PRODUCTION -- 7.2%
Barrett Resources Corp.*.......... 15,100 565,306
EEX Corp.*........................ 202,000 1,893,750
Noble Affiliates, Inc. ........... 5,400 205,200
Ocean Energy, Inc. ............... 81,180 1,588,084
Pioneer Natural Resources Co. .... 46,000 1,098,250
Rutherford-Moran Oil Corp.*....... 35,300 710,413
Santa Fe Energy Resources,
Inc.*........................... 111,100 1,194,325
------------
7,255,328
------------
PRECIOUS METALS -- 10.9%
Battle Mountain Gold Co. ......... 272,000 1,615,000
Cambior, Inc. .................... 140,400 824,850
Canyon Resources Corp.*........... 368,400 276,300
Dayton Mining Corp.*.............. 49,700 34,169
Getchell Gold Corp. .............. 48,500 727,500
Gold Fields Ltd. [ADR]*........... 61,698 261,871
Gold Fields of South Africa Ltd.
[ADR]........................... 24,300 280,969
Homestake Mining Co. ............. 163,700 1,698,388
Newmont Mining Corp. ............. 116,224 2,745,792
</TABLE>
72
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Placer Dome, Inc. ................ 147,300 $ 1,730,775
TVX Gold, Inc.*................... 260,900 799,006
------------
10,994,620
------------
TOTAL COMMON STOCK
(COST $79,751,291).................. 81,436,501
------------
PREFERRED STOCK -- 1.2%
BUILDING & REAL ESTATE -- 1.1%
Rouse Co. $3.00 Cl-B.............. 22,000 1,094,500
------------
PRECIOUS METALS -- 0.1%
Amax Gold, Inc. $3.75 Cl-B........ 1,700 75,119
------------
TOTAL PREFERRED STOCK
(COST $1,134,004)................... 1,169,619
------------
FOREIGN STOCK -- 15.1%
BUILDING & REAL ESTATE -- 1.2%
Security Capital U.S. Realty --
(NLG)*.......................... 60,000 798,000
Sun International -- (ZAR)........ 1,150,000 388,539
------------
1,186,539
------------
DIVERSIFIED METALS -- 2.9%
AVMIN Ltd. -- (ZAR)............... 887,800 527,553
Lonrho PLC -- (GBP)............... 298,559 1,404,771
Rio Tinto PLC -- (GBP)............ 87,000 979,828
------------
2,912,152
------------
DIVERSIFIED RESOURCES -- 0.3%
Lonrho Africa PLC -- (GBP)........ 229,759 281,764
------------
FOREST PRODUCTS -- 1.7%
Macmillan Bloedel Ltd. -- (CAD)... 164,000 1,750,921
------------
NON-FERROUS METALS -- 1.3%
Bougainville Copper
Ltd. -- (AUD)*.................. 882,542 207,675
WMC Ltd. -- (AUD)................. 358,936 1,080,235
------------
1,287,910
------------
PETROLEUM EXPLORATION & PRODUCTION -- 0.3%
Northstar Energy
Corp. -- (CAD)*................. 41,000 313,660
------------
PRECIOUS METALS -- 7.4%
Anglo American Platinum Corp.
Ltd. -- (ZAR)................... 50,139 549,058
Banro Resource Corp. -- (CAD)*.... 126,600 344,363
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Banro Resource Corp. Special --
(CAD)*.......................... 91,630 $ 249,242
Banro Resource Corp. Special
Warrants (CAD)*................. 75,000 163,205
Banro Resources Corp. Restricted
Warrants -- (CAD)*.............. 45,815 0
Gencor Ltd. -- (ZAR).............. 738,000 1,146,465
Gold Fields Ltd. -- (ZAR)*........ 125,570 532,978
Goldfields Ltd. -- (AUD)*......... 965,000 1,075,635
Normandy Mining Ltd. -- (AUD)..... 458,658 374,911
Prime Resources Group, Inc. --
(CAD)........................... 328,000 2,297,387
Samax -- (CAD)*................... 193,500 703,976
------------
7,437,220
------------
TOTAL FOREIGN STOCK
(COST $20,082,337).................. 15,170,166
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
---------
<S> <C> <C>
COMMERCIAL PAPER -- 1.8%
Diageo Capital Corp.+
5.51%, 07/28/98................. $ 1,300 1,294,628
Du Pont, (E.I.) de Nemours & Co.
5.52%, 07/20/98................. 490 488,572
------------
(COST $1,783,200)................. 1,783,200
------------
SHARES
---------
SHORT-TERM INVESTMENTS -- 0.3%
Temporary Investment Cash Fund
(COST $359,623)................... 359,623 359,623
------------
TOTAL INVESTMENTS -- 99.4%
(COST $103,110,455)................. 99,919,109
OTHER ASSETS LESS
LIABILITIES -- 0.6%................. 570,686
------------
NET ASSETS -- 100.0%.................. $100,489,795
============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
+ 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
1.3% of net assets.
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 1.1% of net assets.
See Notes to Financial Statements.
73
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 70.8%
FEDERAL HOME LOAN MORTGAGE CORP. -- 12.6%
8.50%, 01/01/25................ $13,824 $ 14,428,435
8.75%, 10/01/01................ 1,328 1,365,850
6.50%, 07/14/28 [TBA].......... 22,000 21,938,180
------------
37,732,465
------------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 26.6%
6.379%, 03/01/17 [VR].......... 2,349 2,340,675
6.988%, 05/01/25 [VR].......... 1,151 1,164,420
7.50%, 01/25/22-05/01/24....... 60,746 62,503,270
7.573%, 01/01/25 [VR].......... 352 359,330
8.00%, 11/25/23................ 3,488 3,590,586
6.50%, 08/13/28 [TBA].......... 10,000 9,953,100
------------
79,911,381
------------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 31.6%
6.875%, 01/20/26............... 6,545 6,667,609
7.00%, 07/20/17-11/20/26....... 23,087 23,579,637
7.375%, 05/20/24............... 2,542 2,594,763
8.00%, 01/15/25-11/15/25....... 7,061 7,321,311
6.50%, 07/21/28-09/21/28
[TBA]........................ 50,000 49,824,950
6.875%, 03/20/24 [VR].......... 4,998 5,095,275
------------
95,083,545
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (COST $211,183,613).... 212,727,391
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.7%
Merrill Lynch Mtge. Investors,
Inc. Cl-B [VR]
7.218%, 06/15/21............... 1,003 1,023,254
Resolution Trust Corp. [VR]
7.442%, 07/25/28............... 10,000 10,067,280
------------
(COST $11,168,389)............... 11,090,534
------------
CORPORATE OBLIGATIONS -- 30.8%
AUTOMOBILE MANUFACTURERS -- 1.7%
Ford Motor Credit Co.
5.964%, 03/21/01............... 5,000 5,041,549
------------
BUILDING MATERIALS -- 1.0%
Cemex SA Notes 144A
8.50%, 08/31/00................ 3,000 3,030,000
------------
CHEMICALS -- 1.7%
Imperial Chemical, Inc. Euro
Medium Term Notes [FRN]
5.75%, 12/05/98................ 5,000 5,006,525
------------
FINANCIAL SERVICES -- 14.1%
General Motors Acceptance Corp.
Notes
7.125%, 05/01/01............... 2,000 2,057,500
Household Finance Co. Notes
7.625%, 12/29/98............... 15,000 15,843,750
Household Finance Co. Medium Term
Sr. Notes
7.15%, 06/15/00................ 10,000 10,212,500
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
New England Educational Loan
Marketing Assoc. Medium Term
Notes [FRN]
5.857%, 06/11/01............... $ 5,000 $ 4,995,900
Presidential Life Corp. Sr. Notes
9.50%, 12/15/00................ 8,000 8,188,000
Salomon, Inc. Sr. Notes
7.50%, 02/01/03................ 1,000 1,046,250
------------
42,343,900
------------
FOOD -- 4.4%
RJR Nabisco, Inc. Medium Term
Notes
7.625%, 09/15/03............... 5,000 4,971,250
RJR Nabisco, Inc. Notes
8.625%, 12/01/02............... 8,000 8,257,520
------------
13,228,770
------------
OIL & GAS -- 1.4%
Gulf Canada Resources Ltd. Yankee
Sr. Sub. Debs.
9.25%, 01/15/04................ 3,000 3,142,500
Occidental Petroleum Corp. Sr.
Notes
6.40%, 04/01/03................ 1,000 1,002,500
------------
4,145,000
------------
TELECOMMUNICATIONS -- 4.3%
AT&T Capital Corp. Notes [FRN]
144A
6.05%, 04/01/99................ 8,000 8,005,920
TCI Communications, Inc. Sr.
Notes [FRN]
5.945%, 09/11/00............... 5,000 5,044,900
------------
13,050,820
------------
UTILITIES -- 2.2%
Cleveland Electric Illuminating
Co. Notes
7.625%, 08/01/02............... 2,100 2,177,490
Connecticut Lighting & Power Co.
Notes
7.25%, 07/01/99................ 4,482 4,483,255
------------
6,660,745
------------
TOTAL CORPORATE OBLIGATIONS (COST
$92,522,025)....................... 92,507,309
------------
U.S. TREASURY OBLIGATIONS -- 1.1%
U.S. TREASURY BILLS -- 0.0%
4.95%, 07/23/98................ 35 34,899
4.98%, 07/23/98................ 15 14,957
------------
49,856
------------
U.S. TREASURY NOTES -- 1.1%
6.25%, 06/30/02................ 3,300 3,382,962
------------
TOTAL U.S. TREASURY OBLIGATIONS (COST
$3,430,661)........................ 3,432,818
------------
</TABLE>
74
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
SOVEREIGN ISSUES -- 4.6%
ARGENTINA -- 3.2%
Republic of Argentina [FRB, BRB]
6.625%, 03/31/05............... $ 4,750 $ 4,197,812
8.726%, 04/10/05............... 4,000 4,010,000
Republic of Argentina Bote 10
[FRN, PIK]
5.719%, 04/01/00............... 1,607 1,358,223
------------
9,566,035
------------
BRAZIL -- 1.1%
Republic of Brazil-IDU Cl-A
[FRB, BRB]
6.875%, 01/01/01............... 3,500 3,322,714
------------
CANADA -- 0.3%
Hydro-Quebec Government
Guaranteed Notes
9.00%, 03/07/01................ 1,000 1,067,536
------------
TOTAL SOVEREIGN ISSUES (COST
$13,917,118)....................... 13,956,285
------------
PRINCIPAL
IN LOCAL
CURRENCY
(000)
FOREIGN BONDS -- 1.7%
NEW ZEALAND
New Zealand Government 10.00%,
03/15/02 (COST $5,169,010)..... 8,900 5,076,122
------------
PAR
(000)
COMMERCIAL PAPER -- 15.1%
Abbott Laboratories, Inc.
5.55%, 07/28/98................ $ 7,500 7,468,781
5.51%, 07/16/98................ 3,600 3,591,735
Caisse D'amortissement de la
Dette Sociale
5.50%, 08/27/98................ 1,900 1,884,055
Coca-Cola Co.
5.49%, 09/01/98................ 10,000 9,905,277
Du Pont, (E.I.) de Nemours & Co.
5.49%, 07/10/98................ 800 798,939
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
Ford Motor Credit Co.
5.52%, 07/03/98................ $ 600 $ 599,816
5.69%, 07/10/98................ 2,900 2,895,875
KFW International Financial Corp.
5.61%, 07/14/98................ 7,400 7,385,009
Motorola, Inc.
5.49%, 07/24/98................ 1,600 1,594,388
5.49%, 09/24/98................ 100 98,689
5.50%, 09/24/98................ 2,200 2,170,758
National Rural Utilities
Cooperative Finance Corp.
5.50%, 07/28/98................ 1,100 1,095,462
5.50%, 09/03/98................ 1,500 1,484,188
5.49%, 09/10/98................ 800 791,275
5.50%, 09/17/98................ 600 592,837
New Center Asset Trust
5.52%, 07/29/98................ 2,500 2,489,267
Procter & Gamble Co.
5.47%, 07/01/98................ 400 400,000
------------
(COST $45,247,796)............... 45,246,351
------------
REPURCHASE AGREEMENTS -- 4.7%
Morgan Stanley Group, 5.65%,
dated 06/30/98, maturing
07/01/98, repurchase price
$14,202,229 (Collateralized by
U.S. Treasury Notes, par value
$13,820,000, market value
$14,498,419, due 02/29/00)
(COST $14,200,000)............. 14,200 14,200,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.5%
Temporary Investment Cash Fund... 779,067 779,067
Temporary Investment Fund........ 779,066 779,066
------------
(COST $1,558,133)................ 1,558,133
------------
TOTAL INVESTMENTS -- 133.0% (COST
$398,396,745)...................... 399,794,943
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (33.0%).................. (99,112,827)
------------
NET ASSETS -- 100.0%................. $300,682,116
============
</TABLE>
75
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
Interest rate swap agreement outstanding at June 30, 1998:
<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 Notes with a spread
of:
36.50..................... 06/02 $7,000 $49,792
====== =======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 3.7% of net assets.
See Notes to Financial Statements.
76
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 100.3%
BUSINESS SERVICES -- 1.6%
Robert Half International,
Inc.* .......................... 83,500 $ 4,665,562
------------
COMPUTER HARDWARE -- 5.9%
3Com Corp.* ...................... 115,700 3,550,544
Compaq Computer Corp. ............ 271,600 7,706,650
Seagate Technology, Inc.* ........ 232,500 5,536,406
------------
16,793,600
------------
COMPUTER SERVICES & SOFTWARE -- 9.2%
Cadence Design Systems, Inc.* .... 65,800 2,056,250
CompUSA, Inc.* ................... 243,052 4,390,127
Electronic Arts, Inc.* ........... 68,600 3,704,400
Ingram Micro, Inc. Cl-A* ......... 65,800 2,911,650
Microsoft Corp.* ................. 96,800 10,490,700
PeopleSoft, Inc.* ................ 61,500 2,890,500
------------
26,443,627
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 8.9%
Applied Materials, Inc.* ......... 237,900 7,018,050
General Electric Co. ............. 103,900 9,454,900
Texas Instruments, Inc. .......... 154,400 9,003,450
------------
25,476,400
------------
ENTERTAINMENT & LEISURE -- 2.1%
Time Warner, Inc. ................ 69,500 5,937,906
------------
FINANCIAL-BANK & TRUST -- 2.3%
Chase Manhattan Corp. ............ 88,600 6,689,300
------------
FINANCIAL SERVICES -- 12.9%
Ahmanson, (H.F.) & Co. ........... 124,300 8,825,300
Franklin Resources, Inc. ......... 103,500 5,589,000
Household International, Inc. .... 150,900 7,507,275
Merrill Lynch & Co., Inc. ........ 123,676 11,409,111
Providian Financial Corp. ........ 48,200 3,786,712
------------
37,117,398
------------
FOOD -- 2.7%
Kroger Co.* ...................... 35,000 1,500,625
Safeway, Inc.* ................... 153,400 6,241,463
------------
7,742,088
------------
HEALTHCARE SERVICES -- 9.1%
Health Management Associates, Inc.
Cl-A* .......................... 128,000 4,280,000
Omnicare, Inc. ................... 92,700 3,534,188
United Healthcare Corp. .......... 110,300 7,004,050
Universal Health Services,
Inc.* .......................... 76,200 4,448,175
Wellpoint Health Networks,
Inc.* .......................... 90,700 6,711,800
------------
25,978,213
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
INSURANCE -- 4.4%
The Equitable Companies, Inc. .... 77,100 $ 5,777,681
Travelers Group, Inc. ............ 111,450 6,756,656
------------
12,534,337
------------
MEDICAL SUPPLIES & EQUIPMENT -- 3.8%
HBO & Co. ........................ 305,400 10,765,350
------------
OFFICE EQUIPMENT -- 1.7%
Staples, Inc.* ................... 173,550 5,022,103
------------
PHARMACEUTICALS -- 12.1%
Cardinal Health, Inc. ............ 76,200 7,143,750
Lilly, (Eli) & Co. ............... 129,700 8,568,306
McKesson Corp. ................... 115,800 9,408,750
Merck & Co., Inc. ................ 71,900 9,616,625
------------
34,737,431
------------
RETAIL & MERCHANDISING -- 16.6%
Bed, Bath & Beyond, Inc.* ........ 23,200 1,202,050
Costco Companies, Inc.* .......... 114,300 7,208,044
CVS Corp. ........................ 201,100 7,830,331
Dayton-Hudson Corp. .............. 165,800 8,041,300
Gap, Inc. ........................ 145,250 8,951,031
Starbucks Corp.* ................. 116,200 6,209,438
Wal-Mart Stores, Inc.............. 56,000 3,402,000
Walgreen Co. ..................... 114,300 4,722,019
------------
47,566,213
------------
SEMICONDUCTORS -- 3.8%
Intel Corp. ...................... 147,500 10,933,438
------------
TELECOMMUNICATIONS -- 3.2%
ADC Telecommunications, Inc.* .... 81,000 2,959,031
Comcast Corp. Cl-A ............... 75,900 3,081,066
Cox Communications, Inc.* ........ 63,600 3,080,625
------------
9,120,722
------------
TOTAL COMMON STOCK
(COST $243,643,501)................. 287,523,688
------------
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash Fund.... 1,400,792 1,400,792
Temporary Investment Fund......... 1,400,792 1,400,792
------------
(COST $2,801,584)................. 2,801,584
------------
TOTAL INVESTMENTS -- 101.3%
(COST $246,445,085)................. 290,325,272
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (1.3%).................... (3,575,329)
------------
NET ASSETS -- 100.0%.................. $286,749,943
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
77
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FOREIGN STOCK -- 89.5%
ARGENTINA -- 0.8%
Disco SA [ADR].................... 10,885 $ 348,320
Nortel Inversora [ADR]*........... 38,625 960,797
Telecom Argentina Stet SA Cl-B
[ADR]........................... 11,550 344,334
Telefonica de Argentina SA Cl-B
[ADR]........................... 45,425 1,473,473
YPF SA [ADR]...................... 23,000 691,438
------------
3,818,362
------------
AUSTRALIA -- 0.0%
National Australia Bank Ltd. ..... 12,337 162,725
------------
AUSTRIA -- 0.8%
Bank Austria AG................... 38,410 3,124,156
Bank Austria AG Rights*........... 38,410 0
Erste Bank Der Oesterreichischen
Sparkassen AG 144A*............. 12,615 764,906
------------
3,889,062
------------
BRAZIL -- 1.1%
Companhia Cervejaria Brahma
[ADR]........................... 82,620 1,032,750
Companhia Energetica de Minas
Geras [ADR]..................... 3,824 118,371
Companhia Paranaense de Energia-
Copel........................... 69,900 646,575
Telebras SA [ADR]................. 31,555 3,445,412
Uniao de Bancos Brasileiros SA
[GDR]........................... 3,990 117,705
------------
5,360,813
------------
CANADA -- 0.9%
JDS Fitel, Inc. .................. 9,790 163,107
Newcourt Credit Group, Inc. ...... 89,330 4,393,919
------------
4,557,026
------------
CHILE -- 0.1%
Cia de Telecomunicaciones de Chile
SA [ADR]........................ 30,240 614,250
------------
DENMARK -- 0.8%
BG Bank AS........................ 9,609 595,135
Novo Nordisk AS Cl-B.............. 6,228 858,532
Ratin AS Cl-B..................... 7,076 1,497,099
SAS Danmark AS.................... 20,043 402,199
Unidanmark AS Cl-A................ 5,663 508,903
------------
3,861,868
------------
FINLAND -- 4.0%
Merita PLC Cl-A................... 251,062 1,656,516
Nokia Oyj Cl-A.................... 64,224 4,723,317
Nokia Corp. Cl-A [ADR]............ 26,685 1,936,330
Pohjola Insurance Co. ............ 28,383 1,412,301
Raision Tehtaat Oy................ 136,050 2,454,935
Sampo Insurance Co. Ltd. Cl-A..... 91,570 4,339,431
Tieto Corp. Cl-B.................. 45,936 3,491,366
------------
20,014,196
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FRANCE -- 10.1%
Alcatel Alsthom................... 18,278 $ 3,721,486
Alcatel Alsthom [ADR]*............ 6,285 255,721
Alstom............................ 46,688 1,536,696
AXA SA............................ 10,549 1,186,451
Atos SA*.......................... 4,952 1,187,622
Cap Gemini SA..................... 52,468 8,244,187
Castorama Dubois.................. 5,163 908,602
Chargeurs SA...................... 10,841 895,642
Cie des Signaux SA................ 2,058 198,106
Compagnie Francaise d'Etudes et de
Construction Technip............ 8,477 1,036,135
Credit Commercial de France....... 17,799 1,498,453
Dexia France SA................... 2,108 283,808
GrandVision*...................... 2,561 85,140
Groupe Danone..................... 9,017 2,486,150
Groupe des Assurances
Nationales*..................... 16,988 455,184
Lagardere S.C.A. ................. 1,698 70,689
Renault SA*....................... 101,110 5,751,167
Rhodia, Inc.*..................... 80,000 2,230,885
Rhone-Poulenc Cl-A................ 48,118 2,713,886
Sanofi SA......................... 12,339... 1,451,040
Societe Nationale Elf Aquitaine
SA.............................. 40,325 5,669,216
Synthelabo........................ 6,687 1,128,135
Total SA Cl-B..................... 29,456 3,829,358
Valeo SA.......................... 13,011 1,329,930
Vivendi........................... 11,459 2,446,824
------------
50,600,513
------------
GERMANY -- 10.6%
Allianz AG........................ 2,478 816,834
Allianz AG (New)*................. 72 23,534
BASF AG*.......................... 20,627... 977,052
Bayerische Motoren Werke AG....... 1,596 1,610,121
Bayerische Motoren Werke AG
(New)*.......................... 478 475,543
Deutsche Bank AG.................. 63,443 5,372,355
Deutsche Lufthansa AG............. 41,751 1,047,805
Deutsche Pfandbrief &
Hypothekenbank AG............... 26,600 2,122,070
Dresdner Bank AG.................. 14,326 772,242
Ergo Versicherungs Gruppe AG...... 15,579 2,796,406
Hoechst AG........................ 50,494 2,520,462
Hornbach Holdings AG Pfd. ........ 13,432 1,231,556
Mannesmann AG..................... 98,320 9,973,459
Marschollek, Lautenschlaeger und
Partner AG Non-Voting Pfd. ..... 6,909 3,387,459
Merck KGaA........................ 44,988 2,011,341
Muenchener Rueckversicherung AG... 3,651 1,810,300
Porsche AG Pfd. .................. 3,245 9,402,254
Schering AG....................... 25,144 2,962,903
Siemens AG........................ 25,706 1,563,696
Volkswagen AG..................... 2,499 2,402,046
------------
53,279,438
------------
</TABLE>
78
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
GREECE -- 0.6%
Hellenic Telecommunication
Organization SA 144A............ 43,898 $ 1,125,289
STET Hellas Telecommunications SA
[ADR]........................... 41,525 1,723,288
------------
2,848,577
------------
HONG KONG -- 0.6%
China Telecom Ltd. 144A........... 1,428,000 2,478,725
First Pacific Co. Ltd. ........... 1,448,860 607,698
------------
3,086,423
------------
IRELAND -- 1.5%
CBT Group PLC Co. [ADR]*.......... 52,810 2,825,335
Elan Corp. PLC [ADR]*............. 56,135 3,610,182
Saville Systems Ireland PLC
[ADR]*.......................... 24,365 1,221,296
------------
7,656,813
------------
ITALY -- 5.4%
Assicurazioni Generali............ 94,003 3,056,664
Banca Commerciale Italia NA....... 802,501 4,799,069
Banca di Roma*.................... 2,869,439 5,972,785
Banca Fideuram SPA................ 49,890 284,456
Credito Italiano SPA.............. 163,293 854,795
SNIA BPD SPA 144A................. 1,600,000 1,962,251
Telecom Italia Mobile SPA......... 1,237,548 7,567,802
Telecom Italia SPA................ 348,096 2,562,423
------------
27,060,245
------------
JAPAN -- 6.5%
Fujisawa Pharmaceutical Co.
Ltd. ........................... 99,000 925,907
Honda Motor Co. Ltd. ............. 51,000 1,815,326
Ito-Yokado Co. Ltd. .............. 8,000 376,410
Kao Corp. ........................ 67,000 1,033,109
Kirin Brewery Co. Ltd. ........... 281,000 2,652,376
Meitec............................ 73,900 2,555,895
Nippon Telegraph & Telephone
Corp. .......................... 11,940 9,893,719
Nomura Securities Co. Ltd. ....... 59,000 686,565
NTT Data Corp. ................... 330 1,191,267
Rohm Co. ......................... 11,000 1,129,445
Sony Corp. ....................... 93,800 8,076,592
Takeda Chemical Industries........ 91,000 2,419,497
------------
32,756,108
------------
KOREA -- 0.0%
Samsung Electronics Co. [GDR]
144A............................ 10,970 175,301
------------
MEXICO -- 1.6%
Cifra SA de CV Cl-C............... 70,900 97,836
Cifra V*.......................... 76,632 112,227
Coca-Cola Femsa SA [ADR].......... 25,555 444,018
Empresas La Moderna SA de CV
[ADR]........................... 14,665 329,963
Fomento Economico Mexicano SA de
CV UBD Units.................... 39,700 1,237,030
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Grupo Casa Autrey SA de CV
[ADR]........................... 7,302 $ 47,463
Grupo Televisa SA [GDR]*.......... 60,530 2,277,441
Kimberly-Clark de Mexico SA
Cl-A............................ 22,600 78,468
Panamerican Beverages, Inc.
Cl-A............................ 68,000 2,137,750
Telefonos de Mexico SA Cl-L
[ADR]........................... 23,590 1,133,794
------------
7,895,990
------------
NETHERLANDS -- 10.1%
AKZO Nobel NV..................... 27,105 6,025,347
ASM Lithography Holding NV*....... 7,360 213,900
Cap Gemini NV..................... 7,855 648,720
Getronics NV...................... 86,217 4,471,440
Getronics NV 144A................. 5,365 278,243
Hagemeyer NV...................... 28,082 1,214,822
ING Groep NV...................... 62,148 4,069,429
Koninklijke Ahold NV.............. 111,395 3,575,864
Koninklijke Ahrend Groep NV....... 26,768 873,748
Koninklijke Numico NV............. 8,595 269,146
Ordina NV (New)*.................. 125,925 145,473
Ordina NV*........................ 125,925 4,079,430
PolyGram NV....................... 6,992 356,780
Royal Philips Electronics NV...... 73,617 6,188,370
Royal Philips Electronics NV
[ADR]........................... 81,824 6,955,040
Simac Techniek NV................. 9,397 1,972,510
Wolters Kluwer NV................. 65,732 9,021,824
------------
50,360,086
------------
NORWAY -- 1.9%
Den Norske Bank ASA............... 97,078 508,570
Elektronisk Databehandling ASA.... 534,124 2,053,375
Merkantildata ASA................. 67,745 856,354
NCL Holdings ASA*................. 799,795 3,950,228
SAS Norge ASA Cl-B................ 21,301 363,643
Sparebanken ASA................... 53,213 1,525,614
Storebrand ASA.................... 51,944 460,308
------------
9,718,092
------------
PERU -- 0.4%
Millicom International Cellular
SA*............................. 47,349 2,071,519
------------
PORTUGAL -- 0.9%
Cimpor-Cimentos de Portugal SA.... 38,780 1,362,506
Portugal Telecom SA............... 32,932 1,745,367
Telecel-Comunicacaoes Pessoais
SA.............................. 8,051 1,429,584
------------
4,537,457
------------
RUSSIA -- 0.0%
LUKoil Holding [ADR].............. 2,485 83,248
Mosenergo [ADR] 144A*............. 2,460 12,241
------------
95,489
------------
SPAIN -- 1.6%
Banco Bilbao Vizcaya SA........... 4,892 251,486
Banco Central Hispanoamericano
SA.............................. 32,102 1,010,723
</TABLE>
79
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Corporacion Bancaria de Espana
SA.............................. 88,120 $ 1,980,095
Endesa SA......................... 45,009 986,382
Tabacalera SA Cl-A 144A........... 14,623 299,930
Telefonica SA..................... 36,276 1,680,037
Tele Pizza SA*.................... 185,540 1,969,446
------------
8,178,099
------------
SWEDEN -- 6.3%
Assa Abloy AB Cl-B................ 69,858 2,746,159
Astra AB Cl-A..................... 160,666 3,283,852
Electrolux AB Cl-B................ 377,465 6,484,392
Ericsson, (L.M.) Telephone Co.
[ADR]........................... 34,176 978,288
Ericsson, (L.M.) Telephone Co.
Cl-B............................ 78,776 2,301,558
Mandator AB....................... 8,515 333,128
Modern Times Group MTG AB*........ 195,854 2,554,100
Ortivus AB Cl-B*.................. 16,248 254,672
SAS Sverige AB.................... 26,790 480,375
Securitas AB Cl-B................. 213,323 10,445,537
Skandinaviska Enskilda Banken..... 96,797 1,656,787
------------
31,518,848
------------
SWITZERLAND -- 6.7%
Ares-Serono Group................. 465 646,851
Baloise Holding Ltd. ............. 144 117,911
Baloise Holding Rights*........... 288 235,631
Credit Suisse Group............... 7,618 1,695,054
Julius Baer Holdings AG Cl-B...... 219 685,092
Kuoni Reisen AG................... 1,290 6,404,032
Novartis AG....................... 2,530 4,209,967
Roche Holding AG.................. 48 471,358
Schweizerische
Lebensversicherungs-Und
Rentenanstalt................... 8,036 6,802,582
Sulzer AG......................... 133 104,958
UBS AG*........................... 22,505 8,368,101
Zurich
Versicherungs-Gesellschaft...... 5,892 3,760,165
------------
33,501,702
------------
UNITED KINGDOM -- 16.2%
Amvescap PLC...................... 234,278 2,286,726
Capita Group PLC.................. 254,217 2,186,553
COLT Telecom Group PLC*........... 98,136 3,933,856
Compass Group PLC................. 155,110 1,785,729
Diageo PLC........................ 80,184 949,889
ECsoft Group PLC [ADR]*........... 7,300 236,338
Electrocomponents PLC............. 354,121 2,856,768
Energis PLC*...................... 303,964 4,627,876
General Electric Co. PLC.......... 304,980 2,628,261
Hays PLC.......................... 79,014 1,326,260
ICON PLC [ADR].................... 19,435 490,734
Imperial Chemical Industries
PLC............................. 138,076 2,216,256
JBA Holdings PLC.................. 59,836 609,003
Lloyds TSB Group PLC.............. 380,572 5,314,826
Logica PLC........................ 149,892 4,845,593
Misys PLC......................... 60,998 3,469,520
National Westminster Bank PLC..... 176,357 3,151,439
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Rentokil Initial PLC.............. 1,395,324 $ 10,045,755
Royal & Sun Alliance Insurance
Group PLC....................... 139,446 1,441,365
Schroders PLC..................... 66,255 1,709,038
Select Appointments Holdings
PLC............................. 42,301 599,924
Select Appointments Holdings PLC
[ADR]........................... 147,630 4,355,085
SEMA Group PLC.................... 443,364 5,270,745
Siebe PLC......................... 351,666 7,035,198
Smith Industries PLC.............. 74,866 1,036,787
SmithKline Beecham PLC [ADR]...... 59,475 3,598,238
Standard Chartered PLC............ 98,780 1,122,388
Tomkins PLC....................... 19,348 104,998
Wetherspoon, (J.D.) PLC........... 2,490 12,152
Williams PLC...................... 127,463 824,105
Zeneca Group PLC.................. 24,414 1,047,699
------------
81,119,104
------------
TOTAL FOREIGN STOCK
(COST $370,115,751)................. 448,738,106
------------
COMMON STOCK -- 1.9%
CHEMICALS -- 0.0%
Solutia, Inc. .................... 650 18,647
------------
FINANCIAL-BANK & TRUST -- 0.2%
Royal Bank of Canada.............. 10,368 625,968
------------
FINANCIAL SERVICES -- 0.0%
Romanian Investment Fund**........ 163 132,438
------------
PHARMACEUTICALS -- 0.3%
Bristol-Meyers Squibb Co.......... 2,600 298,838
Pharmacia & Upjohn, Inc........... 22,460 1,035,968
------------
1,334,806
------------
TELECOMMUNICATIONS -- 1.4%
Cellular Communications
International, Inc.*............ 50,370 2,512,204
Clearnet Communications, Inc...... 78,955 868,505
Global TeleSystems Group, Inc.*... 76,673 3,737,809
------------
7,118,518
------------
TOTAL COMMON STOCK
(COST $7,394,724).................... 9,230,377
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 8.9%
FEDERAL MTGE. CORP. DISC.
NOTES -- 4.9%
5.42%, 08/31/98................... $25,000 24,766,641
FEDERAL NATIONAL MTGE. ASSOC. DISC.
NOTES -- 4.0%
5.38%, 09/09/98................... 20,000 19,787,789
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $44,561,184).................. 44,554,430
------------
</TABLE>
80
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
COMMERCIAL PAPER -- 3.0%
Household Finance Corp.
6.00%, 07/01/98
(COST $15,200,000)................ $15,200 $ 15,200,000
------------
TOTAL INVESTMENTS -- 103.3%
(COST $437,271,659)................. 517,722,913
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (3.3%).............. (16,428,869)
------------
NET ASSETS -- 100.0%.................. $501,294,044
============
</TABLE>
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy DEM 12,257,500 $ 6,931,885 $ 6,791,821 $(140,064)
10/98 Buy DEM 2,200,000 1,256,353 1,227,391 (28,962)
07/98 Buy FRF 55,249,995 9,211,807 9,151,953 (59,854)
08/98 Buy FRF 1,500,000 254,570 248,605 (5,965)
10/98 Buy FRF 500,000 85,196 83,183 (2,013)
07/98 Buy GBP 3,042,128 5,067,748 5,074,934 7,186
07/98 Buy JPY 1,271,290,794 9,042,759 9,163,528 120,769
10/98 Buy JPY 1,189,000,000 9,100,726 8,700,398 (400,328)
11/98 Buy JPY 175,000,000 1,324,344 1,288,109 (36,235)
07/98 Buy NLG 8,900,000 4,495,082 4,381,529 (113,553)
07/98 Buy SEK 18,924,090 2,393,195 2,373,015 (20,180)
10/98 Buy ZAR 1,750,000 335,012 285,802 (49,210)
----------- ----------- ---------
$49,498,677 $48,770,268 $(728,409)
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE(DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell CHF 5,147,462 $ 3,494,369 $ 3,398,483 $ 95,886
10/98 Sell CHF 1,700,000 1,147,098 1,131,598 15,500
12/98 Sell CHF 4,760,000 3,222,749 3,186,952 35,797
07/98 Sell DEM 14,666,549 8,133,059 8,127,907 5,152
10/98 Sell DEM 2,200,000 1,225,166 1,227,391 (2,225)
11/98 Sell DEM 2,357,500 1,318,962 1,316,929 2,033
07/98 Sell DKK 1,375,262 199,417 200,001 (584)
07/98 Sell ESP 43,381,409 282,063 283,377 (1,314)
07/98 Sell FIM 32,890 5,974 5,995 (21)
07/98 Sell FRF 44,808,819 7,402,823 7,422,179 (19,356)
08/98 Sell FRF 1,500,000 247,180 248,606 (1,426)
10/98 Sell FRF 2,000,000 332,138 332,733 (595)
07/98 Sell GBP 2,463,424 4,038,894 4,108,758 (69,864)
08/98 Sell GBP 9,730,000 15,904,993 16,207,944 (302,951)
10/98 Sell GBP 9,455,000 15,446,582 15,689,820 (243,238)
07/98 Sell JPY 257,757,452 2,024,170 1,861,238 162,932
08/98 Sell JPY 154,800,000 1,192,191 1,121,739 70,452
10/98 Sell JPY 2,834,200,000 21,485,273 20,742,099 743,174
11/98 Sell JPY 375,000,000 2,898,963 2,756,830 142,133
07/98 Sell NLG 22,875,034 11,239,191 11,264,087 (24,896)
07/98 Sell SEK 18,451,110 2,292,901 2,313,702 (20,801)
08/98 Sell SEK 13,000,000 1,628,991 1,631,354 (2,363)
10/98 Sell SEK 18,300,000 2,324,385 2,302,191 22,194
10/98 Sell ZAR 1,750,000 346,741 285,803 60,938
------------ ------------ ---------
$107,834,273 $107,167,716 $ 666,557
============ ============ =========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
** Closed-end fund.
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.
See Notes to Financial Statements.
81
<PAGE>
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 95.1%
AEROSPACE -- 0.8%
Boeing Co. ........................ 30,135 $ 1,342,891
------------
AIRLINES -- 0.6%
UAL Corp.*......................... 12,000 936,000
------------
AUTOMOBILE MANUFACTURERS -- 1.0%
Ford Motor Co...................... 28,335 1,671,765
------------
AUTOMOTIVE PARTS -- 3.7%
Dana Corp.......................... 30,641 1,639,293
Eaton Corp......................... 14,888 1,157,542
Goodyear Tire & Rubber Co.......... 30,640 1,974,365
Lear Corp.*........................ 24,385 1,251,255
------------
6,022,455
------------
BEVERAGES -- 1.0%
PepsiCo, Inc....................... 38,445 1,583,453
------------
CHEMICALS -- 2.6%
Du Pont, (E.I.) de Nemours & Co.... 29,343 2,189,721
Eastman Chemical Co................ 19,238 1,197,565
Witco Corp......................... 32,490 950,332
------------
4,337,618
------------
COMPUTER HARDWARE -- 3.4%
Hewlett-Packard Co. ............... 27,506 1,646,922
International Business Machines
Corp. ........................... 23,765 2,728,519
Seagate Technology, Inc.*.......... 51,065 1,215,985
------------
5,591,426
------------
COMPUTER SERVICES & SOFTWARE -- 1.3%
Computer Associates International,
Inc. ............................ 21,300 1,183,481
NCR Corp.*......................... 30,730 998,725
------------
2,182,206
------------
CONGLOMERATES -- 2.1%
Minnesota Mining & Manufacturing
Co. ............................. 17,768 1,460,307
Philip Morris Companies, Inc....... 50,714 1,996,864
------------
3,457,171
------------
CONSUMER PRODUCTS & SERVICES -- 4.6%
Clorox Co.......................... 13,015 1,241,306
Colgate-Palmolive Co............... 17,290 1,521,520
Eastman Kodak Co................... 22,810 1,666,556
Hasbro, Inc........................ 35,085 1,379,279
Whitman Corp....................... 78,290 1,795,777
------------
7,604,438
------------
CONTAINERS & PACKAGING -- 1.3%
Owens-Illinois, Inc.*.............. 48,160 2,155,160
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.1%
Emerson Electric Co................ 21,630 1,305,911
Texas Instruments, Inc............. 64,515 3,762,031
------------
5,067,942
------------
ENTERTAINMENT & LEISURE -- 0.8%
Viacom, Inc. Cl-B*................. 22,275 1,297,519
------------
FINANCIAL-BANK & TRUST -- 12.1%
BankBoston Corp.................... 30,180 1,678,762
Bankers Trust Corp................. 11,355 1,317,890
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Chase Manhattan Corp............... 2,600 $ 196,300
Citicorp........................... 18,560 2,770,080
Crestar Financial Corp............. 15,535 847,628
First Chicago NBD Corp............. 20,665 1,831,436
Firstar Corp....................... 13,820 525,160
Fleet Financial Group, Inc......... 11,575 966,512
Hibernia Corp. Cl-A................ 16,730 337,737
Keycorp............................ 32,985 1,175,091
Mercantile Bancorporation, Inc..... 14,057 708,121
Morgan, (J.P.) & Co., Inc.......... 12,173 1,425,763
National City Corp................. 18,570 1,318,470
PNC Bank Corp...................... 29,935 1,610,877
Summit Bancorp..................... 11,900 565,250
Union Planters Corp................ 13,421 789,323
Wells Fargo & Co................... 4,935 1,821,015
------------
19,885,415
------------
FINANCIAL SERVICES -- 3.0%
Ahmanson, (H.F.) & Co. ............ 1,608 114,168
American Express Co................ 10,000 1,140,000
Fannie Mae......................... 23,255 1,412,741
Merrill Lynch & Co., Inc........... 13,445 1,240,301
Washington Mutual, Inc............. 24,245 1,053,142
------------
4,960,352
------------
FOOD -- 3.8%
General Mills, Inc................. 18,241 1,247,228
Heinz, (H.J.) Co................... 34,895 1,958,482
Quaker Oats Co..................... 30,405 1,670,375
Sara Lee Corp...................... 23,868 1,335,116
------------
6,211,201
------------
HOTELS & MOTELS -- 0.7%
Starwood Hotels & Resorts [REIT]... 24,199 1,169,114
------------
INSURANCE -- 5.9%
Allstate Corp. .................... 16,775 1,535,961
American General Corp. ............ 25,940 1,846,604
AON Corp........................... 26,119 1,834,860
CIGNA Corp......................... 24,981 1,723,689
The Equitable Companies, Inc....... 18,500 1,386,344
Travelers Group, Inc............... 21,545 1,306,166
------------
9,633,624
------------
MACHINERY & EQUIPMENT -- 3.4%
Caterpillar, Inc................... 7,415 392,068
Cooper Cameron Corp.*.............. 17,075 870,825
Cooper Industries, Inc............. 28,610 1,571,762
Deere & Co. ....................... 24,590 1,300,196
Ingersoll-Rand Co.................. 34,815 1,534,036
------------
5,668,887
------------
MEDICAL SUPPLIES & EQUIPMENT -- 2.2%
Baxter International, Inc.......... 39,157 2,107,136
Johnson & Johnson Co............... 21,000 1,548,750
------------
3,655,886
------------
OFFICE EQUIPMENT -- 3.2%
Pitney Bowes, Inc. ................ 27,555 1,326,084
Xerox Corp......................... 38,882 3,951,383
------------
5,277,467
------------
</TABLE>
82
<PAGE>
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OIL & GAS -- 9.4%
Amoco Corp......................... 39,326 $ 1,636,945
Atlantic Richfield Co.............. 18,721 1,462,578
British Petroleum Co. PLC [ADR].... 23,515 2,075,199
Coastal Corp....................... 18,816 1,313,592
Exxon Corp......................... 27,796 1,982,202
Kerr-McGee Corp.................... 29,320 1,696,895
Mobil Corp......................... 19,624 1,503,689
Societe Nationale Elf Aquitaine SA
[ADR]............................ 23,255 1,651,105
Sonat, Inc......................... 27,540 1,063,732
Tosco Corp......................... 39,425 1,158,109
------------
15,544,046
------------
PAPER & FOREST PRODUCTS -- 2.1%
Boise Cascade Corp................. 36,785 1,204,709
International Paper Co. ........... 19,760 849,680
Kimberly-Clark Corp................ 29,470 1,351,936
------------
3,406,325
------------
PHARMACEUTICALS -- 7.5%
American Home Products Corp........ 53,470 2,767,073
Bristol-Meyers Squibb Co. ......... 26,690 3,067,682
Merck & Co., Inc. ................. 22,805 3,050,169
Pharmacia & Upjohn, Inc............ 76,252 3,517,124
------------
12,402,048
------------
PRINTING & PUBLISHING -- 1.7%
McGraw-Hill Co., Inc............... 15,715 1,281,755
Times Mirror Co. Cl-A.............. 24,740 1,555,528
------------
2,837,283
------------
RESTAURANTS -- 1.2%
McDonald's Corp.................... 27,555 1,901,295
------------
RETAIL & MERCHANDISING -- 3.2%
Kmart Corp.*....................... 79,255 1,525,659
Penney, (J.C.) Co., Inc............ 21,035 1,521,093
Sears, Roebuck & Co................ 19,115 1,167,210
Toys "R" Us, Inc.*................. 44,245 1,042,523
------------
5,256,485
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TELECOMMUNICATIONS -- 7.4%
Ameritech Corp..................... 34,420 $ 1,544,598
AT&T Corp.......................... 36,509 2,085,577
GTE Corp........................... 26,805 1,491,028
MediaOne Group, Inc.*.............. 42,720 1,877,010
SBC Communications, Inc............ 48,074 1,922,960
Sprint Corp........................ 23,011 1,622,276
U. S. West, Inc.................... 34,339 1,613,933
------------
12,157,382
------------
UTILITIES -- 2.0%
Duke Energy Corp................... 21,940 1,299,946
Texas Utilities Co................. 49,490 2,060,021
------------
3,359,967
------------
TOTAL COMMON STOCK (COST
$146,967,849)........................ 156,576,821
------------
PAR
(000)
-----
REPURCHASE AGREEMENTS -- 3.0%
Morgan, (J.P.) & Co., Inc.
5.75%, dated 06/30/98,
maturing 07/01/98,
repurchase price
$5,006,800
(Collateralized by U.S
Treasury Bonds, par value
$4,835,000, market value
$5,138,853, due 02/15/26)
(COST $5,006,000)......... $5,006 5,006,000
------------
TOTAL INVESTMENTS -- 98.1%
(COST $151,973,849)..................... 161,582,821
OTHER ASSETS LESS LIABILITIES -- 1.9%... 3,133,320
------------
NET ASSETS -- 100.0%.................... $164,716,141
============
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
83
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 62.1%
ADVERTISING -- 2.3%
Outdoor Systems, Inc.* ............ 41,900 $ 1,173,200
-----------
AIRLINES -- 1.1%
Alaska Air Group, Inc.* ........... 4,100 223,706
AMR Corp.* ........................ 4,300 357,975
-----------
581,681
-----------
BEVERAGES -- 1.0%
Coca-Cola Co. ..................... 5,900 504,450
-----------
BROADCASTING -- 2.4%
Clear Channel Communications,
Inc.* ........................... 11,100 1,211,287
-----------
COMPUTER SERVICES & SOFTWARE -- 4.4%
America Online, Inc.* ............. 7,200 763,200
BMC Software, Inc.* ............... 7,900 410,306
Cisco Systems, Inc.* .............. 6,100 561,581
Compuware Corp.* .................. 9,700 495,912
-----------
2,230,999
-----------
CONGLOMERATES -- 3.1%
Tyco International Ltd. ........... 24,800 1,562,400
-----------
CONSUMER PRODUCTS & SERVICES -- 5.1%
Cendant Corp.* .................... 27,800 580,325
Gillette Co. ...................... 16,300 924,006
Procter & Gamble Co. .............. 11,500 1,047,219
-----------
2,551,550
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.1%
AES Corp.* ........................ 18,700 982,919
General Electric Co. .............. 17,400 1,583,400
-----------
2,566,319
-----------
ENTERTAINMENT & LEISURE -- 1.7%
Time Warner, Inc. ................. 4,600 393,012
Viacom, Inc. Cl-B* ................ 7,900 460,175
-----------
853,187
-----------
ENVIRONMENTAL SERVICES -- 1.1%
Republic Services, Inc. Cl-A* ..... 7,700 184,800
Waste Management, Inc. ............ 10,400 364,000
-----------
548,800
-----------
FINANCIAL-BANK & TRUST -- 1.3%
Chase Manhattan Corp. ............. 2,100 158,550
Citicorp .......................... 2,400 358,200
NationsBank Corp. ................. 1,600 122,400
-----------
639,150
-----------
FINANCIAL SERVICES -- 7.5%
American Express Co. .............. 10,700 1,219,800
CIT Group, Inc. Cl-A .............. 11,200 420,000
Fannie Mae ........................ 11,000 668,250
Morgan Stanley, Dean Witter &
Co. ............................. 3,000 274,125
SunAmerica, Inc. .................. 20,700 1,188,956
-----------
3,771,131
-----------
INSURANCE -- 4.6%
Allstate Corp. .................... 4,800 439,500
American International Group,
Inc. ............................ 5,400 788,400
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Conseco, Inc. ..................... 11,500 $ 537,625
Travelers Group, Inc. ............. 8,800 533,500
-----------
2,299,025
-----------
MEDICAL SUPPLIES & EQUIPMENT -- 2.7%
Guidant Corp. ..................... 2,200 156,888
HBO & Co. ......................... 8,600 303,150
Medtronic, Inc. ................... 13,800 879,750
-----------
1,339,788
-----------
PHARMACEUTICALS -- 5.4%
Bristol-Meyers Squibb Co. ......... 8,900 1,022,944
Cardinal Health, Inc. ............. 4,500 421,875
Lilly, (Eli) & Co. ................ 2,900 191,581
Merck & Co., Inc. ................. 1,400 187,250
Pfizer, Inc. ...................... 3,600 391,275
Warner-Lambert Co. ................ 7,700 534,188
-----------
2,749,113
-----------
PRINTING & PUBLISHING -- 2.6%
McGraw-Hill Co., Inc. ............. 6,400 522,000
Tribune Co. ....................... 11,600 798,225
-----------
1,320,225
-----------
RETAIL & MERCHANDISING -- 5.6%
Costco Companies, Inc.* ........... 10,200 643,238
Dayton-Hudson Corp. ............... 13,300 645,050
Sears, Roebuck & Co. .............. 9,700 592,306
Wal-Mart Stores, Inc. ............. 15,300 929,475
-----------
2,810,069
-----------
TELECOMMUNICATIONS -- 5.2%
Ameritech Corp. ................... 3,200 143,600
Bell Atlantic Corp. ............... 9,900 451,688
Jacor Communications, Inc.* ....... 5,100 300,900
Tele-Communications, Inc. Cl-A* ... 28,057 1,078,441
WorldCom, Inc.* ................... 13,200 639,375
-----------
2,614,004
-----------
TOTAL COMMON STOCK
(COST $25,774,069) ................ 31,326,378
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
CORPORATE OBLIGATIONS -- 4.0%
AEROSPACE -- 0.5%
Lockheed Martin Corp. Notes
7.25%, 05/15/06 ............... $ 200 212,750
-----------
BUSINESS SERVICES -- 0.4%
Comdisco, Inc. Notes
6.50%, 04/30/99 ............... 200 200,750
-----------
FINANCIAL-BANK & TRUST -- 0.2%
First Bank System Sub. Notes
7.625%, 05/01/05 .............. 100 108,250
-----------
FINANCIAL SERVICES -- 1.2%
Ford Motor Credit Corp. Sr. Notes
6.55%, 09/10/02 ............... 215 219,300
</TABLE>
84
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
General Motors Acceptance Corp.
Notes
7.125%, 05/01/03 .............. $ 100 $ 103,500
Lehman Brothers Holdings
Medium Term Notes
6.00%, 02/26/01 ............... 200 199,500
Sears, Roebuck Acceptance Corp.
Notes
6.00%, 03/20/03 ............... 100 99,250
-----------
621,550
-----------
METALS & MINING -- 0.2%
Barrick Gold Corp. Notes
7.50%, 05/01/07 ............... 100 107,125
-----------
OIL & GAS -- 0.5%
Enron Corp. Notes
6.625%, 11/15/05 .............. 150 153,000
Petroleum Geo-Systems Sr. Notes
7.125%, 03/30/28 .............. 100 103,500
-----------
256,500
-----------
RETAIL & MERCHANDISING -- 0.4%
Sears, Roebuck & Co. Notes
6.25%, 01/15/04 ............... 200 202,500
-----------
TELECOMMUNICATIONS -- 0.6%
Cable & Wire Communications Notes
6.625%, 03/06/05 .............. 200 202,250
WorldCom, Inc. Notes
7.55%, 04/01/04 ............... 100 106,000
-----------
308,250
-----------
TOTAL CORPORATE OBLIGATIONS
(COST $1,973,035).................. 2,017,675
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.4%
FEDERAL HOME LOAN BANK DISCOUNT NOTES -- 4.2%
5.55%, 07/01/98 ............... 2,115 2,115,000
-----------
FEDERAL NATIONAL MORTGAGE ASSOC. -- 3.5%
7.00%, 02/20/07-03/01/28 ...... 1,152 1,171,084
7.50%, 03/01/27-07/01/27 ...... 595 611,677
-----------
1,782,761
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOC. -- 4.7%
6.50%, 03/15/28-04/15/28 ...... 1,689 1,686,602
7.00%, 12/15/27 ............... 294 298,739
8.00%, 03/15/27 ............... 152 157,497
8.75%, 01/15/27-04/15/27 ...... 200 213,288
-----------
2,356,126
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $6,223,397) ................. 6,253,887
-----------
U.S. TREASURY OBLIGATIONS -- 16.2%
U.S. TREASURY BONDS -- 3.0%
6.125%, 11/15/27 .............. 1,400 1,500,982
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000) VALUE
----- -----
<S> <C> <C>
U.S. TREASURY NOTES -- 13.2%
5.75%, 08/15/03 ............... $ 2,100 $ 2,122,995
6.625%, 05/15/07 .............. 1,200 1,288,452
6.625%, 07/31/01............... 400 412,120
7.75%, 11/30/99 ............... 2,750 2,832,472
-----------
6,656,039
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $8,064,109) ................. 8,157,021
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.4%
AMRESCO Residential Securities
Mtge. Loan
6.44%, 04/25/27 ............... 400 404,130
CIT RV Trust Series 1998-A C1-A
6.09%, 02/15/12 ............... 300 300,984
First Union-Lehman Brothers
Commercial Mtge.
6.28%, 06/18/07 ............... 299 301,264
Morgan Stanley Capital I
Series 1998-WF 1 C1-A1
6.25%, 07/15/07 ............... 198 200,220
-----------
(COST $1,198,822) ............... 1,206,598
-----------
FOREIGN BONDS -- 4.4%
AUSTRALIA -- 0.3%
Queensland Treasury Corp.
8.00%, 08/14/01 ............... 200 132,979
-----------
CANADA -- 0.1%
Canadian Government
6.50%, 06/01/04 ............... 100 71,961
-----------
FRANCE -- 0.9%
French O.A.T.
6.75%, 10/25/03 ............... 2,500 457,738
-----------
GERMANY -- 0.9%
Deutscheland Republic
6.00%, 09/15/03 ............... 800 474,674
-----------
ITALY -- 0.4%
Italian Government
6.75%, 02/01/07 ............... 350,000 220,625
-----------
JAPAN -- 0.8%
Japanese Government
4.10%, 12/22/03 ............... 50,000 416,255
-----------
SPAIN -- 0.2%
Spanish Government
10.50%, 10/30/03 .............. 10,000 82,814
-----------
UNITED KINGDOM -- 0.8%
United Kingdom Treasury
8.00%, 06/10/03 ............... 225 401,810
-----------
TOTAL FOREIGN BONDS
(COST $2,252,452) ................. 2,258,856
-----------
</TABLE>
85
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash
Fund .......................... 1,012 $ 1,012
Temporary Investment Fund ....... 1,012 1,012
-----------
(COST $2,024) ................... 2,024 2,024
-----------
TOTAL INVESTMENTS -- 101.5%
(COST $45,487,908)................. 51,222,439
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (1.5%)................... (760,177)
-----------
NET ASSETS -- 100.0% ................ $50,462,262
===========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
86
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FOREIGN STOCK -- 92.6%
AUSTRALIA -- 1.5%
AMP Ltd. 144A* .................... 58,430 $ 683,853
Coca-Cola Amatil Ltd. ............. 39,000 253,172
-----------
937,025
-----------
BELGIUM -- 1.1%
Lernout & Hauspie Speech Products
NV* ............................. 4,400 262,625
UCB SA ............................ 86 446,178
-----------
708,803
-----------
BRAZIL -- 0.5%
Telecomunicacoes do Rio de Janeiro
SA Rights* ...................... 5,318 0
Telerj Celular SA Pfd. Cl-B ....... 1,792,800 105,403
Telesp Celular SA Pfd. Cl-B* ...... 2,309,000 193,646
-----------
299,049
-----------
CANADA -- 4.2%
BCE, Inc. ......................... 7,400 313,755
Bombardier, Inc. Cl-B ............. 15,600 424,334
Call-Net Enterprises, Inc.* ....... 13,000 221,007
Geac Computer Corp. Ltd. .......... 8,900 296,558
Investors Group, Inc. ............. 8,700 314,446
Magna International Inc. Cl-A ..... 3,500 239,674
Newcourt Credit Group, Inc.
144A ............................ 6,470 317,882
Teleglobe Inc. .................... 19,200 511,812
-----------
2,639,468
-----------
DENMARK -- 1.9%
Novo Nordisk AS Cl-B .............. 2,585 356,343
Tele Danmark AS Cl-B* ............. 8,900 854,149
-----------
1,210,492
-----------
FINLAND -- 3.0%
Merita PLC Cl-A ................... 73,500 484,956
Nokia Corp. Cl-A [ADR] ............ 7,000 507,937
Raision Tehtaat Oy ................ 17,000 306,754
Sampo Insurance Co. Ltd. Cl-A ..... 12,800 606,339
-----------
1,905,986
-----------
FRANCE -- 14.6%
Accor SA .......................... 2,737 765,958
Alcatel Alsthom ................... 4,198 854,732
Altran Technologies SA ............ 1,735 394,003
Atos SA* .......................... 1,600 383,723
AXA SA ............................ 5,062 569,326
Banque Nationale de Paris ......... 4,859 397,012
Cap Gemini SA ..................... 6,088 956,595
Groupe Danone ..................... 3,800 1,047,729
Lafarge SA ........................ 6,000 620,242
Pinault-Printemps Redoute SA ...... 800 669,530
Rhodia, Inc.* ..................... 6,615 184,466
Societe Generale .................. 3,100 644,506
Societe Television Francaise ...... 2,400 371,947
Vivendi ........................... 6,600 1,409,288
-----------
9,269,057
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
GERMANY -- 13.6%
Allianz AG ........................ 1,600 $ 527,415
Allianz AG, (New)* ................ 29 9,479
Bayerische Motoren Werke AG ....... 458 462,052
Bayerische Motoren Werke AG
Rights* ......................... 9 258
Bayerische Motoren Werke AG
(New)* .......................... 124 123,311
Daimler Benz AG ................... 5,976 586,002
Deutsche Bank AG .................. 2,900 245,572
Deutsche Pfandbrief &
Hypothekenbank AG ............... 10,100 805,748
Douglas Holding AG ................ 5,600 296,283
Dresdner Bank AG .................. 6,900 371,944
Henkel KGaA ....................... 9,000 894,999
Mannesmann AG ..................... 14,300 1,454,931
Metro AG .......................... 6,000 363,983
Metro AG Rights* .................. 5,000 194
SAP AG Pfd. ....................... 1,200 815,721
Veba AG ........................... 5,000 340,715
Volkswagen AG ..................... 1,371 1,317,809
-----------
8,616,416
-----------
GREECE -- 0.3%
Hellenic Telecommunication
Organization SA ................. 7,333 187,966
-----------
HONG KONG -- 0.4%
Hutchison Whampoa Ltd. ............ 51,000 269,198
-----------
HUNGARY -- 0.2%
Magyar Tavkozlesi Rights* ......... 3,400 100,087
-----------
IRELAND -- 2.3%
Bank of Ireland ................... 24,900 512,258
CBT Group PLC Co. [ADR]* .......... 7,000 374,500
Elan Corp. PLC [ADR]* ............. 4,700 302,269
Saville Systems Ireland PLC
[ADR]* .......................... 6,000 300,750
-----------
1,489,777
-----------
ITALY -- 3.2%
Banca di Roma* .................... 251,300 523,085
Banco Intesa SPA .................. 60,900 340,722
Credito Italiano SPA .............. 72,400 378,995
La Rinascente SPA ................. 14,445 72,081
Mondadori (Arnoldo) Editore SPA ... 23,200 274,085
Telecom Italia SPA ................ 55,700 410,022
-----------
1,998,990
-----------
JAPAN -- 4.5%
Aiwa Co. Ltd. ..................... 8,000 250,748
Bridgestone Corp. ................. 6,000 141,802
Fujitsu Ltd. ...................... 54,000 568,073
Honda Motor Co. Ltd. .............. 6,000 213,568
Minebea Co. Ltd. .................. 45,000 447,779
Nintendo Co. Ltd. ................. 2,000 185,178
NTT Data Corp. .................... 50 180,495
Sony Corp. ........................ 7,700 663,004
Takeda Chemical Industries ........ 7,000 186,115
-----------
2,836,762
-----------
</TABLE>
87
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
MEXICO -- 0.0%
Cemex SA de CV .................... 774 $ 2,894
-----------
NETHERLANDS -- 8.8%
Amsterdam Option Traders NV ....... 2,300 233,932
Assurantieconcern Stad Rotterdam
NV .............................. 6,800 576,968
Cap Gemini NV ..................... 5,600 462,487
Getronics NV ...................... 11,800 611,979
ING Groep NV ...................... 23,752 1,555,272
Koninklijke Ahold NV .............. 16,878 541,797
Royal Philips Electronics NV
[ADR] ........................... 3,000 255,000
Unilever NV ....................... 5,200 410,475
Vedior NV 144A .................... 7,700 217,651
Verenigde Nederlandse
Uitgeversbedrijven Verenig
Bezit ........................... 19,600 712,037
-----------
5,577,598
-----------
NORWAY -- 1.1%
Petroleum Geo-Services [ADR]* ..... 16,400 500,200
Storebrand ASA .................... 25,600 226,857
-----------
727,057
-----------
PORTUGAL -- 1.3%
Banco Espirito Santo e Comercial de
Lisboa SA ....................... 8,100 243,237
Banco Espirito Santo e Comercial de
Lisboa SA-Bonus Rights* ......... 5,100 31,751
Banco Espirito Santo (New)* ....... 637 18,611
Portugal Telecom SA ............... 3,800 201,397
Telecel-Comunicacaoes Pessoais
SA .............................. 1,800 319,619
-----------
814,615
-----------
SPAIN -- 2.6%
Banco Popular Espanol SA .......... 2,100 179,424
Corporacion Bancaria de Espana
SA .............................. 12,000 269,645
Telefonica SA ..................... 19,900 921,621
Tele Pizza SA* .................... 28,560 303,155
-----------
1,673,845
-----------
SWEDEN -- 3.7%
Assa Abloy AB Cl-B ................ 3,300 129,725
Electrolux AB Cl-B ................ 20,000 343,576
Ericsson, (L.M.) Telephone Co.
[ADR] ........................... 12,300 352,087
Europolitan Holdings AB ........... 5,700 400,253
Hennes & Mauritz AB Cl-B .......... 12,800 816,958
NetCom Systems AB Cl-B* ........... 8,235 315,462
-----------
2,358,061
-----------
SWITZERLAND -- 8.5%
Credit Suisse Group ............... 3,250 723,146
Julius Baer Holdings AG Cl-B ...... 517 1,617,319
Kuoni Reisen AG ................... 100 496,437
Nestle SA ......................... 575 1,230,510
Novartis AG ....................... 250 416,005
UBS AG* ........................... 2,555 950,033
-----------
5,433,450
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
UNITED KINGDOM -- 15.3%
Amvescap PLC ...................... 53,700 $ 524,152
British Aerospace PLC ............. 74,600 572,563
British Airways PLC ............... 29,600 320,279
Cable & Wireless Communications
PLC* ............................ 66,000 667,885
Capita Group PLC .................. 37,600 323,402
CMG PLC ........................... 13,900 436,593
Compass Group PLC ................. 34,400 396,036
Crt Group PLC ..................... 22,500 156,359
Diageo PLC ........................ 38,129 451,690
Energis PLC* ...................... 32,000 487,203
Hays PLC .......................... 24,300 407,879
Logica PLC ........................ 12,300 397,625
Misys PLC ......................... 18,600 1,057,954
Orange PLC* ....................... 24,000 254,280
Provident Financial PLC* .......... 9,768 154,430
Schroders PLC ..................... 6,600 170,247
SEMA Group PLC .................... 37,000 439,859
Serco Group PLC ................... 4,400 101,311
Somerfield PLC .................... 48,600 310,166
Standard Chartered PLC ............ 17,000 193,162
Vodafone Group PLC ................ 78,900 1,001,817
WPP Group PLC ..................... 80,600 530,529
Zeneca Group PLC .................. 7,600 326,145
-----------
9,681,566
-----------
TOTAL FOREIGN STOCK
(COST $52,842,148)................... 58,738,162
-----------
COMMON STOCK -- 1.0%
TELECOMMUNICATIONS
AirTouch Communications, Inc.*
(COST $574,823).................... 11,000 642,812
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 15.1%
Federal Home Loan Bank
Disc. Notes
5.55%, 07/01/98
(COST $9,599,000)...................... $9,599 9,599,000
-----------
TOTAL INVESTMENTS -- 108.7%
(COST $63,015,971)..................... 68,979,974
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (8.7%)....................... (5,531,022)
-----------
NET ASSETS -- 100.0%..................... $63,448,952
===========
</TABLE>
88
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy AUD 95,492 $ 58,014 $ 59,204 $1,190
07/98 Buy BEL 1,569,725 42,024 42,215 191
07/98 Buy BRC 111,430 96,355 96,342 (13)
07/98 Buy CHF 509,247 335,857 335,804 (53)
07/98 Buy CAD 120,799 82,103 82,150 47
07/98 Buy DEM 1,202,974 665,325 666,542 1,217
07/98 Buy DKK 1,327,707 192,798 193,087 289
07/98 Buy FRF 5,794,340 957,861 959,940 2,079
07/98 Buy GBP 759,727 1,266,018 1,267,330 1,312
07/98 Buy HKD 412,185 53,196 53,241 45
07/98 Buy JPY 49,341,903 355,874 355,634 (240)
07/98 Buy PTE 59,272,199 320,095 320,935 840
07/98 Buy SEK 916,644 114,710 114,944 234
---------- ---------- ------
$4,540,230 $4,547,368 $7,138
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Sell CHF 749,884 $ 499,563 $ 495,922 $ 3,641
07/98 Sell DEM 1,552,550 865,869 861,662 4,207
07/98 Sell DKK 767,887 111,437 111,665 (228)
07/98 Sell FRF 4,889,280 813,250 809,953 3,297
07/98 Sell GBP 541,800 903,357 903,000 357
07/98 Sell ITL 52,268,376 29,472 29,405 67
07/98 Sell JPY 31,131,078 220,874 225,326 (4,452)
07/98 Sell NLG 1,098,367 543,953 540,961 2,992
07/98 Sell SEK 1,488,564 189,164 186,738 2,426
---------- ---------- -------
$4,176,939 $4,164,632 $12,307
========== ========== =======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* 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 1.9% of net assets.
See Notes to Financial Statements.
89
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 89.2%
AIRLINES -- 1.8%
Midwest Express Holdings, Inc.*.... 150,000 $ 5,428,125
------------
AUTOMOTIVE PARTS -- 1.8%
Myers Industries, Inc. ............ 110,000 2,640,000
OEA, Inc. ......................... 100,000 1,600,000
TBC Corp.*......................... 200,000 1,325,000
------------
5,565,000
------------
BUILDING MATERIALS -- 9.1%
Cameron Ashley Building Products,
Inc.*............................ 110,900 1,871,437
Giant Cement Holdings, Inc.*....... 60,000 1,717,500
Gibraltar Steel Corp.*............. 120,000 2,460,000
Holophane Corp.*................... 120,000 3,060,000
Juno Lighting, Inc. ............... 130,000 3,071,250
Lone Star Technologies, Inc.*...... 130,000 1,982,500
Modine Manufacturing Co. .......... 100,000 3,462,500
Republic Group, Inc. .............. 150,900 3,168,900
Skyline Corp. ..................... 61,600 2,009,700
Synthetic Industries, Inc.*........ 180,000 2,621,250
Thomas Industries, Inc. ........... 110,000 2,688,125
------------
28,113,162
------------
BUSINESS SERVICES -- 1.0%
Grey Advertising, Inc. ............ 8,000 3,168,000
------------
CHEMICALS -- 2.0%
Furon Co. ......................... 220,000 3,987,500
Schulman, (A.), Inc. .............. 120,000 2,347,500
------------
6,335,000
------------
CLOTHING & APPAREL -- 1.4%
Dan River, Inc. Cl-A*.............. 120,000 2,040,000
Unitog Co. ........................ 100,000 2,200,000
------------
4,240,000
------------
COMPUTER HARDWARE -- 1.1%
Analogic Corp. .................... 75,000 3,356,250
------------
COMPUTER SERVICES & SOFTWARE -- 1.0%
Analysts International Corp. ...... 110,000 3,121,250
------------
CONSUMER PRODUCTS & SERVICES -- 1.2%
American Safety Razor Co.*......... 120,000 1,755,000
Culp, Inc. ........................ 140,000 1,811,250
------------
3,566,250
------------
CONTAINERS & PACKAGING -- 3.9%
Aptargroup, Inc. .................. 60,000 3,731,250
First Brands Corp. ................ 120,000 3,075,000
Ivex Packaging Corp.*.............. 130,000 3,022,500
Shorewood Packaging Corp.*......... 150,000 2,381,250
------------
12,210,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 8.4%
Electro Rental Corp.*.............. 300,000 6,731,250
Franklin Electric Co., Inc. ....... 40,000 2,720,000
Landauer, Inc. .................... 75,000 2,240,625
Littelfuse, Inc.*.................. 150,000 3,787,500
Methode Electronics, Inc. Cl-A..... 250,000 3,875,000
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Nichols Research Corp.*............ 120,000 $ 3,277,500
Pioneer-Standard Electronics,
Inc. ............................ 130,000 1,251,250
Scotsman Industries, Inc. ......... 80,000 2,220,000
------------
26,103,125
------------
ENVIRONMENTAL SERVICES -- 0.4%
Waterlink, Inc.*................... 150,000 1,275,000
------------
EQUIPMENT SERVICES -- 3.0%
Cort Business Services Corp.*...... 100,000 3,150,000
Rival Co. ......................... 87,000 1,174,500
Unifirst Corp. .................... 120,000 3,000,000
VWR Scientific Products, Inc.*..... 80,000 1,970,000
------------
9,294,500
------------
FINANCIAL-BANK & TRUST -- 5.3%
Commercial Federal Savings & Loan
Corp. ........................... 30,000 948,750
Community First Bankshares,
Inc. ............................ 120,000 3,142,500
First Republic Bank*............... 100,000 3,612,500
Silicon Valley Bancshares*......... 140,000 4,983,125
Sirrom Capital Corp. .............. 140,000 3,640,000
------------
16,326,875
------------
FINANCIAL SERVICES -- 4.7%
Allied Capital Corp. .............. 140,000 3,430,000
AMRESCO, Inc.*..................... 80,000 2,330,000
First Financial Fund, Inc. ........ 150,000 2,840,625
McGrath Rentcorp................... 120,000 2,535,000
Medallion Financial Corp. ......... 120,000 3,300,000
------------
14,435,625
------------
INSURANCE -- 6.0%
FBL Financial Group, Inc. Cl-A..... 130,000 3,331,250
Harleysville Group, Inc. .......... 46,000 954,500
Markel Corp.*...................... 18,000 3,204,000
Poe & Brown, Inc. ................. 138,800 5,161,625
Presidential Life Corp. ........... 140,000 2,992,500
PXRE Corp. ........................ 70,000 2,100,000
Selective Insurance Group, Inc. ... 40,000 896,250
------------
18,640,125
------------
LUMBER & WOOD PRODUCTS -- 0.6%
Deltic Timber Corp. ............... 80,000 2,005,000
------------
MACHINERY & EQUIPMENT -- 5.2%
Alamo Group, Inc. ................. 62,000 1,178,000
Carbo Ceramics, Inc. .............. 85,500 2,917,687
Smith, (A.O.) Corp. ............... 100,000 5,168,750
TransTechnology Corp. ............. 120,000 3,082,500
Woodward Governor Co. ............. 120,000 3,705,000
------------
16,051,937
------------
MEDICAL SUPPLIES & EQUIPMENT -- 1.6%
Lunar Corp.*....................... 150,000 2,756,250
Owens & Minor, Inc. ............... 220,000 2,200,000
------------
4,956,250
------------
METALS & MINING -- 2.7%
Cambior, Inc. ..................... 90,000 528,750
Dayton Mining Corp.*............... 140,000 96,250
</TABLE>
90
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Golden Star Resources Ltd.*........ 120,000 $ 255,000
Layne Christensen Co.*............. 120,000 1,485,000
Material Sciences Corp.*........... 150,000 1,743,750
Penn Virginia Corp. ............... 110,000 2,846,250
Prime Resources Group, Inc. ....... 180,000 1,248,750
------------
8,203,750
------------
OFFICE EQUIPMENT -- 3.5%
Aaron Rents, Inc. Cl-A............. 50,000 906,250
Aaron Rents, Inc. Cl-B............. 150,000 3,000,000
CompX International, Inc.*......... 128,000 2,768,000
IDEX Corp. ........................ 120,000 4,140,000
------------
10,814,250
------------
OIL & GAS -- 2.6%
Chieftain International, Inc.*..... 5,500 130,281
Cross Timbers Oil Co. ............. 165,000 3,145,313
Devon Energy Corp. ................ 50,000 1,746,875
Rutherford-Moran Oil Corp.*........ 150,000 3,018,750
------------
8,041,219
------------
PAPER & FOREST PRODUCTS -- 1.5%
CSS Industries, Inc.*.............. 62,900 2,059,975
Wausau-Mosinee Paper Corp. ........ 110,000 2,516,250
------------
4,576,225
------------
PERSONAL SERVICES -- 1.3%
Matthews International Corp.
Cl-A............................. 170,000 4,175,625
------------
REAL ESTATE -- 4.6%
Apartment Investment & Management
Co. Cl-A [REIT].................. 55,000 2,172,500
Glenborough Realty Trust, Inc. .... 50,000 1,318,750
Innkeepers USA Trust............... 130,000 1,641,250
Meridian Industrial Trust, Inc. ... 150,000 3,450,000
National Health Investors, Inc. ... 50,000 1,656,250
Post Properties, Inc. [REIT]....... 24,600 947,100
Sun Communities, Inc. ............. 90,000 2,981,250
------------
14,167,100
------------
RESTAURANTS -- 2.6%
Consolidated Products, Inc.*....... 180,000 3,802,500
Ruby Tuesday, Inc.*................ 280,000 4,340,000
------------
8,142,500
------------
RETAIL & MERCHANDISING -- 6.3%
Bon-Ton Stores, Inc.*.............. 150,000 2,409,375
Casey's General Stores, Inc. ...... 200,000 3,312,500
CompuCom Systems, Inc.*............ 450,000 2,925,000
Fabri-Centers of America, Inc.
Cl-B*............................ 130,000 3,079,375
Hancock Fabrics, Inc. ............. 200,000 2,500,000
Proffitt's, Inc.*.................. 50,000 2,018,750
Stein Mart, Inc.*.................. 250,000 3,375,000
------------
19,620,000
------------
TELECOMMUNICATIONS -- 2.4%
Aliant Communications, Inc. ....... 180,000 4,938,750
Mosaix, Inc.*...................... 250,000 2,453,125
------------
7,391,875
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
TRANSPORTATION -- 1.1%
Landstar Systems, Inc.*............ 100,000 $ 3,493,750
------------
UTILITIES -- 1.1%
United Water Resources, Inc. ...... 190,000 3,420,000
------------
TOTAL COMMON STOCK
(COST $260,321,574).................. 276,237,768
------------
PREFERRED STOCK -- 0.5%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
(COST $1,188,022).................. 33,000 1,412,813
------------
FOREIGN STOCK -- 0.3%
METALS & MINING
Prime Resources Group,
Inc. -- (CAD)
(COST $956,274).................... 120,000 832,347
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 3.2%
U.S. Treasury Bills
4.985%, 07/23/98#................. $5,000 4,985,619
5.04%, 07/23/98#.................. 5,000 4,985,619
------------
(COST $9,969,368)................... 9,971,238
------------
COMMERCIAL PAPER -- 6.7%
Asset Securitization Cooperation
Corp.+
5.50%, 07/07/98................... 750 749,301
BellSouth Telecommunications 5.70%,
07/08/98.......................... 164 163,818
Ciesco L.P. 5.50%, 07/17/98......... 5,500 5,486,556
Du Pont, (E.I.) de Nemours & Co.
5.52%, 07/20/98................... 7,970 7,946,781
IBM Credit Corp.
5.50%, 07/08/98................... 5,815 5,808,781
Merck & Co., Inc.
6.10%, 07/01/98................... 562 562,000
------------
(COST $20,717,249).................. 20,717,237
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Fund
(COST $491)....................... 491 491
------------
TOTAL INVESTMENTS -- 99.9%
(COST $293,152,978)................. 309,171,894
OTHER ASSETS LESS
LIABILITIES -- 0.1%................. 272,243
------------
NET ASSETS -- 100.0%.................. $309,444,137
============
</TABLE>
91
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
# Securities with an aggregate market value of $9,971,238 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1998:
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF UNREALIZED
DESCRIPTION MONTH CONTRACTS APPRECIATION
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Russell 2000................... 09/98 40 $212,925
========
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
+ 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
0.2% of net assets.
See Notes to Financial Statements.
92
<PAGE>
MARSICO CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 84.4%
AEROSPACE -- 5.2%
AlliedSignal, Inc. ................ 77,082 $ 3,420,514
Gulfstream Aerospace Corp.*........ 254,521 11,835,226
Lockheed Martin Corp. ............. 10,650 1,127,569
------------
16,383,309
------------
AIRLINES -- 4.7%
AMR Corp.*......................... 45,360 3,776,220
UAL Corp.*......................... 141,233 11,016,174
------------
14,792,394
------------
AUTOMOBILE MANUFACTURERS -- 3.0%
Ford Motor Co. .................... 158,933 9,377,047
------------
BEVERAGES -- 2.6%
Coca-Cola Enterprises, Inc. ....... 208,117 8,168,592
------------
CHEMICALS -- 2.9%
Cytec Industries, Inc.*............ 128,986 5,707,630
Monsanto Co. ...................... 63,238 3,533,423
------------
9,241,053
------------
CLOTHING & APPAREL -- 0.4%
Polo Ralph Lauren Corp.*........... 48,750 1,365,000
------------
COMPUTER SERVICES & SOFTWARE -- 7.2%
Cisco Systems, Inc.*............... 54,075 4,978,280
Microsoft Corp.*................... 110,977 12,027,132
PeopleSoft, Inc.*.................. 120,389 5,658,283
------------
22,663,695
------------
CONGLOMERATES -- 1.1%
Textron, Inc. ..................... 46,928 3,364,151
------------
CONSTRUCTION -- 0.8%
M.D.C. Holdings, Inc. ............. 130,770 2,582,707
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.8%
General Electric Co. .............. 97,670 8,887,970
------------
ENTERTAINMENT & LEISURE -- 7.2%
Carnival Corp. Cl-A................ 214,670 8,506,299
Premier Parks, Inc.*............... 41,000 2,731,625
Time Warner, Inc. ................. 134,223 11,467,678
------------
22,705,602
------------
EQUIPMENT SERVICES -- 2.9%
Hertz Corp. Cl-A................... 204,454 9,059,868
------------
FARMING & AGRICULTURE -- 0.1%
Pioneer Hi-Bred International,
Inc. ............................ 6,000 248,250
------------
FINANCIAL-BANK & TRUST -- 5.0%
Citicorp .......................... 65,493 9,774,830
Star Banc Corp. ................... 24,425 1,560,147
Wells Fargo & Co. ................. 11,775 4,344,975
------------
15,679,952
------------
FINANCIAL SERVICES -- 7.5%
Affiliated Managers Group, Inc.*... 2,925 108,591
Associates First Capital Corp.
Cl-A............................. 141,462 10,874,891
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Fannie Mae......................... 74,230 $ 4,509,472
Merrill Lynch & Co., Inc. ......... 86,061 7,939,127
------------
23,432,081
------------
FOOD -- 2.0%
Ralston Purina Group............... 54,488 6,364,879
------------
HOTELS & MOTELS -- 0.8%
Four Seasons Hotels, Inc. ......... 69,326 2,443,742
------------
MACHINERY & EQUIPMENT -- 1.5%
Caterpillar, Inc. ................. 85,679 4,530,277
------------
METALS & MINING -- 0.0%
Phelps Dodge Corp. ................ 1,150 65,766
------------
PHARMACEUTICALS -- 10.5%
Lilly, (Eli) & Co. ................ 78,023 5,154,394
Pfizer, Inc. ...................... 72,174 7,844,412
Schering-Plough Corp. ............. 67,547 6,188,994
Warner-Lambert Co. ................ 197,947 13,732,573
------------
32,920,373
------------
RETAIL & MERCHANDISING -- 7.5%
Gap, Inc. ......................... 129,694 7,992,393
Home Depot, Inc. .................. 89,280 7,415,820
Wal-Mart Stores, Inc. ............. 132,210 8,031,758
------------
23,439,971
------------
TELECOMMUNICATIONS -- 8.7%
Lucent Technologies, Inc. ......... 161,459 13,431,371
MediaOne Group, Inc.*.............. 313,811 13,788,072
------------
27,219,443
------------
TOTAL COMMON STOCK
(COST $239,812,450).................. 264,936,122
------------
FOREIGN STOCK -- 3.9%
AUTOMOBILE MANUFACTURERS
Volkswagen AG -- (DEM)
(COST $11,582,004)................. 12,740 12,245,724
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 14.5%
Federal Home Loan Bank Disc. Notes
5.40%, 07/01/98
(COST $45,500,000)................. $45,500 45,500,000
------------
TOTAL INVESTMENTS -- 102.8%
(COST $296,894,454).................. 322,681,846
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (2.8%)..................... (8,686,556)
------------
NET ASSETS -- 100.0%................... $313,995,290
============
</TABLE>
93
<PAGE>
MARSICO CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at June 30, 1998:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
07/98 Buy DEM 9,726,309 $5,408,466 $5,389,134 $19,332
========== ========== =======
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
94
<PAGE>
COHEN & STEERS REALTY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 92.4%
APARTMENT/RESIDENTIAL -- 13.2%
Apartment Investment & Management
Co. Cl-A [REIT] .................. 23,400 $ 924,300
Avalon Bay Communities, Inc.
[REIT] ........................... 19,239 731,082
Essex Property Trust, Inc.
[REIT] ........................... 25,200 781,200
Irvine Apartment Communities, Inc.
[REIT] ........................... 3,200 92,600
Security Capital Pacific Trust
[REIT] ........................... 29,100 652,931
Smith, (Charles E.) Residential
Realty, Inc. ..................... 8,200 262,400
-----------
3,444,513
-----------
COMMUNITY CENTER -- 9.0%
Developers Diversified Realty Corp.
[REIT] ........................... 27,900 1,093,331
Kimco Realty Corp. [REIT] .......... 21,000 861,000
Pan Pacific Retail Properties, Inc.
[REIT] ........................... 19,600 399,350
-----------
2,353,681
-----------
DIVERSIFIED -- 9.7%
LNR Property Corp. ................. 16,700 427,937
Reckson Services Industries,
Inc.* ............................ 12,432 41,181
Saint Joe Co. ...................... 7,200 197,100
Security Capital Group, Inc.
Cl-B* ............................ 1,800 47,925
Vornado Realty Trust [REIT] ........ 45,900 1,821,656
-----------
2,535,799
-----------
HEALTH CARE -- 4.7%
American Retirement Corp.* ......... 12,000 213,000
Health Care Property Investors, Inc.
[REIT] ........................... 2,900 104,581
Healthcare Realty Trust, Inc.
[REIT] ........................... 9,500 258,875
Meditrust Companies [REIT] ......... 22,900 639,769
-----------
1,216,225
-----------
HOTEL -- 6.1%
Starwood Hotels & Resorts [REIT] ... 33,100 1,599,144
-----------
OFFICE -- 20.4%
Arden Realty, Inc. [REIT] .......... 29,900 773,662
Brandywine Realty Trust [REIT] ..... 14,600 326,675
Cousins Properties, Inc. [REIT] .... 5,800 173,275
Crescent Real Estate Equities Co.
[REIT] ........................... 40,500 1,361,812
Equity Office Properties Trust
[REIT] ........................... 700 19,863
Highwoods Properties, Inc.
[REIT] ........................... 28,700 927,369
Mack-Cali Realty Corp. [REIT] ...... 35,900 1,234,063
SL Green Realty Corp. [REIT] ....... 22,700 510,750
-----------
5,327,469
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OFFICE/INDUSTRIAL -- 14.9%
CenterPoint Properties Corp.
[REIT] ........................... 5,800 $ 191,763
First Industrial Realty Trust, Inc.
[REIT] ........................... 26,500 843,031
Reckson Associates Realty Corp.
[REIT] ........................... 28,400 670,950
Security Capital Industrial Trust
[REIT] ........................... 32,100 802,500
Spieker Properties, Inc. [REIT] .... 23,500 910,625
Trinet Corporate Realty Trust, Inc.
[REIT] ........................... 13,600 462,400
-----------
3,881,269
-----------
REGIONAL MALL -- 12.1%
General Growth Properties [REIT] ... 29,800 1,113,775
JP Realty, Inc. [REIT] ............. 9,400 221,488
Simon DeBartolo Group, Inc.
[REIT] ........................... 13,400 435,500
The Macerich Co.[REIT] ............. 28,400 832,475
The Rouse Co. ...................... 17,700 556,444
-----------
3,159,682
-----------
SELF STORAGE -- 2.3%
Public Storage, Inc. [REIT] ........ 21,500 602,000
-----------
TOTAL COMMON STOCK
(COST $24,940,108) ................... 24,119,782
-----------
SHORT-TERM INVESTMENTS -- 2.8%
Temporary Investment Cash Fund...... 364,677 364,677
Temporary Investment Fund........... 364,677 364,677
-----------
(COST $729,354)..................... 729,354
-----------
TOTAL INVESTMENTS -- 95.2%
(COST $25,669,462).................... 24,849,136
OTHER ASSETS LESS LIABILITIES -- 4.8%... 1,239,059
-----------
NET ASSETS -- 100.0%.................... $26,088,195
===========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
95
<PAGE>
LORD ABBETT SMALL CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 90.0%
AEROSPACE -- 2.3%
AAR Corp. ......................... 14,000 $ 413,875
DONCASTERS PLC [ADR]* ............. 2,000 55,625
TriStar Aerospace Co.* ............ 14,000 217,000
-----------
686,500
-----------
AUTOMOBILE MANUFACTURERS -- 1.7%
Oshkosh Truck Corp. ............... 20,000 500,000
-----------
AUTOMOTIVE PARTS -- 0.5%
OEA, Inc. ......................... 9,000 144,000
-----------
BUILDING MATERIALS -- 6.2%
CalMat Co. ........................ 19,000 418,000
Gradall Industries, Inc.* ......... 6,900 100,912
Hughes Supply, Inc. ............... 9,900 362,587
Medusa Corp. ...................... 10,300 646,325
Simpson Manufacturing Co.,
Inc.* ........................... 9,000 347,625
-----------
1,875,449
-----------
BUSINESS SERVICES -- 1.1%
Aviation Sales Co.* ............... 5,000 198,125
Baker, (Michael) Corp.* ........... 15,000 135,937
-----------
334,062
-----------
CLOTHING & APPAREL -- 11.0%
Dan River, Inc. Cl-A* ............. 21,000 357,000
Garan, Inc. ....................... 14,000 379,750
Gerber Childrenswear, Inc.* ....... 27,200 419,900
Maxwell Shoe Co., Inc. Cl-A* ...... 1,600 31,800
North Face, Inc.* ................. 15,000 360,000
Phillips-Van Heusen Corp. ......... 25,000 368,750
Stride Rite Corp. ................. 93,000 1,400,812
-----------
3,318,012
-----------
COMPUTER SERVICES & SOFTWARE -- 1.7%
Artesyn Technologies, Inc.* ....... 6,200 99,200
Structural Dynamics Research
Corp.* .......................... 4,000 92,500
Telxon Corp. ...................... 10,000 323,750
-----------
515,450
-----------
CONGLOMERATES -- 0.5%
Ruddick Corp. ..................... 8,000 145,000
-----------
CONSTRUCTION -- 2.8%
Kaufman & Broad Home Corp. ........ 19,000 603,250
Newmark Homes Corp.* .............. 12,000 124,500
Willbros Group, Inc.* ............. 8,000 125,000
-----------
852,750
-----------
CONSUMER PRODUCTS & SERVICES -- 2.8%
Gibson Greetings, Inc.* ........... 18,000 450,000
Oneida Ltd. ....................... 3,000 91,875
Sola International, Inc.* ......... 9,000 294,187
-----------
836,062
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
CONTAINERS & PACKAGING -- 2.7%
BWAY Corp.* ....................... 18,200 $ 391,300
Tuscarora, Inc. ................... 9,000 142,875
ZERO Corp. ........................ 10,000 283,750
-----------
817,925
-----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 16.8%
AMETEK, Inc. ...................... 4,400 128,975
Control Devices, Inc. ............. 12,500 162,500
Electronics for Imaging, Inc.* .... 63,000 1,330,875
General Scanning, Inc.* ........... 23,000 205,562
GenRad, Inc.* ..................... 8,000 158,000
Methode Electronics, Inc. Cl-A .... 23,400 362,700
Microsemi Corp.* .................. 20,000 185,000
Moog, Inc. Cl-A* .................. 21,000 801,937
Newport Corp. ..................... 7,600 150,100
Plexus Corp.* ..................... 13,100 260,362
Richey Electronics, Inc.* ......... 2,600 20,312
Rogers Corp.* ..................... 24,200 798,600
The DII Group, Inc.* .............. 13,000 221,812
Zebra Technologies Corp.* ......... 6,500 277,875
-----------
5,064,610
-----------
FINANCIAL SERVICES -- 0.2%
Doral Financial Corp. ............. 3,000 52,500
-----------
FOOD -- 2.2%
Dreyer's Grand Ice Cream, Inc. .... 10,000 201,250
Midwest Grain Products, Inc.* ..... 10,300 149,350
Sanderson Farms, Inc. ............. 21,000 309,750
-----------
660,350
-----------
HEALTHCARE SERVICES -- 2.2%
Sierra Health Services, Inc.* ..... 26,200 659,912
-----------
INDUSTRIAL PRODUCTS -- 3.9%
Blount International, Inc. Cl-A ... 15,000 427,500
Oregon Steel Mills, Inc. .......... 40,000 745,000
-----------
1,172,500
-----------
INSURANCE -- 1.7%
Chartwell Re Corp. ................ 13,000 382,687
Farm Family Holdings, Inc.* ....... 3,000 116,813
-----------
499,500
-----------
MACHINERY & EQUIPMENT -- 8.5%
Albany International Corp. Cl-A ... 12,035 288,088
American Precision Industries,
Inc. ............................ 5,000 76,350
Cincinnati Milacron, Inc. ......... 15,000 364,688
CLARCOR, Inc. ..................... 5,100 107,100
CUNO, Inc.* ....................... 5,300 114,613
Kollmorgen Corp. .................. 19,000 381,188
Manitowoc Co., Inc. ............... 11,000 443,438
Precision Castparts Corp. ......... 1,000 53,375
Regal Beloit Corp. ................ 3,500 99,750
SPS Technologies, Inc.* ........... 7,500 438,750
Stewart & Stevenson Services,
Inc. ............................ 11,000 198,000
-----------
2,565,340
-----------
</TABLE>
96
<PAGE>
LORD ABBETT SMALL CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 3.9%
Arrow International, Inc. ......... 27,000 $ 740,813
Invacare Corp. .................... 4,400 112,750
Marquette Medical Systems,
Inc.* ........................... 13,000 333,531
-----------
1,187,094
-----------
METALS & MINING -- 4.2%
Cleveland-Cliffs, Inc. ............ 3,100 166,238
Hawk Corp. Cl-A* .................. 2,100 37,013
IMCO Recycling, Inc. .............. 11,000 203,500
Penn Virginia Corp. ............... 7,500 194,063
Quanex Corp. ...................... 10,900 330,406
Wolverine Tube, Inc.* ............. 8,500 323,000
-----------
1,254,220
-----------
OFFICE EQUIPMENT -- 0.5%
Brady, (W.H.) Co. ................. 5,000 139,063
-----------
OIL & GAS -- 4.0%
Domain Energy Corp.* .............. 10,000 120,000
Grey Wolf, Inc.* .................. 35,000 111,563
KCS Energy, Inc. .................. 5,000 57,188
Meridian Resource Corp.* .......... 50,000 353,125
Oceaneering International,
Inc.* ........................... 14,000 248,500
Patterson Energy, Inc.* ........... 19,000 185,844
Pool Energy Services Co.* ......... 8,000 118,000
-----------
1,194,220
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 1.2%
Wausau-Mosinee Paper Corp. ........ 16,000 $ 366,000
-----------
PRINTING & PUBLISHING -- 2.4%
Scholastic Corp.* ................. 18,000 717,750
-----------
RETAIL & MERCHANDISING -- 2.2%
Elder-Berrman Stores Corp.* ....... 20,000 533,750
K2, Inc. .......................... 7,000 123,375
-----------
657,125
-----------
TRANSPORTATION -- 2.8%
Air Express International Corp. ... 27,000 722,250
Smithway Motor Express Corp.
Cl-A* ........................... 11,000 110,000
-----------
832,250
-----------
TOTAL COMMON STOCK
(COST $27,456,827)................... 27,047,644
-----------
SHORT-TERM INVESTMENTS -- 8.4%
Temporary Investment Cash Fund..... 1,260,557 1,260,557
Temporary Investment Fund.......... 1,260,557 1,260,557
-----------
(COST $2,521,114).................. 2,521,114
-----------
TOTAL INVESTMENTS -- 98.4%
(COST $29,977,941)................... 29,568,758
OTHER ASSETS LESS
LIABILITIES -- 2.6%.................. 481,066
-----------
NET ASSETS -- 100.0%................... $30,049,824
===========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
97
<PAGE>
BANKERS TRUST ENHANCED 500 PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 88.8%
ADVERTISING -- 0.1%
Interpublic Group of Companies,
Inc. ............................ 700 $ 42,481
Omnicom Group, Inc. ............... 1,700 84,787
------------
127,268
------------
AEROSPACE -- 0.9%
AlliedSignal, Inc. ................ 5,200 230,750
Boeing Co. ........................ 5,300 236,181
General Dynamics Corp. ............ 600 27,900
Lockheed Martin Corp. ............. 1,700 179,987
Raytheon Co. Cl-B.................. 2,900 171,462
United Technologies Corp. ......... 2,100 194,250
------------
1,040,530
------------
AIRLINES -- 0.8%
AMR Corp.*......................... 4,700 391,275
Delta Air Lines, Inc. ............. 2,500 323,125
Southwest Airlines Co. ............ 1,000 29,625
US Airways Group, Inc.*............ 1,700 134,725
------------
878,750
------------
AUTOMOBILE MANUFACTURERS -- 1.9%
Chrysler Corp. .................... 10,400 586,300
Ford Motor Co. .................... 15,000 885,000
General Motors Corp. .............. 10,100 674,806
Navistar International Corp.*...... 2,300 66,412
------------
2,212,518
------------
AUTOMOTIVE PARTS -- 0.4%
Autozone, Inc.*.................... 3,200 102,200
Cummins Engine Co., Inc. .......... 4,200 215,250
Eaton Corp. ....................... 400 31,100
Echlin, Inc. ...................... 630 30,909
Genuine Parts Co. ................. 1,300 44,931
Goodyear Tire & Rubber Co. ........ 1,100 70,881
------------
495,271
------------
BEVERAGES -- 2.7%
Anheuser-Busch Companies, Inc. .... 4,400 207,625
Brown-Forman Corp. Cl-B............ 100 6,425
Coca-Cola Co. ..................... 26,000 2,223,000
PepsiCo, Inc. ..................... 15,000 617,812
------------
3,054,862
------------
BROADCASTING -- 0.5%
CBS Corp. ......................... 6,500 206,375
Clear Channel Communications,
Inc.*............................ 800 87,300
Cognizant Corp. ................... 1,000 63,000
Gannett Co., Inc. ................. 2,500 177,656
King World Productions, Inc.*...... 3,000 76,500
------------
610,831
------------
BUILDING MATERIALS -- 0.1%
Lowe's Companies, Inc. ............ 2,400 97,350
Masco Corp. ....................... 1,100 66,550
------------
163,900
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
BUSINESS SERVICES -- 0.2%
Avery Dennison Corp. .............. 500 $ 26,875
Deluxe Corp. ...................... 4,500 161,156
Ecolab, Inc. ...................... 200 6,200
Equifax, Inc. ..................... 700 25,419
Harris Corp. ...................... 100 4,469
------------
224,119
------------
CHEMICALS -- 2.1%
Air Products & Chemicals, Inc. .... 1,900 76,000
Dow Chemical Co. .................. 4,400 425,425
Du Pont, (E.I.) de Nemours &
Co. ............................. 11,500 858,187
Eastman Chemical Co. .............. 3,600 224,100
FMC Corp.*......................... 1,100 75,006
Monsanto Co. ...................... 5,600 312,900
PPG Industries, Inc. .............. 1,300 90,431
Rohm & Haas Co. ................... 300 31,181
Union Carbide Corp. ............... 5,400 288,225
------------
2,381,455
------------
CLOTHING & APPAREL -- 0.2%
Abercrombie & Fitch Co. Cl-A*...... 415 18,260
Fruit of the Loom, Inc. Cl-A....... 2,300 76,331
Limited, Inc. ..................... 1,250 41,406
VF Corp. .......................... 800 41,200
------------
177,197
------------
COMPUTER HARDWARE -- 3.2%
Bay Networks, Inc.*................ 4,000 129,000
Compaq Computer Corp. ............. 20,445 580,113
Dell Computer Corp.*............... 7,600 705,375
EMC Corp.*......................... 6,700 300,244
Hewlett-Packard Co. ............... 10,400 622,700
International Business Machines
Corp. ........................... 11,700 1,343,306
------------
3,680,738
------------
COMPUTER SERVICES & SOFTWARE -- 4.8%
Apple Computer, Inc.*.............. 3,300 94,669
Automatic Data Processing, Inc. ... 2,500 182,187
Ceridian Corp.*.................... 1,800 105,750
Cisco Systems, Inc.*............... 11,500 1,058,719
Computer Associates International,
Inc. ............................ 5,000 277,812
Gateway 2000, Inc.*................ 2,500 126,562
Microsoft Corp.*................... 27,100 2,936,962
Novell, Inc.*...................... 8,700 110,925
Oracle Corp.*...................... 2,800 68,775
Parametric Technology Corp.*....... 4,300 116,637
Silicon Graphics, Inc.*............ 5,800 70,325
Sun Microsystems, Inc.*............ 5,200 225,875
Unisys Corp.*...................... 5,200 146,900
------------
5,522,098
------------
CONGLOMERATES -- 2.0%
ITT Industries, Inc. .............. 200 7,475
Johnson Controls, Inc. ............ 200 11,437
Minnesota Mining &
Manufacturing Co. ............... 6,300 517,781
Philip Morris Companies, Inc. ..... 29,900 1,177,312
Tenneco, Inc. ..................... 1,000 38,062
</TABLE>
98
<PAGE>
BANKERS TRUST ENHANCED 500 PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Textron, Inc. ..................... 4,400 $ 315,425
The Seagram Co. Ltd. .............. 2,700 110,531
Tyco International Ltd. ........... 1,450 91,350
------------
2,269,373
------------
CONSTRUCTION -- 0.6%
Centex Corp. ...................... 5,900 222,725
Fleetwood Enterprises, Inc. ....... 4,800 192,000
Pulte Corp. ....................... 8,300 247,962
------------
662,687
------------
CONSUMER PRODUCTS & SERVICES -- 3.1%
Allergan, Inc. .................... 200 9,275
Bausch & Lomb, Inc. ............... 200 10,025
Cendant Corp.*..................... 11,500 240,062
Clorox Co. ........................ 700 66,762
Colgate-Palmolive Co. ............. 2,800 246,400
Eastman Kodak Co. ................. 2,900 211,881
Gillette Co. ...................... 11,100 629,231
Hasbro, Inc. ...................... 400 15,725
International Flavors & Fragrances,
Inc. ............................ 400 17,375
Jostens, Inc. ..................... 5,800 139,925
Procter & Gamble Co. .............. 13,700 1,247,556
Raychem Corp. ..................... 100 2,956
Rubbermaid, Inc. .................. 500 16,594
Sherwin-Williams Co. .............. 600 19,875
Unilever NV........................ 6,200 489,412
UST, Inc. ......................... 7,200 194,400
Whirlpool Corp. ................... 200 13,750
------------
3,571,204
------------
CONTAINERS & PACKAGING -- 0.1%
Crown Cork & Seal Co., Inc. ....... 600 28,500
Sealed Air Corp.*.................. 1,700 62,475
------------
90,975
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.7%
Aeroquip-Vickers, Inc. ............ 3,600 210,150
AMP, Inc. ......................... 1,500 51,562
Emerson Electric Co. .............. 4,000 241,500
General Electric Co. .............. 34,500 3,139,500
Honeywell, Inc. ................... 3,600 300,825
Parker-Hannifin Corp. ............. 500 19,062
Tandy Corp. ....................... 400 21,225
Texas Instruments, Inc. ........... 3,500 204,094
The Perkin-Elmer Corp. ............ 100 6,219
------------
4,194,137
------------
ENTERTAINMENT & LEISURE -- 1.3%
Disney, (Walt) Co. ................ 7,100 745,944
Mirage Resorts, Inc.*.............. 3,900 83,119
Time Warner, Inc. ................. 5,400 461,362
Viacom, Inc. Cl-B*................. 3,900 227,175
------------
1,517,600
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
ENVIRONMENTAL SERVICES -- 0.1%
Browning-Ferris Industries,
Inc. ............................ 1,200 41,700
Waste Management, Inc. ............ 3,800 133,000
------------
174,700
------------
FARMING & AGRICULTURE -- 0.9%
Dekalb Genetics Corp. Cl-B......... 10,200 $ 965,175
Pioneer Hi-Bred International,
Inc. ............................ 1,200 49,650
------------
1,014,825
------------
FINANCIAL-BANK & TRUST -- 6.9%
Banc One Corp. .................... 6,100 340,456
Bank of New York Co., Inc. ........ 3,500 212,406
BankAmerica Corp. ................. 9,500 821,156
BankBoston Corp. .................. 2,300 127,937
BB&T Corp. ........................ 900 60,862
Chase Manhattan Corp. ............. 8,300 626,650
Citicorp........................... 6,460 964,155
Comerica, Inc. .................... 1,100 72,875
Countrywide Credit Industries,
Inc. ............................ 400 20,300
Fifth Third Bancorp................ 1,800 113,400
First Chicago NBD Corp. ........... 2,700 239,287
First Union Corp. ................. 9,742 567,471
Golden West Financial Corp. ....... 2,600 276,412
Huntington Bancshares, Inc. ....... 1,200 40,200
Keycorp............................ 3,700 131,812
MBNA Corp. ........................ 4,300 141,900
Mellon Bank Corp. ................. 2,200 153,175
Mercantile Bancorporation, Inc. ... 800 40,300
Morgan, (J.P.) & Co., Inc. ........ 3,300 386,512
National City Corp. ............... 3,000 213,000
NationsBank Corp. ................. 9,400 719,100
Northern Trust Corp. .............. 1,100 83,875
Norwest Corp. ..................... 7,100 265,362
PNC Bank Corp. NA ................. 2,700 145,294
Republic New York Corp. ........... 600 37,762
State Street Boston Corp. ......... 1,100 76,450
Summit Bancorp..................... 1,100 52,250
Suntrust Banks, Inc. .............. 1,800 146,362
Synovus Financial Corp. ........... 1,350 32,062
U.S. Bancorp....................... 6,700 288,100
Wachovia Corp. .................... 1,800 152,100
Wells Fargo & Co. ................. 800 295,200
------------
7,844,183
------------
FINANCIAL SERVICES -- 3.7%
Ahmanson, (H.F.) & Co. ............ 2,600 184,600
American Express Co. .............. 7,000 798,000
Associates First Capital Corp.
Cl-A............................. 3,131 240,696
Beneficial Corp. .................. 200 30,637
Block, (H&R), Inc. ................ 400 16,850
Capital One Financial Corp. ....... 4,000 496,750
Fannie Mae......................... 10,600 643,950
Franklin Resources, Inc. .......... 2,500 135,000
Freddie Mac........................ 6,600 310,612
Lehman Brothers Holdings, Inc. .... 700 54,294
Merrill Lynch & Co., Inc. ......... 3,100 285,975
Morgan Stanley, Dean Witter &
Co. ............................. 5,600 511,700
</TABLE>
99
<PAGE>
BANKERS TRUST ENHANCED 500 PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Schwab, (Charles) Corp. ........... 1,800 $ 58,500
SLM Holding Corp. ................. 9,600 470,400
------------
4,237,964
------------
FOOD -- 2.7%
Albertson's, Inc. ................. 2,000 103,625
American Stores Co. ............... 1,300 31,444
Archer-Daniels-Midland Co. ........ 5,100 98,812
Bestfoods, Inc. ................... 2,700 156,769
Campbell Soup Co. ................. 4,300 228,437
General Mills, Inc. ............... 3,800 259,825
Giant Food, Inc. Cl-A.............. 22,400 964,600
Heinz, (H.J.) Co. ................. 3,300 185,212
Hershey Foods Corp. ............... 700 48,300
Kellogg Co. ....................... 3,600 135,225
Kroger Co.*........................ 3,900 167,212
Quaker Oats Co. ................... 800 43,950
Ralston Purina Group............... 800 93,450
Sara Lee Corp. .................... 4,600 257,312
Supervalu, Inc. ................... 4,600 204,125
Sysco Corp. ....................... 2,200 56,375
Vlasic Foods International,
Inc. ............................ 410 8,251
Winn-Dixie Stores, Inc. ........... 800 40,950
Wrigley, (Wm., Jr.) Co. ........... 600 58,800
------------
3,142,674
------------
HEALTHCARE SERVICES -- 0.2%
Tenet Healthcare Corp.*............ 4,600 143,750
United Healthcare Corp. ........... 1,500 95,250
------------
239,000
------------
HOTELS & MOTELS -- 0.3%
Harrah's Entertainment, Inc.*...... 9,600 223,200
Hilton Hotels Corp. ............... 1,500 42,750
Marriott International, Inc.
Cl-A............................. 1,800 58,275
------------
324,225
------------
INSURANCE -- 4.4%
Allstate Corp. .................... 4,300 393,719
American General Corp. ............ 2,000 142,375
American International Group,
Inc. ............................ 8,950 1,306,700
AON Corp. ......................... 1,200 84,300
Chubb Corp. ....................... 1,400 112,525
CIGNA Corp. ....................... 1,800 124,200
Conseco, Inc. ..................... 1,300 60,775
General Re Corp. .................. 600 152,100
Humana, Inc.*...................... 4,000 124,750
Jefferson-Pilot Corp. ............. 500 28,969
John Alden Financial Corp. ........ 43,500 957,000
Lincoln National Corp. ............ 600 54,825
Loews Corp. ....................... 900 78,412
Marsh & McLennan Companies,
Inc. ............................ 1,950 117,853
MGIC Investment Corp. ............. 800 45,650
Progressive Corp. ................. 500 70,500
Safeco Corp. ...................... 200 9,088
St. Paul Companies, Inc. .......... 6,814 286,614
The Hartford Financial Services
Group, Inc. ..................... 900 102,938
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Torchmark Corp. ................... 700 $ 32,025
Travelers Group, Inc. ............. 10,600 642,625
UNUM Corp. ........................ 1,000 55,500
------------
4,983,443
------------
MACHINERY & EQUIPMENT -- 1.5%
Black & Decker Corp. .............. 200 12,200
Camco International, Inc. ......... 1,450 112,919
Case Corp. ........................ 200 9,650
Caterpillar, Inc. ................. 7,400 391,275
Cooper Industries, Inc. ........... 900 49,444
Deere & Co. ....................... 6,400 338,400
Dover Corp. ....................... 1,400 47,950
Harnischfeger Industries, Inc. .... 200 5,663
Illinois Tool Works, Inc. ......... 2,100 140,044
Ingersoll-Rand Co. ................ 1,300 57,281
Paccar, Inc. ...................... 4,000 209,000
Pall Corp. ........................ 8,900 182,450
Stanley Works, Inc. ............... 200 8,313
Thermo Electron Corp.*............. 3,000 102,563
W.W. Grainger, Inc. ............... 400 19,925
------------
1,687,077
------------
MEDICAL SUPPLIES & EQUIPMENT -- 2.1%
Abbott Laboratories................ 14,900 609,038
Baxter International, Inc. ........ 2,400 129,150
Becton Dickinson & Co. ............ 600 46,575
Biomet, Inc. ...................... 500 16,531
Boston Scientific Corp.*........... 2,800 200,550
C.R. Bard, Inc. ................... 100 3,806
Guidant Corp. ..................... 1,000 71,313
Johnson & Johnson Co. ............. 13,600 1,003,000
Medtronic, Inc. ................... 4,300 274,125
St. Jude Medical, Inc.*............ 2,300 84,669
U.S. Surgical Corp. ............... 325 14,828
------------
2,453,585
------------
METALS & MINING -- 0.7%
Alcan Aluminium Ltd. .............. 1,200 33,150
Allegheny Teledyne, Inc. .......... 600 13,725
Armco, Inc.*....................... 10,500 66,938
Asarco, Inc. ...................... 7,000 155,750
Barrick Gold Corp. ................ 2,300 44,131
Bethlehem Steel Corp.*............. 4,750 59,078
Cyprus AMAX Minerals Co. .......... 10,400 137,800
Homestake Mining Co. .............. 600 6,225
Inco, Ltd. ........................ 200 2,725
Nucor Corp. ....................... 200 9,200
Placer Dome, Inc. ................. 100 1,175
Reynolds Metals Co. ............... 4,200 234,938
Worthington Industries, Inc. ...... 200 3,013
------------
767,848
------------
OFFICE EQUIPMENT -- 0.4%
Pitney Bowes, Inc. ................ 2,200 105,875
Xerox Corp. ....................... 3,000 304,875
------------
410,750
------------
</TABLE>
100
<PAGE>
BANKERS TRUST ENHANCED 500 PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
OIL & GAS -- 7.6%
Amerada Hess Corp. ................ 600 $ 32,588
Amoco Corp. ....................... 8,300 345,488
Ashland, Inc. ..................... 4,100 211,663
Atlantic Richfield Co. ............ 4,900 382,813
Baker Hughes, Inc. ................ 1,000 34,563
Burlington Resources, Inc. ........ 1,200 51,675
Chevron Corp. ..................... 9,500 789,094
Coastal Corp. ..................... 600 41,888
Columbia Gas System, Inc. ......... 300 16,688
Consolidated Natural Gas Co. ...... 3,400 200,175
Dresser Industries, Inc. .......... 13,600 599,250
Eastern Enterprises................ 3,500 150,063
Exxon Corp. ....................... 28,800 2,053,800
Mobil Corp. ....................... 7,800 597,675
Nicor, Inc. ....................... 4,300 172,538
Occidental Petroleum Corp. ........ 10,900 294,300
Oneok, Inc. ....................... 5,400 215,325
Oryx Energy Co.*................... 2,900 64,163
Pennzoil Co. ...................... 3,800 192,375
Phillips Petroleum Co. ............ 1,600 77,100
Rowan Companies, Inc.*............. 2,700 52,481
Royal Dutch Petroleum Co. ......... 21,900 1,200,394
Schlumberger Ltd. ................. 3,100 211,769
Sonat, Inc. ....................... 200 7,725
Texaco, Inc. ...................... 8,800 525,250
Unocal Corp. ...................... 1,600 57,200
USX-Marathon Group................. 2,100 72,056
------------
8,650,099
------------
PAPER & FOREST PRODUCTS -- 1.5%
Boise Cascade Corp. ............... 200 6,550
Fort James Corp. .................. 1,300 57,850
Georgia Pacific Group.............. 3,700 218,069
International Paper Co. ........... 7,000 301,000
Kimberly-Clark Corp. .............. 5,300 243,138
Mead Corp. ........................ 6,400 203,200
Potlatch Corp. .................... 4,100 172,200
Stone Container Corp.*............. 5,700 89,063
Temple Inland, Inc. ............... 3,600 193,950
Union Camp Corp. .................. 100 4,963
Weyerhaeuser Co. .................. 1,400 64,663
Willamette Industries, Inc. ....... 6,200 198,400
------------
1,753,046
------------
PHARMACEUTICALS -- 6.9%
ALZA Corp.*........................ 2,300 99,475
American Home Products Corp. ...... 13,000 672,750
Bristol-Meyers Squibb Co. ......... 10,100 1,160,869
Cardinal Health, Inc. ............. 700 65,625
Lilly, (Eli) & Co. ................ 11,300 746,506
Merck & Co., Inc. ................. 10,700 1,431,125
Pfizer, Inc. ...................... 13,600 1,478,150
Pharmacia & Upjohn, Inc. .......... 4,700 216,788
Schering-Plough Corp. ............. 7,300 668,863
Vitalink Pharmacy Services,
Inc.*............................ 36,800 811,900
Warner-Lambert Co. ................ 8,000 555,000
------------
7,907,051
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PRINTING & PUBLISHING -- 0.4%
Dow Jones & Co., Inc. ............. 200 $ 11,150
Knight-Ridder, Inc. ............... 4,000 220,250
McGraw-Hill Co., Inc. ............. 800 65,250
New York Times Co. Cl-A............ 500 39,625
R.R. Donnelley & Sons Co. ......... 700 32,025
Times Mirror Co. Cl-A.............. 200 12,575
Tribune Co. ....................... 700 48,169
------------
429,044
------------
RAILROADS -- 0.2%
Burlington Northern Santa Fe
Corp. ........................... 1,400 137,463
Norfolk Southern Corp. ............ 2,900 86,456
------------
223,919
------------
RESTAURANTS -- 0.7%
Darden Restaurants, Inc. .......... 13,400 212,725
McDonald's Corp. .................. 6,500 448,500
Tricon Global Restaurants, Inc.*... 3,200 101,400
------------
762,625
------------
RETAIL & MERCHANDISING -- 4.6%
Avon Products, Inc. ............... 900 69,750
Circuit City Stores, Inc. ......... 100 4,688
Costco Companies, Inc.*............ 3,300 208,106
CVS Corp. ......................... 2,600 101,238
Dayton-Hudson Corp. ............... 3,800 184,300
Dillard's, Inc. Cl-A............... 200 8,288
Federated Department Stores,
Inc.*............................ 3,300 177,581
Gap, Inc. ......................... 3,200 197,200
Harcourt General, Inc. ............ 100 5,950
Home Depot, Inc. .................. 7,100 589,744
Kmart Corp.*....................... 8,000 154,000
May Department Stores Co. ......... 1,900 124,450
Mercantile Stores Co., Inc. ....... 12,300 970,931
Nordstrom, Inc. ................... 300 23,175
Penney, (J.C.) Co., Inc. .......... 2,200 159,088
Rite Aid Corp. .................... 1,900 71,369
Sears, Roebuck & Co. .............. 3,400 207,613
TJX Companies, Inc. ............... 1,600 38,600
Venator Group, Inc.*............... 3,700 70,763
Wal-Mart Stores, Inc. ............. 27,800 1,688,850
Walgreen Co. ...................... 4,300 177,644
------------
5,233,328
------------
SEMICONDUCTORS -- 1.0%
Intel Corp. ....................... 14,300 1,059,988
Motorola, Inc. .................... 1,300 68,331
------------
1,128,319
------------
TELECOMMUNICATIONS -- 9.2%
360 Communications Co.*............ 800 25,600
AirTouch Communications, Inc.*..... 9,800 572,688
Alltel Corp. ...................... 600 27,900
Ameritech Corp. ................... 10,700 480,163
Ascend Communications, Inc.*....... 2,000 99,125
Bell Atlantic Corp. ............... 19,800 903,375
BellSouth Corp. ................... 9,800 657,825
Comcast Corp. Cl-A................. 2,200 89,306
</TABLE>
101
<PAGE>
BANKERS TRUST ENHANCED 500 PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
General Instrument Corp.*.......... 4,000 $ 108,750
GTE Corp. ......................... 12,500 695,313
Lucent Technologies, Inc. ......... 13,600 1,131,350
MCI Communications Corp. .......... 37,900 2,202,938
MediaOne Group, Inc.*.............. 8,000 351,500
Northern Telecom Ltd............... 2,300 130,525
SBC Communications, Inc. .......... 10,000 400,000
Southern New England
Telecommunications Corp. ........ 4,800 314,400
Sprint Corp. ...................... 3,300 232,650
Teleport Communications Group, Inc.
Cl-A*............................ 20,900 1,133,825
Tellabs, Inc.*..................... 2,800 200,550
U. S. West, Inc. .................. 8,104 380,888
Williams Companies, Inc. .......... 3,400 114,750
WorldCom, Inc.*.................... 4,600 222,813
------------
10,476,234
------------
TRANSPORTATION -- 0.4%
CSX Corp. ......................... 1,900 86,450
FDX Corp.*......................... 2,000 125,500
Laidlaw, Inc. ..................... 1,100 13,406
Ryder Systems, Inc. ............... 5,800 183,063
------------
408,419
------------
UTILITIES -- 3.7%
Ameren Corp.*...................... 600 23,850
American Electric Power Co.,
Inc. ............................ 6,100 276,788
Baltimore Gas & Electric Co. ...... 600 18,638
Carolina Power & Light Co. ........ 4,900 212,538
Central & South West Corp. ........ 1,000 26,875
Cinergy Corp. ..................... 800 28,000
Consolidated Edison, Inc. ......... 5,700 262,556
DTE Energy Co. .................... 600 24,225
Duke Energy Corp. ................. 6,800 402,900
Edison International Co. .......... 10,100 298,581
Enron Corp. ....................... 2,300 124,344
FirstEnergy Corp. ................. 8,100 249,075
FPL Group, Inc. ................... 4,200 264,600
GPU, Inc. ......................... 500 18,906
Houston Industries, Inc. .......... 10,000 308,750
Niagara Mohawk Power Corp.*........ 17,200 256,925
PacifiCorp......................... 10,700 242,088
PECO Energy Co. ................... 8,400 245,175
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
PG&E Corp. ........................ 8,500 $ 268,281
PP&L Resources, Inc. .............. 400 9,075
Public Service Enterprise Group,
Inc. ............................ 1,500 51,656
Sempra Energy*..................... 6,316 175,268
Southern Co. ...................... 6,200 171,663
Texas Utilities Co. ............... 1,700 70,763
Unicom Corp. ...................... 6,600 231,413
------------
4,262,933
------------
TOTAL COMMON STOCK
(COST $96,587,584)................... 101,390,804
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-----
<S> <C> <C>
U.S. TREASURY OBLIGATIONS -- 0.6%
U.S. Treasury Bills
4.97%, 08/20/98#................. $350 347,668
4.99%, 08/20/98#................. 95 94,367
5.01%, 08/20/98#................. 25 24,833
5.02%, 08/20/98#................. 200 198,667
5.03%, 08/20/98#................. 10 9,933
------------
(COST $675,288)...................... 675,468
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 7.8%
Temporary Investment Cash Fund.... 4,442,964 4,442,964
Temporary Investment Fund......... 4,442,965 4,442,965
------------
(COST $8,885,929)................... 8,885,929
------------
TOTAL INVESTMENTS -- 97.2%
(COST $106,148,801)................. 110,952,201
OTHER ASSETS LESS
LIABILITIES -- 2.8%................. 3,242,357
------------
NET ASSETS -- 100.0%.................. $114,194,558
============
</TABLE>
- ----------------------------------------------------------
# Securities with an aggregate market value of $675,468 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at June 30, 1998:
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF UNREALIZED
DESCRIPTION MONTH CONTRACTS APPRECIATION
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
S&P 500.. 09/98 61 $369,160
========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
102
<PAGE>
STEIN ROE VENTURE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCK -- 92.9%
ADVERTISING -- 0.3%
Catalina Marketing Corp.*.......... 300 $ 15,581
----------
AUTOMOTIVE PARTS -- 0.8%
Superior Industries International,
Inc. ............................ 1,400 39,462
----------
BROADCASTING -- 6.4%
Central European Media Enterprises
Ltd.*............................ 8,800 190,300
Metro Networks, Inc. .............. 3,000 129,375
----------
319,675
----------
BUSINESS SERVICES -- 9.0%
Alternative Resources Corp.*....... 8,800 108,900
Meadowbrook Insurance Group,
Inc. ............................ 6,400 174,000
Metamor Worldwide, Inc. ........... 4,700 165,381
----------
448,281
----------
CHEMICALS -- 2.7%
Chemfirst, Inc. ................... 5,300 133,825
----------
CLOTHING & APPAREL -- 2.7%
Columbia Sportswear Co. ........... 7,100 134,900
----------
COMPUTER SERVICES & SOFTWARE -- 9.5%
Artesyn Technologies, Inc.*........ 8,100 129,600
Barra, Inc.*....................... 4,800 117,600
National Computer Systems, Inc. ... 2,000 48,000
Radiant Systems, Inc.*............. 3,900 56,550
SPSS, Inc. ........................ 5,300 123,225
----------
474,975
----------
CONSUMER PRODUCTS & SERVICES -- 6.6%
Nu Skin Asia Pacific, Inc.*........ 6,200 120,900
Sola International, Inc.*.......... 6,400 209,200
----------
330,100
----------
CONTAINERS & PACKAGING -- 2.2%
Silgan Holdings, Inc. ............. 3,900 109,200
----------
DIVERSIFIED RESOURCES -- 1.7%
Fisher Companies, Inc. ............ 1,200 85,200
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 10.3%
AVX Corp. ......................... 4,800 77,100
Black Box Corp.*................... 4,100 136,069
Celestica, Inc.*................... 5,200 91,000
Hubbell, Inc. Cl-B................. 2,900 120,712
Kent Electronics Corp. ............ 4,700 86,069
----------
510,950
----------
ENTERTAINMENT & LEISURE -- 3.2%
Ballantyne of Omaha, Inc. ......... 14,100 118,087
Video Update, Inc. ................ 28,300 40,681
----------
158,768
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 1.2%
National Bankcorp of Alaska,
Inc. ............................ 1,900 $ 58,662
----------
HEALTHCARE SERVICES -- 2.1%
Complete Management, Inc. ......... 5,400 21,262
National Dentex Corp. ............. 3,500 82,250
----------
103,512
----------
INSURANCE -- 2.0%
Paula Financial, Inc. ............. 4,900 98,612
----------
MEDICAL SUPPLIES & EQUIPMENT -- 10.4%
BioSource International, Inc. ..... 6,200 34,488
Schein, (Henry), Inc.*............. 3,500 161,438
Urologix, Inc. .................... 5,500 46,750
Uroquest Medical Corp. ............ 5,100 13,388
Xomed Surgical Products, Inc. ..... 5,700 177,413
Young Innovations, Inc. ........... 5,400 83,025
----------
516,502
----------
OIL & GAS -- 2.9%
Barrett Resources Corp.*........... 1,400 52,413
Meridian Resource Corp.*........... 13,200 93,225
----------
145,638
----------
PHARMACEUTICALS -- 2.3%
Ligand Pharmaceuticals, Inc.
Cl-B............................. 4,100 52,788
Shire Pharmaceuticals Group PLC
[ADR]............................ 2,900 61,988
----------
114,776
----------
PRINTING & PUBLISHING -- 2.0%
CMP Media, Inc. ................... 5,600 98,000
----------
REAL ESTATE -- 7.3%
CB Commercial Real Estate Services
Group............................ 6,800 227,375
Lasalle Partners, Inc. ............ 3,000 133,500
Reckson Services Industries,
Inc.*............................ 164 543
----------
361,418
----------
RESTAURANTS -- 3.4%
Triarc Companies, Inc. ............ 7,600 166,725
----------
RETAIL & MERCHANDISING -- 3.9%
Regis Corp. ....................... 4,600 135,988
School Specialty, Inc.*............ 3,400 55,675
----------
191,663
----------
TOTAL COMMON STOCK
(COST $5,094,455).................... 4,616,425
----------
SHORT-TERM INVESTMENTS -- 9.6%
Temporary Investment Cash Fund..... 238,798 238,798
Temporary Investment Fund.......... 238,799 238,799
----------
(COST $477,597).................... 477,597
----------
</TABLE>
103
<PAGE>
STEIN ROE VENTURE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
-----
<S> <C> <C>
TOTAL INVESTMENTS -- 102.5%
(COST $5,572,052).................... $5,094,022
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (2.5%)..................... (122,637)
----------
NET ASSETS -- 100.0%................... $4,971,385
==========
</TABLE>
- --------------------------------------------------------------------------------
Definitions of abbreviations are included following the Schedules of
Investments.
* Non-income producing securities.
See Notes to Financial Statements.
DEFINITION OF ABBREVIATIONS
- --------------------------------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
- -----------------------
ADR-American Depositary Receipt
ADS-American Depositary Shares
BRB-Brady Bond
FLIRB-Floating Interest Rate Bond
FRB-Floating Rate Bond (1)
FRN-Floating Rate Note (1)
GDR-Global Depositary Receipt
IO-Interest Only Security
PIK-Payment in Kind Security
REIT-Real Estate Investment Trust
STEP-Stepped Coupon Bond (2)
TBA-To be Announced Security
VR-Variable Rate Bond (1)
ZCB-Zero Coupon Bond (2)
(1)- Rates shown for variable and floating rate securities are the coupon rates
as of June 30, 1998.
(2)- Rates shown are the effective yields at purchase date.
COUNTRIES/CURRENCIES:
- -----------------------
ATS-Austria/Austrian Schilling
AUD-Australia/Australian Dollar
BEF-Belgium/Belgian Franc
BRC- Brazil/Brazilian Real
CAD-Canada/Canadian Dollar
CHF-Switzerland/Swiss Franc
DEM-Germany/German Deutschemark
DKK-Denmark/Danish Krone
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 Krone
NZD-New Zealand/New Zealand Dollar
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Krona
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
104
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
----------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
AST NEUBERGER&
PUTNAM LORD ABBETT AST BERMAN
INTERNATIONAL GROWTH AND JANCAP MONEY MID-CAP
EQUITY INCOME GROWTH MARKET VALUE
------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at value (A)....... $515,594 $1,110,121 $2,232,683 $816,316 $216,036
Cash in bank, including foreign currency
holdings................................... 1,809 630 -- 8 --
Net receivable for forward foreign currency
exchange contracts purchased............... 341 -- -- -- --
Net receivable for forward foreign currency
exchange contracts sold.................... -- -- -- -- --
Receivable for:
Securities sold............................ 14,748 5,051 4,117 -- 2,712
Dividends and interest..................... 1,988 2,204 1,880 3,784 257
Fund shares sold........................... 7 5 4,421 7,983 760
Futures variation margin................... -- -- -- -- --
Other assets................................. 38 -- 6 2 1
Unrealized appreciation on interest rate swap
agreements................................. -- -- -- -- --
-------- ---------- ---------- -------- --------
TOTAL ASSETS............................. 534,525 1,118,011 2,243,107 828,093 219,766
-------- ---------- ---------- -------- --------
LIABILITIES
Cash overdraft............................... -- -- -- -- --
Net payable for forward foreign currency
exchange contracts purchased............... -- -- 90 -- --
Net payable for forward foreign currency
exchange contracts sold.................... 1,002 -- 15 -- --
Written options outstanding, at value........ -- -- -- -- --
Payable for:
Securities purchased....................... 17,542 10,169 -- -- 4,255
Fund shares redeemed....................... 156 36 131 20 1
Futures variation margin................... -- -- -- -- --
Advisory fees.............................. 229 356 827 97 84
Shareholder servicing fees................. 42 89 168 79 16
Accrued expenses........................... 294 108 155 147 44
Accrued dividends.......................... -- -- -- 3,795 --
-------- ---------- ---------- -------- --------
TOTAL LIABILITIES........................ 19,265 10,758 1,386 4,318 4,400
-------- ---------- ---------- -------- --------
NET ASSETS...................................... $515,260 $1,107,253 $2,241,721 $823,775 $215,366
======== ========== ========== ======== ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares
authorized, $.001 par value per share)......... $ 22 $ 52 $ 76 $ 824 $ 16
Additional paid-in capital...................... 390,852 861,118 1,319,905 822,918 192,799
Undistributed net investment income (loss)...... 3,762 7,111 2,738 -- 2,511
Accumulated net realized gain (loss) on
investments.................................... 30,975 70,244 66,617 33 26,384
Accumulated net unrealized appreciation
(depreciation) on investments.................. 89,649 168,728 852,385 -- (6,344)
-------- ---------- ---------- -------- --------
NET ASSETS...................................... $515,260 $1,107,253 $2,241,721 $823,775 $215,366
======== ========== ========== ======== ========
Shares of common stock outstanding.............. 22,462 52,400 76,163 823,742 16,318
Net asset value, offering and redemption price
per share...................................... $ 22.94 $ 21.13 $ 29.43 $ 1.00 $ 13.20
======== ========== ========== ======== ========
(A) Investments at cost......................... $425,204 $ 941,393 $1,380,192 $816,316 $222,380
======== ========== ========== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
105
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO T. ROWE T. ROWE NEUBERGER&
AST PRICE TOTAL INVESCO FOUNDERS PRICE PRICE BERMAN
PUTNAM FEDERATED ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL MID-CAP
BALANCED HIGH YIELD ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH
-------- ----------- ---------- -------- -------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$398,022 $552,797 $266,533 $861,747 $754,919 $272,642 $451,601 $132,130 $225,360
2,047 -- 187 1,607 1,028 1 25,701 5,515 --
31 -- -- -- -- -- -- 81 --
-- -- -- -- -- -- -- -- --
8,073 1,946 290 2 -- 676 341 4 --
1,829 9,066 1,895 5,986 3,361 33 1,061 3,466 60
265 2,714 5 1,417 954 5 11 32 270
362 -- -- 648 -- -- -- -- --
1 330 -- 2 2 1 2 1 1
-- -- -- 91 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
410,630 566,853 268,910 871,500 760,264 273,358 478,717 141,229 225,691
-------- -------- -------- -------- -------- -------- -------- -------- --------
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
42 -- -- 4 -- -- 2 -- --
-- -- -- 15 -- -- -- -- --
10,409 4,765 149 173,814 12,596 3,458 424 -- 7,771
-- 28 280 269 64 73 489 45 --
-- -- -- -- -- -- -- -- --
136 246 65 158 225 127 200 -- 73
33 45 22 58 60 21 39 12 16
134 -- 85 94 92 57 132 98 52
-- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
10,754 5,084 601 174,412 13,037 3,736 1,286 155 7,912
-------- -------- -------- -------- -------- -------- -------- -------- --------
$399,876 $561,769 $268,309 $697,088 $747,227 $269,622 $477,431 $141,074 $217,779
======== ======== ======== ======== ======== ======== ======== ======== ========
$ 30 $ 44 $ 17 $ 61 $ 44 $ 15 $ 36 $ 14 $ 13
338,856 522,851 210,799 664,617 585,954 216,179 379,929 140,888 177,029
4,979 20,601 3,369 16,992 7,163 (723) 2,521 8,578 (111)
21,383 4,710 775 7,751 31,085 7,685 2,746 (7,112) 35,071
34,628 13,563 53,349 7,667 122,981 46,466 92,199 (1,294) 5,777
-------- -------- -------- -------- -------- -------- -------- -------- --------
$399,876 $561,769 $268,309 $697,088 $747,227 $269,622 $477,431 $141,074 $217,779
======== ======== ======== ======== ======== ======== ======== ======== ========
29,396 43,770 16,398 60,987 43,806 15,268 36,041 13,797 12,832
$ 13.60 $ 12.83 $ 16.36 $ 11.43 $ 17.06 $ 17.66 $ 13.25 $ 10.23 $ 16.97
======== ======== ======== ======== ======== ======== ======== ======== ========
$364,032 $539,234 $213,180 $856,035 $631,938 $226,176 $359,253 $133,480 $219,583
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
106
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
T. ROWE PIMCO ROBERTSON
PRICE LIMITED STEPHENS AST JANUS
FOUNDERS NATURAL MATURITY VALUE + OVERSEAS
PASSPORT RESOURCES BOND GROWTH GROWTH
-------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at value (A)....... $133,686 $ 99,919 $399,795 $290,325 $517,723
Cash in bank, including foreign currency
holdings................................... -- 15 -- -- 823
Net receivable for forward foreign currency
exchange contracts purchased............... -- -- -- -- --
Net receivable for forward foreign currency
exchange contracts sold.................... -- -- -- -- 667
Receivable for:
Securities sold............................ 1,574 563 60,900 11,528 3,934
Dividends and interest..................... 135 139 3,084 105 447
Fund shares sold........................... 1 -- -- 8 563
Futures variation margin................... -- -- 1 -- --
Other assets................................. 1 1 1 1 1
Unrealized appreciation on interest rate swap
agreements................................. -- -- 50 -- --
-------- -------- -------- -------- --------
TOTAL ASSETS............................. 135,397 100,637 463,831 301,967 524,158
-------- -------- -------- -------- --------
LIABILITIES
Cash overdraft............................... 268 -- -- -- --
Net payable for forward foreign currency
exchange contracts purchased............... 1 -- -- -- 728
Net payable for forward foreign currency
exchange contracts sold.................... 1 -- -- -- --
Written options outstanding, at value........ -- -- -- -- --
Payable for:
Securities purchased....................... 495 -- 162,279 14,160 21,747
Fund shares redeemed....................... 413 54 707 858 --
Futures variation margin................... -- -- -- -- --
Advisory fees.............................. 65 43 72 131 244
Shareholder servicing fees................. 11 8 25 22 39
Accrued expenses........................... 81 42 66 46 106
Accrued dividends.......................... -- -- -- -- --
-------- -------- -------- -------- --------
TOTAL LIABILITIES........................ 1,335 147 163,149 15,217 22,864
-------- -------- -------- -------- --------
NET ASSETS...................................... $134,062 $ 100,490 $300,682 $286,750 $501,294
======== ======== ======== ======== ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares
authorized, $.001 par value per share)......... $ 9 $ 7 $ 28 $ 19 $ 34
Additional paid-in capital...................... 100,733 94,937 291,834 238,597 416,837
Undistributed net investment income (loss)...... 590 472 8,802 (872) 1,937
Accumulated net realized gain (loss) on
investments.................................... (1,173) 8,268 (1,574) 5,126 2,264
Accumulated net unrealized appreciation
(depreciation) on investments.................. 33,903 (3,194) 1,592 43,880 80,222
-------- -------- -------- -------- --------
NET ASSETS...................................... $134,062 $ 100,490 $300,682 $286,750 $501,294
======== ======== ======== ======== ========
Shares of common stock outstanding.............. 9,323 7,219 27,986 19,298 34,424
Net asset value, offering and redemption price
per share...................................... $ 14.38 $ 13.92 $ 10.74 $ 14.86 $ 14.56
======== ======== ======== ======== ========
(A) Investments at cost......................... $ 99,780 $ 103,110 $398,397 $246,445 $437,272
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
107
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
AST PUTNAM TWENTIETH TWENTIETH T. ROWE LORD BANKERS
VALUE CENTURY CENTURY PRICE SMALL MARSICO COHEN & ABBETT TRUST
GROWTH & STRATEGIC INTERNATIONAL COMPANY CAPITAL STEERS SMALL CAP ENHANCED STEIN ROE
INCOME BALANCED GROWTH VALUE GROWTH REALTY VALUE 500 VENTURE
---------- --------- ------------- ----------- -------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$161,582 $51,222 $68,980 $309,172 $322,682 $24,849 $29,569 $110,952 $5,094
51 -- 23 -- 76 967 1,397 402 88
-- -- 7 -- -- -- -- -- --
-- -- 12 -- -- -- -- -- --
2,974 188 264 -- 3,051 275 54 368 32
335 239 137 328 58 113 16 119 1
524 181 270 468 2,207 114 1,148 2,699 43
-- -- -- 47 -- -- -- -- --
1 -- -- 1 -- -- -- -- --
-- -- -- -- -- -- -- -- --
-------- ------- ------- -------- -------- ------- ------- -------- ------
165,467 51,830 69,693 310,016 328,074 26,318 32,184 114,540 5,258
-------- ------- ------- -------- -------- ------- ------- -------- ------
-- -- -- -- -- -- -- -- --
-- -- -- -- 19 -- -- -- --
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
589 1,321 6,181 359 13,909 212 2,115 163 282
-- -- -- 7 -- -- -- -- --
-- -- -- -- -- -- -- 121 --
60 20 32 127 95 12 11 15 1
13 4 5 24 20 2 2 8 --
89 23 26 55 36 4 6 38 4
-- -- -- -- -- -- -- -- --
-------- ------- ------- -------- -------- ------- ------- -------- ------
751 1,368 6,244 572 14,079 230 2,134 345 287
-------- ------- ------- -------- -------- ------- ------- -------- ------
$164,716 $50,462 $63,449 $309,444 $313,995 $26,088 $30,050 $114,195 $4,971
======== ======= ======= ======== ======== ======= ======= ======== ======
$ 13 $ 4 $ 4 $ 24 $ 24 $ 2 $ 3 $ 10 $ 1
148,398 43,787 53,899 289,989 282,961 26,694 30,497 101,323 5,457
716 379 220 930 197 290 (18) 510 (6)
5,981 558 3,348 2,269 5,030 (78) (23) 7,179 (3)
9,608 5,734 5,978 16,232 25,783 (820) (409) 5,173 (478)
-------- ------- ------- -------- -------- ------- ------- -------- ------
$164,716 $50,462 $63,449 $309,444 $313,995 $26,088 $30,050 $114,195 $4,971
======== ======= ======= ======== ======== ======= ======= ======== ======
12,663 3,938 4,418 23,654 23,784 2,754 2,770 9,760 541
$ 13.01 $ 12.81 $ 14.36 $ 13.08 $ 13.20 $ 9.47 $ 10.85 $ 11.70 $ 9.18
======== ======= ======= ======== ======== ======= ======= ======== ======
$151,974 $45,488 $63,016 $293,153 $296,894 $25,669 $29,978 $106,149 $5,572
======== ======= ======= ======== ======== ======= ======= ======== ======
</TABLE>
- --------------------------------------------------------------------------------
108
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
NEUBERGER&
AST PUTNAM LORD ABBETT AST BERMAN
INTERNATIONAL GROWTH AND JANCAP MONEY MID-CAP
EQUITY INCOME GROWTH MARKET VALUE
------------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................................. $ 387 $ 749 $ 7,181 $21,190 $ 396
Dividends................................. 5,995 11,058 4,963 -- 2,979
------- ------- -------- ------- --------
Total Investment Income............... 6,382 11,807 12,144 21,190 3,375
------- ------- -------- ------- --------
EXPENSES
Investment advisory fees.................. 2,062 3,865 8,256 1,675 691
Shareholder servicing fees................ 236 516 917 372 95
Administration and accounting fees........ 169 227 268 201 95
Custodian fees............................ 131 54 99 49 20
Professional fees......................... 10 22 40 16 4
Trustees' fees and expenses............... 4 10 17 7 2
Insurance expenses........................ 2 4 6 3 1
Miscellaneous expenses.................... 6 8 14 5 1
------- ------- -------- ------- --------
Total Expenses........................ 2,620 4,706 9,617 2,328 909
Less: Advisory fee waivers and expense
reimbursements...................... -- (10) (211) (95) --
------- ------- -------- ------- --------
Net Expenses.......................... 2,620 4,696 9,406 2,233 909
------- ------- -------- ------- --------
Net Investment Income (Loss)................. 3,762 7,111 2,738 18,957 2,466
------- ------- -------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities............................ 31,157 70,452 66,549 33 26,521
Foreign currency transactions......... (1,402) -- 534 -- --
Futures contracts..................... -- -- -- -- --
Option contracts...................... -- -- -- -- --
------- ------- -------- ------- --------
Net realized gain (loss).................. 29,755 70,452 67,083 33 26,521
------- ------- -------- ------- --------
Net change in unrealized appreciation
(depreciation) on:
Securities............................ 54,188 16,225 472,295 -- (32,273)
Futures contracts..................... -- -- -- -- --
Written option contracts.............. -- -- -- -- --
Interest rate swaps................... -- -- -- -- --
Translation of assets and liabilities
denominated in foreign currencies... 1,230 -- (181) -- --
------- ------- -------- ------- --------
Net change in unrealized appreciation
(depreciation).......................... 55,418 16,225 472,114 -- (32,273)
------- ------- -------- ------- --------
Net gain (loss) on investments............ 85,173 86,677 539,197 33 (5,752)
------- ------- -------- ------- --------
Net Increase (Decrease) in Net Assets
Resulting from Operations............... $88,935 $93,788 $541,935 $18,990 $ (3,286)
======= ======= ======== ======= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
109
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO NEUBERGER&
AST PRICE TOTAL INVESCO FOUNDERS T. ROWE PRICE T. ROWE PRICE BERMAN
PUTNAM FEDERATED ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL MID-CAP
BALANCED HIGH YIELD ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH
-------- ---------- ---------- ------- ------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 4,970 $22,356 $ 3,560 $19,651 $ 6,341 $ 620 $ 268 $4,210 $ 581
1,937 645 1,162 6 3,962 192 5,702 -- 402
------- ------- ------- ------- ------- ------- ------- ------ -------
6,907 23,001 4,722 19,657 10,303 812 5,970 4,210 983
------- ------- ------- ------- ------- ------- ------- ------ -------
1,419 1,891 1,028 2,068 2,536 1,234 2,388 544 851
192 252 121 318 338 137 239 68 107
155 173 112 190 194 122 170 68 103
112 27 24 55 38 27 137 66 22
8 11 5 14 15 6 11 3 5
3 5 2 6 6 3 4 1 2
1 2 1 2 2 1 2 -- 1
36 38 33 12 11 5 28 11 3
------- ------- ------- ------- ------- ------- ------- ------ -------
1,926 2,399 1,326 2,665 3,140 1,535 2,979 761 1,094
-- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ -------
1,926 2,399 1,326 2,665 3,140 1,535 2,979 761 1,094
------- ------- ------- ------- ------- ------- ------- ------ -------
4,981 20,602 3,396 16,992 7,163 (723) 2,991 3,449 (111)
------- ------- ------- ------- ------- ------- ------- ------ -------
18,021 4,724 749 3,432 31,085 7,706 5,502 1,659 36,131
67 -- 2 400 -- (6) 346 (3,480) --
3,343 -- -- 5,209 -- -- -- -- --
-- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ -------
21,431 4,724 751 9,041 31,085 7,700 5,848 (1,821) 36,131
------- ------- ------- ------- ------- ------- ------- ------ -------
3,931 (6,232) 20,430 222 28,220 4,182 49,397 1,253 1,896
901 -- -- 611 -- -- -- -- --
-- -- -- 128 -- -- -- -- --
-- -- -- (98) -- -- -- -- --
137 -- (2) (1,502) -- (1) (119) 63 --
------- ------- ------- ------- ------- ------- ------- ------ -------
4,969 (6,232) 20,428 (639) 28,220 4,181 49,278 1,316 1,896
------- ------- ------- ------- ------- ------- ------- ------ -------
26,400 (1,508) 21,179 8,402 59,305 11,881 55,126 (505) 38,027
------- ------- ------- ------- ------- ------- ------- ------ -------
$31,381 $19,094 $24,575 $25,394 $66,468 $11,158 $58,117 $2,944 $37,916
======= ======= ======= ======= ======= ======= ======= ====== =======
</TABLE>
- --------------------------------------------------------------------------------
110
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------
T. ROWE PIMCO ROBERTSON
PRICE LIMITED STEPHENS AST JANUS
FOUNDERS NATURAL MATURITY VALUE + OVERSEAS
PASSPORT RESOURCES BOND GROWTH GROWTH
-------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................................. $ 552 $ 104 $ 9,981 $ 134 $ 988
Dividends................................. 573 981 -- 620 3,170
------- ------- ------- ------- -------
Total Investment Income............... 1,125 1,085 9,981 754 4,158
------- ------- ------- ------- -------
EXPENSES
Investment advisory fees.................. 629 493 968 1,340 1,835
Shareholder servicing fees................ 63 55 149 134 184
Administration and accounting fees........ 63 55 129 120 147
Custodian fees............................ 69 22 27 19 106
Professional fees......................... 3 2 7 6 8
Trustees' fees and expenses............... 1 1 3 3 3
Insurance expenses........................ -- -- 1 1 1
Miscellaneous expenses.................... 5 5 8 3 14
------- ------- ------- ------- -------
Total Expenses........................ 833 633 1,292 1,626 2,298
Less: Advisory fee waivers and expense
reimbursements...................... -- -- -- -- --
------- ------- ------- ------- -------
Net Expenses.......................... 833 633 1,292 1,626 2,298
------- ------- ------- ------- -------
Net Investment Income (Loss)................. 292 452 8,689 (872) 1,860
------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities............................ 2,378 8,286 (532) 9,828 4,548
Foreign currency transactions......... (85) (13) -- -- 393
Futures contracts..................... -- -- (15) -- --
Option contracts...................... -- -- -- -- --
------- ------- ------- ------- -------
Net realized gain (loss).................. 2,293 8,273 (547) 9,828 4,941
------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation) on:
Securities............................ 22,682 (5,894) (762) 35,361 66,676
Future contracts...................... -- -- (5) -- --
Written option contracts.............. -- -- -- -- --
Interest rate swaps................... -- -- 19 -- --
Translation of assets and liabilities
denominated in foreign currencies... 5 (3) (248) -- (90)
------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation).......................... 22,687 (5,897) (996) 35,361 66,586
------- ------- ------- ------- -------
Net gain (loss) on investments............ 24,980 2,376 (1,543) 45,189 71,527
------- ------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations............... $25,272 $ 2,828 $ 7,146 $44,317 $73,387
======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on January 2, 1998.
See Notes to Financial Statements.
111
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
TWENTIETH TWENTIETH T. ROWE PRICE LORD BANKERS
AST PUTNAM CENTURY CENTURY SMALL MARSICO COHEN & ABBETT TRUST
VALUE GROWTH STRATEGIC INTERNATIONAL COMPANY CAPITAL STEERS SMALL CAP ENHANCED STEIN ROE
& INCOME BALANCED GROWTH VALUE GROWTH REALTY(1) VALUE(1) 500(1) VENTURE(1)
------------ --------- ------------- ------------- ------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 161 $ 484 $ 82 $ 766 $ 459 $ 24 $ 24 $ 181 $ 5
1,303 80 590 1,591 456 357 30 661 6
------- ------ ------ ------ ------- ----- ----- ------- -----
1,464 564 672 2,357 915 381 54 842 11
------- ------ ------ ------ ------- ----- ----- ------- -----
533 161 226 1,155 579 72 52 248 11
71 19 23 128 64 7 5 41 1
71 25 35 117 63 8 7 21 7
66 12 95 18 6 3 7 61 6
3 1 1 5 3 -- -- 2 --
1 1 -- 2 1 -- -- 1 --
-- -- -- 1 -- -- -- -- --
3 2 8 4 2 1 1 10 1
------- ------ ------ ------ ------- ----- ----- ------- -----
748 221 388 1,430 718 91 72 384 26
-- 4 -- -- -- -- -- (52) (9)
------- ------ ------ ------ ------- ----- ----- ------- -----
748 225 388 1,430 718 91 72 332 17
------- ------ ------ ------ ------- ----- ----- ------- -----
716 339 284 927 197 290 (18) 510 (6)
------- ------ ------ ------ ------- ----- ----- ------- -----
6,011 967 3,786 2,438 5,049 (78) (23) 4,960 (3)
-- (2) 71 -- (19) -- -- -- --
-- -- -- (167) -- -- -- 2,219 --
-- -- -- -- -- -- -- -- --
------- ------ ------ ------ ------- ----- ----- ------- -----
6,011 965 3,857 2,271 5,030 (78) (23) 7,179 (3)
------- ------ ------ ------ ------- ----- ----- ------- -----
3,966 3,904 4,593 (789) 25,765 (820) (409) 4,804 (478)
-- -- -- 213 -- -- -- 369 --
-- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-- -- (80) -- (5) -- -- -- --
------- ------ ------ ------ ------- ----- ----- ------- -----
3,966 3,904 4,513 (576) 25,760 (820) (409) 5,173 (478)
------- ------ ------ ------ ------- ----- ----- ------- -----
9,977 4,869 8,370 1,695 30,790 (898) (432) 12,352 (481)
------- ------ ------ ------ ------- ----- ----- ------- -----
$10,693 $5,208 $8,654 $2,622 $30,987 $(608) $(450) $12,862 $(487)
======= ====== ====== ====== ======= ===== ===== ======= =====
</TABLE>
- --------------------------------------------------------------------------------
112
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------
AST PUTNAM INTERNATIONAL EQUITY LORD ABBETT GROWTH AND INCOME
------------------------------- -------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).................... $ 3,762 $ 3,398 $ 7,111 $ 11,541
Net realized gain (loss) on investments......... 29,755 49,254 70,452 50,708
Net change in unrealized appreciation
(depreciation) on investments................. 55,418 10,077 16,225 81,537
-------- --------- ---------- ---------
Net Increase (Decrease) in Net Assets from
Operations................................. 88,935 62,729 93,788 143,786
-------- --------- ---------- ---------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income........................................ (4,058) (5,413) (11,541) (7,379)
Distributions to shareholders from capital
gains......................................... (47,200) (17,443) (50,708) (13,267)
-------- --------- ---------- ---------
Total Dividends and Distributions to
Shareholders............................... (51,258) (22,856) (62,249) (20,646)
-------- --------- ---------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold....................... 65,648 125,193 145,078 426,438
Net asset value of shares issued in reinvestment
of dividends and distributions................ 51,258 22,856 62,249 20,647
Cost of shares redeemed......................... (51,593) (121,863) (68,599) (163,736)
-------- --------- ---------- ---------
Increase (Decrease) in Net Assets from Capital
Share Transactions......................... 65,313 26,186 138,728 283,349
-------- --------- ---------- ---------
Total Increase (Decrease) in Net Assets.... 102,990 66,059 170,267 406,489
NET ASSETS
Beginning of Period............................. 412,270 346,211 936,986 530,497
-------- --------- ---------- ---------
End of Period................................... $515,260 $ 412,270 $1,107,253 $ 936,986
======== ========= ========== =========
SHARES ISSUED AND REDEEMED
Shares sold..................................... 2,933 6,183 6,941 22,448
Shares issued in reinvestment of dividends and
distributions................................. 2,483 1,229 3,057 1,185
Shares redeemed................................. (2,319) (6,057) (3,248) (8,879)
-------- --------- ---------- ---------
Net Increase (Decrease) in Shares
Outstanding................................ 3,097 1,355 6,750 14,754
======== ========= ========== =========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
113
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
-------------------------------------------------------------------------------------------------------------------------
NEUBERGER&BERMAN
JANCAP GROWTH AST MONEY MARKET MID-CAP VALUE AST PUTNAM BALANCED
---------------------------- ---------------------------- ---------------------------- ----------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,738 $ 3,000 $ 18,957 $ 33,089 $ 2,466 $ 4,517 $ 4,981 $ 8,977
67,083 84,851 33 61 26,521 16,140 21,431 22,004
472,114 199,524 -- -- (32,273) 13,829 4,969 21,963
---------- ---------- ----------- ----------- -------- -------- -------- --------
541,935 287,375 18,990 33,150 (3,286) 34,486 31,381 52,944
---------- ---------- ----------- ----------- -------- -------- -------- --------
(3,000) (2,524) (18,957) (33,089) (4,472) (3,604) (8,979) (6,615)
(85,067) (42,072) (61) (80) (16,201) (5,148) (21,996) (30,342)
---------- ---------- ----------- ----------- -------- -------- -------- --------
(88,067) (44,596) (19,018) (33,169) (20,673) (8,752) (30,975) (36,957)
---------- ---------- ----------- ----------- -------- -------- -------- --------
570,045 862,306 1,589,682 2,492,066 83,956 90,589 25,935 42,308
88,067 44,596 18,400 31,988 20,673 8,752 30,974 36,957
(381,861) (530,403) (1,544,167) (2,313,617) (66,447) (47,070) (15,030) (24,140)
---------- ---------- ----------- ----------- -------- -------- -------- --------
276,251 376,499 63,915 210,437 38,182 52,271 41,879 55,125
---------- ---------- ----------- ----------- -------- -------- -------- --------
730,119 619,278 63,887 210,418 14,223 78,005 42,285 71,112
1,511,602 892,324 759,888 549,470 201,143 123,138 357,591 286,479
---------- ---------- ----------- ----------- -------- -------- -------- --------
$2,241,721 $1,511,602 $ 823,775 $ 759,888 $215,366 $201,143 $399,876 $357,591
========== ========== =========== =========== ======== ======== ======== ========
21,975 40,825 1,589,682 2,492,065 6,153 6,689 1,915 3,259
3,601 2,311 18,400 31,988 1,531 711 2,361 3,095
(14,715) (25,329) (1,544,167) (2,313,617) (4,644) (3,718) (1,106) (1,850)
---------- ---------- ----------- ----------- -------- -------- -------- --------
10,861 17,807 63,915 210,436 3,040 3,682 3,170 4,504
========== ========== =========== =========== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
114
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------
FEDERATED HIGH YIELD T. ROWE PRICE ASSET ALLOCATION
------------------------------- -------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)..................... $ 20,602 $ 27,616 $ 3,396 $ 4,904
Net realized gain (loss) on investments.......... 4,724 1,491 751 889
Net change in unrealized appreciation
(depreciation) on investments.................. (6,232) 10,886 20,428 21,216
-------- -------- -------- --------
Net Increase (Decrease) in Net Assets from
Operations.................................. 19,094 39,993 24,575 27,009
-------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income......................................... (27,617) (10,610) (4,904) (2,585)
Distributions to shareholders from capital
gains.......................................... (1,506) (1,263) (863) (2,403)
-------- -------- -------- --------
Total Dividends and Distributions to
Shareholders................................ (29,123) (11,873) (5,767) (4,988)
-------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........................ 173,059 269,597 37,444 74,080
Net asset value of shares issued in reinvestment
of dividends and distributions................. 29,123 11,874 5,767 4,987
Cost of shares redeemed.......................... (64,804) (80,433) (6,785) (8,162)
-------- -------- -------- --------
Increase (Decrease) in Net Assets from Capital
Share Transactions.......................... 137,378 201,038 36,426 70,905
-------- -------- -------- --------
Total Increase (Decrease) in Net Assets..... 127,349 229,158 55,234 92,926
NET ASSETS
Beginning of Period.............................. 434,420 205,262 213,075 120,149
-------- -------- -------- --------
End of Period.................................... $561,769 $434,420 $268,309 $213,075
======== ======== ======== ========
SHARES ISSUED AND REDEEMED
Shares sold...................................... 13,346 21,771 2,369 5,224
Shares issued in reinvestment of dividends and
distributions.................................. 2,302 1,000 371 377
Shares redeemed.................................. (5,017) (6,550) (424) (570)
-------- -------- -------- --------
Net Increase (Decrease) in Shares
Outstanding................................. 10,631 16,221 2,316 5,031
======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
115
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
PIMCO TOTAL RETURN BOND INVESCO EQUITY INCOME FOUNDERS CAPITAL APPRECIATION T. ROWE PRICE INTERNATIONAL EQUITY
- ---------------------------- ---------------------------- ------------------------------ -----------------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997
- ------------- ------------ ------------- ------------ -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16,992 $ 25,494 $ 7,163 $ 12,069 $ (723) $ (777) $ 2,991 $ 3,315
9,041 16,378 31,085 30,597 7,700 13,327 5,848 8,709
(639) 3,629 28,220 52,553 4,181 4,903 49,278 (3,621)
-------- -------- --------- --------- -------- -------- --------- ---------
25,394 45,501 66,468 95,219 11,158 17,453 58,117 8,403
-------- -------- --------- --------- -------- -------- --------- ---------
(25,494) (15,321) (12,069) (7,141) -- -- (3,315) (2,360)
(13,415) -- (30,597) (9,950) (12,821) -- (10,843) (2,682)
-------- -------- --------- --------- -------- -------- --------- ---------
(38,909) (15,321) (42,666) (17,091) (12,821) -- (14,158) (5,042)
-------- -------- --------- --------- -------- -------- --------- ---------
143,961 239,491 220,938 325,090 45,030 159,953 128,714 303,075
38,909 15,321 42,666 17,091 12,821 -- 14,158 5,042
(44,367) (72,902) (142,284) (166,884) (64,824) (119,216) (173,856) (249,581)
-------- -------- --------- --------- -------- -------- --------- ---------
138,503 181,910 121,320 175,297 (6,973) 40,737 (30,984) 58,536
-------- -------- --------- --------- -------- -------- --------- ---------
124,988 212,090 145,122 253,425 (8,636) 58,190 12,975 61,897
572,100 360,010 602,105 348,680 278,258 220,068 464,456 402,559
-------- -------- --------- --------- -------- -------- --------- ---------
$697,088 $572,100 $ 747,227 $ 602,105 $269,622 $278,258 $ 477,431 $ 464,456
======== ======== ========= ========= ======== ======== ========= =========
12,555 21,382 13,129 21,367 2,515 9,416 9,910 24,350
3,502 1,429 2,613 1,227 706 -- 1,115 419
(3,871) (6,415) (8,404) (11,049) (3,574) (6,897) (13,399) (19,694)
-------- -------- --------- --------- -------- -------- --------- ---------
12,186 16,396 7,338 11,545 (353) 2,519 (2,374) 5,075
======== ======== ========= ========= ======== ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
116
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------
T. ROWE PRICE NEUBERGER&BERMAN
INTERNATIONAL BOND MID-CAP GROWTH
------------------------------- -------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).................... $ 3,449 $ 5,568 $ (111) $ 122
Net realized gain (loss) on investments......... (1,821) (4,845) 36,131 33,536
Net change in unrealized appreciation
(depreciation) on investments................. 1,316 (3,925) 1,896 (11,415)
-------- -------- -------- ---------
Net Increase (Decrease) in Net Assets from
Operations................................. 2,944 (3,202) 37,916 22,243
-------- -------- -------- ---------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income........................................ (439) (1,563) (122) (223)
Distributions to shareholders from capital
gains......................................... (1,035) (2,503) (34,532) (1,347)
-------- -------- -------- ---------
Total Dividends and Distributions to
Shareholders............................... (1,474) (4,066) (34,654) (1,570)
-------- -------- -------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold....................... 15,079 57,168 89,552 210,696
Net asset value of shares issued in reinvestment
of dividends and distributions................ 1,474 4,066 34,654 1,570
Cost of shares redeemed......................... (7,357) (21,793) (94,739) (184,136)
-------- -------- -------- ---------
Increase (Decrease) in Net Assets from Capital
Share Transactions......................... 9,196 39,441 29,467 28,130
-------- -------- -------- ---------
Total Increase (Decrease) in Net Assets.... 10,666 32,173 32,729 48,803
NET ASSETS
Beginning of Period............................. 130,408 98,235 185,050 136,247
-------- -------- -------- ---------
End of Period................................... $141,074 $130,408 $217,779 $ 185,050
======== ======== ======== =========
SHARES ISSUED AND REDEEMED
Shares sold..................................... 1,466 5,634 5,251 13,595
Shares issued in reinvestment of dividends and
distributions................................. 145 405 2,140 109
Shares redeemed................................. (716) (2,152) (5,700) (12,032)
-------- -------- -------- ---------
Net Increase (Decrease) in Shares
Outstanding................................ 895 3,887 1,691 1,672
======== ======== ======== =========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
117
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
ROBERTSON STEPHENS
FOUNDERS PASSPORT T. ROWE PRICE NATURAL RESOURCES PIMCO LIMITED MATURITY BOND VALUE + GROWTH
- ---------------------------- -------------------------------- ---------------------------- ----------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED) 1997
- ------------- ------------ --------------- -------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 292 $ 547 $ 452 $ 1,072 $ 8,689 $ 14,491 $ (872) $ (890)
2,293 (3,437) 8,273 6,263 (547) 427 9,828 (4,645)
22,687 5,943 (5,897) (5,032) (996) 3,612 35,361 5,704
-------- -------- -------- -------- -------- -------- -------- --------
25,272 3,053 2,828 2,303 7,146 18,530 44,317 169
-------- -------- -------- -------- -------- -------- -------- --------
(249) (805) (1,052) (417) (14,378) (10,857) -- --
-- (129) (6,235) (2,073) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
(249) (934) (7,287) (2,490) (14,378) (10,857) -- --
-------- -------- -------- -------- -------- -------- -------- --------
56,105 74,511 14,265 63,364 57,186 141,511 74,354 265,275
249 933 7,287 2,489 14,378 10,857 -- --
(65,253) (77,268) (28,557) (42,246) (52,292) (80,412) (67,569) (78,586)
-------- -------- -------- -------- -------- -------- -------- --------
(8,899) (1,824) (7,005) 23,607 19,272 71,956 6,785 186,689
-------- -------- -------- -------- -------- -------- -------- --------
16,124 295 (11,464) 23,420 12,040 79,629 51,102 186,858
117,938 117,643 111,954 88,534 288,642 209,013 235,648 48,790
-------- -------- -------- -------- -------- -------- -------- --------
$134,062 $117,938 $100,490 $111,954 $300,682 $288,642 $286,750 $235,648
======== ======== ======== ======== ======== ======== ======== ========
4,248 6,247 964 4,198 5,289 13,311 5,476 20,523
20 78 527 172 1,360 1,049 -- --
(4,961) (6,422) (1,955) (2,804) (4,852) (7,504) (4,844) (6,296)
-------- -------- -------- -------- -------- -------- -------- --------
(693) (97) (464) 1,566 1,797 6,856 632 14,227
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
118
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------
PORTFOLIO
------------------------------------------------------------------
AST PUTNAM VALUE
AST JANUS OVERSEAS GROWTH GROWTH & INCOME
------------------------------- -------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997(1) (UNAUDITED) 1997(1)
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).................... $ 1,860 $ 452 $ 716 $ 686
Net realized gain (loss) on investments......... 4,941 (1,787) 6,011 1,862
Net change in unrealized appreciation
(depreciation) on investments................. 66,586 13,636 3,966 5,642
--------- -------- -------- --------
Net Increase (Decrease) in Net Assets from
Operations................................. 73,387 12,301 10,693 8,190
--------- -------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income........................................ (452) -- (686) --
Distributions to shareholders from capital
gains......................................... (813) -- (1,892) --
--------- -------- -------- --------
Total Dividends and Distributions to
Shareholders............................... (1,265) -- (2,578) --
--------- -------- -------- --------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold....................... 288,796 295,567 49,157 121,563
Net asset value of shares issued in reinvestment
of dividends and distributions................ 1,265 -- 2,578 --
Cost of shares redeemed......................... (116,594) (52,163) (12,572) (12,315)
--------- -------- -------- --------
Increase (Decrease) in Net Assets from Capital
Share Transactions......................... 173,467 243,404 39,163 109,248
--------- -------- -------- --------
Total Increase (Decrease) in Net Assets.... 245,589 255,705 47,278 117,438
NET ASSETS
Beginning of Period............................. 255,705 -- 117,438 --
--------- -------- -------- --------
End of Period................................... $ 501,294 $255,705 $164,716 $117,438
========= ======== ======== ========
SHARES ISSUED AND REDEEMED
Shares sold..................................... 21,501 25,962 3,818 10,693
Shares issued in reinvestment of dividends and
distributions................................. 99 -- 203 --
Shares redeemed................................. (8,718) (4,420) (963) (1,088)
--------- -------- -------- --------
Net Increase (Decrease) in Shares
Outstanding................................ 12,882 21,542 3,058 9,605
========= ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on January 2, 1997.
(2) Commenced operations on December 22, 1997.
See Notes to Financial Statements.
119
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
TWENTIETH CENTURY TWENTIETH CENTURY T. ROWE PRICE
STRATEGIC BALANCED INTERNATIONAL GROWTH SMALL COMPANY VALUE MARSICO CAPITAL GROWTH
- ---------------------------- ---------------------------- ---------------------------- ----------------------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997(1) (UNAUDITED) 1997(1) (UNAUDITED) 1997(1) (UNAUDITED) 1997(2)
- ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 339 $ 273 $ 284 $ (92) $ 927 $ 949 $ 197 $ 6
965 (407) 3,857 (481) 2,271 1,023 5,030 0
3,904 1,830 4,513 1,465 (576) 16,808 25,760 23
------- ------- ------- -------- -------- -------- -------- -------
5,208 1,696 8,654 892 2,622 18,780 30,987 29
------- ------- ------- -------- -------- -------- -------- -------
(233) -- -- -- (946) -- (6) --
-- -- -- -- (1,025) -- -- --
------- ------- ------- -------- -------- -------- -------- -------
(233) -- -- -- (1,971) -- (6) --
------- ------- ------- -------- -------- -------- -------- -------
20,592 29,464 50,272 48,070 140,739 210,455 303,738 9,665
233 -- -- -- 1,971 -- 6 --
(4,285) (2,213) (28,602) (15,837) (33,813) (29,339) (28,029) (2,395)
------- ------- ------- -------- -------- -------- -------- -------
16,540 27,251 21,670 32,233 108,897 181,116 275,715 7,270
------- ------- ------- -------- -------- -------- -------- -------
21,515 28,947 30,324 33,125 109,548 199,896 306,696 7,299
28,947 -- 33,125 -- 199,896 -- 7,299 --
------- ------- ------- -------- -------- -------- -------- -------
$50,462 $28,947 $63,449 $ 33,125 $309,444 $199,896 $313,995 $ 7,299
======= ======= ======= ======== ======== ======== ======== =======
1,715 2,754 3,690 4,258 10,554 17,898 25,344 966
20 -- -- -- 146 -- 1 --
(349) (202) (2,147) (1,383) (2,566) (2,378) (2,288) (239)
------- ------- ------- -------- -------- -------- -------- -------
1,386 2,552 1,543 2,875 8,134 15,520 23,057 727
======= ======= ======= ======== ======== ======== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
120
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------
PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
COHEN & LORD ABBETT BANKERS TRUST STEIN ROE
STEERS REALTY SMALL CAP VALUE ENHANCED 500 VENTURE
-------------- --------------- -------------- --------------
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998 JUNE 30, 1998
(UNAUDITED)(3) (UNAUDITED)(3) (UNAUDITED)(3) (UNAUDITED)(3)
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)......................... $ 290 $ (18) $ 510 $ (6)
Net realized gain (loss) on investments.............. (78) (23) 7,179 (3)
Net change in unrealized appreciation (depreciation)
on investments..................................... (820) (409) 5,173 (478)
------- ------- -------- ------
Net Increase (Decrease) in Net Assets from
Operations...................................... (608) (450) 12,862 (487)
------- ------- -------- ------
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............................ 27,358 32,870 159,204 5,784
Net asset value of shares issued in reinvestment of
dividends and distributions........................ -- -- -- --
Cost of shares redeemed.............................. (662) (2,370) (57,871) (326)
------- ------- -------- ------
Increase (Decrease) in Net Assets from Capital
Share Transactions.............................. 26,696 30,500 101,333 5,458
------- ------- -------- ------
Total Increase (Decrease) in Net Assets......... 26,088 30,050 114,195 4,971
NET ASSETS
Beginning of Period.................................. -- -- -- --
------- ------- -------- ------
End of Period........................................ $26,088 $30,050 $114,195 $4,971
======= ======= ======== ======
SHARES ISSUED AND REDEEMED
Shares sold.......................................... 2,822 2,989 14,897 573
Shares issued in reinvestment of dividends and
distributions...................................... -- -- -- --
Shares redeemed...................................... (68) (219) (5,137) (32)
------- ------- -------- ------
Net Increase (Decrease) in Shares Outstanding...... 2,754 2,770 9,760 541
======= ======= ======== ======
</TABLE>
- --------------------------------------------------------------------------------
(3) Commenced operations on January 2, 1998.
See Notes to Financial Statements.
121
<PAGE>
[This page intentionally left blank.]
122
<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
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS
- -------------------------- -------- --------- ---------- ------------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 06/30/98* $21.29 $ 0.23 $ 4.05 $ 4.28 $ (0.67) $ (1.96) $ (2.63)
International Equity 12/31/97 19.22 0.22 3.10 3.32 (0.30) (0.95) (1.25)
12/31/96 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69)
12/31/95 17.61 0.14 1.44 1.58 -- (0.99) (0.99)
12/31/94 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19)
12/31/93 12.74 0.14 4.46 4.60 -- -- --
Lord Abbett 06/30/98* $20.53 $ 0.13 $ 1.80 $ 1.93 $ (0.25) $ (1.08) $ (1.33)
Growth and Income 12/31/97 17.17 0.24 3.76 4.00 (0.23) (0.41) (0.64)
12/31/96 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52)
12/31/95 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40)
12/31/94 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32)
12/31/93 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10)
JanCap Growth 06/30/98* $23.15 $ 0.04 $ 7.53 $ 7.57 $ (0.08) $ (1.21) $ (1.29)
12/31/97 18.79 0.05 5.17 5.22 (0.05) (0.81) (0.86)
12/31/96 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82)
12/31/95 11.22 0.06 4.18 4.24 (0.06) -- (0.06)
12/31/94 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03)
12/31/93 10.53 0.03 1.22 1.25 -- -- --
AST Money Market 06/30/98* $ 1.00 $0.0214 $0.0001 $0.0215 $(0.0214) $(0.0001) $(0.0215)
12/31/97 1.00 0.0507 0.0002 0.0509 (0.0507) (0.0002) (0.0509)
12/31/96 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497)
12/31/95 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494)
12/31/94 1.00 0.0369 -- 0.0369 (0.0367) (0.0002) (0.0369)
12/31/93 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252)
Neuberger&Berman 06/30/98* $15.15 $ 0.18 $ (0.45) $ (0.27) $ (0.36) $ (1.32) $ (1.68)
Mid-Cap Value 12/31/97 12.83 0.32 2.87 3.19 (0.36) (0.51) (0.87)
12/31/96 11.94 0.36 0.97 1.33 (0.44) -- (0.44)
12/31/95 9.87 0.40 2.09 2.49 (0.42) -- (0.42)
12/31/94 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18)
12/31/93(2) 10.00 0.17 0.62 0.79 -- -- --
AST Putnam Balanced 06/30/98* $13.64 $ 0.17 $ 0.95 $ 1.12 $ (0.35) $ (0.81) $ (1.16)
12/31/97 13.19 0.34 1.84 2.18 (0.31) (1.42) (1.73)
12/31/96 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68)
12/31/95 10.49 0.26 2.06 2.32 (0.28) -- (0.28)
12/31/94 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09)
12/31/93(2) 10.00 0.08 0.49 0.57 -- -- --
<CAPTION>
- -------------------------- ---------
NET ASSET
VALUE
END
PORTFOLIO OF PERIOD
- -------------------------- ---------
<S> <C>
AST Putnam $22.94
International Equity 21.29
19.22
18.20
17.61
17.34
Lord Abbett $21.13
Growth and Income 20.53
17.17
14.98
12.00
12.06
JanCap Growth $29.43
23.15
18.79
15.40
11.22
11.78
AST Money Market $ 1.00
1.00
1.00
1.00
1.00
1.00
Neuberger&Berman $13.20
Mid-Cap Value 15.15
12.83
11.94
9.87
10.79
AST Putnam Balanced $13.60
13.64
13.19
12.53
10.49
10.57
</TABLE>
- --------------------------------------------------------------------------------
(1) Annualized.
(2) Commenced operations on May 4, 1993.
* Unaudited.
See Notes to Financial Statements.
123
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
---------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
21.53% $ 524,286 59% 1.11%(1) 1.11%(1) 1.59%(1) 1.59%(1)
18.15% 412,270 116% 1.15% 1.15% 1.04% 1.04%
9.65% 346,211 124% 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%
9.63% $1,107,523 35% 0.91%(1) 0.91%(1) 1.38%(1) 1.38%(1)
23.92% 936,986 41% 0.93% 0.93% 1.60% 1.60%
18.56% 530,497 43% 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%
33.83% $2,241,721 21% 1.03%(1) 1.05%(1) 0.30%(1) 0.28%(1)
28.66% 1,511,563 94% 1.07% 1.07% 0.24% 0.24%
28.36% 892,324 79% 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%
2.58% $ 827,751 N/A 0.60%(1) 0.68%(1) 5.10%(1) 5.02%(1)
5.18% 759,893 N/A 0.60% 0.69% 5.06% 4.97%
5.08% 549,470 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%
(2.03%) $ 215,366 143% 0.96%(1) 0.96%(1) 2.59%(1) 2.59%(1)
26.42% 201,143 91% 0.90% 0.90% 3.34% 3.34%
11.53% 123,138 73% 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)
8.62% $ 399,876 82% 1.00%(1) 1.00%(1) 2.59%(1) 2.59%(1)
18.28% 357,589 170% 1.03% 1.03% 2.81% 2.81%
11.23% 286,479 276% 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>
124
<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
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS
- ----------------------- -------- --------- ---------- ------------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High Yield 06/30/98* $13.11 $ 0.40 $ 0.12 $ 0.52 $(0.76) $(0.04) $(0.80)
12/31/97 12.13 0.75 0.83 1.58 (0.54) (0.06) (0.60)
12/31/96 11.14 0.56 0.90 1.46 (0.47) -- (0.47)
12/31/95 9.69 0.38 1.46 1.84 (0.39) -- (0.39)
12/31/94()(3) 10.00 0.55 (0.86) (0.31) -- -- --
T. Rowe Price 06/30/98* $15.13 $ 0.19 $ 1.43 $ 1.62 $(0.33) $(0.06) $(0.39)
Asset Allocation 12/31/97 13.27 0.33 2.03 2.36 (0.26) (0.24) (0.50)
12/31/96 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29)
12/31/95 9.94 0.26 2.02 2.28 (0.21) -- (0.21)
12/31/94()(3) 10.00 0.21 (0.27) (0.06) -- -- --
PIMCO Total 06/30/98* $11.72 $ 0.25 $ 0.21 $ 0.46 $(0.51) $(0.24) $(0.75)
Return Bond 12/31/97 11.11 0.49 0.57 1.06 (0.45) -- (0.45)
12/31/96 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59)
12/31/95 9.75 0.25 1.55 1.80 (0.21) -- (0.21)
12/31/94()(3) 10.00 0.26 (0.51) (0.25) -- -- --
INVESCO Equity 06/30/98* $16.51 $ 0.15 $ 1.53 $ 1.68 $(0.32) $(0.81) $(1.13)
Income 12/31/97 13.99 0.31 2.84 3.15 (0.26) (0.37) (0.63)
12/31/96 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57)
12/31/95 9.75 0.25 2.65 2.90 (0.15) -- (0.15)
12/31/94(3) 10.00 0.16 (0.41) (0.25) -- -- --
Founders Capital 06/30/98* $17.81 $(0.05) $ 0.75 $ 0.70 $ -- $(0.85) $(0.85)
Appreciation 12/31/97 16.80 (0.05) 1.06 1.01 -- -- --
12/31/96 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27)
12/31/95 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09)
12/31/94(3) 10.00 0.11 0.73 0.84 -- -- --
T. Rowe Price 06/30/98* $12.09 $ 0.08 $ 1.45 $ 1.53 $(0.14) $(0.23) $(0.37)
International Equity 12/31/97 12.07 0.08 0.09 0.17 (0.07) (0.08) (0.15)
12/31/96 10.65 0.06 1.44 1.50 (0.08) -- (0.08)
12/31/95 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03)
12/31/94(3) 10.00 0.02 (0.40) (0.38) -- -- --
T. Rowe Price 06/30/98* $10.11 $ 0.22 $ 0.01 $ 0.23 $(0.03) $(0.08) $(0.11)
International Bond 12/31/97 10.90 0.36 (0.73) (0.37) (0.16) (0.26) (0.42)
12/31/96 10.60 0.23 0.38 0.61 (0.14) (0.17) (0.31)
12/31/95 9.68 0.31 0.75 1.06 (0.14) -- (0.14)
12/31/94(4) 10.00 0.27 (0.59) (0.32) -- -- --
<CAPTION>
- ----------------------- ---------
NET ASSET
VALUE
END
PORTFOLIO OF PERIOD
- ----------------------- ---------
<S> <C>
Federated High Yield $12.83
13.11
12.13
11.14
9.69
T. Rowe Price $16.36
Asset Allocation 15.13
13.27
12.01
9.94
PIMCO Total $11.43
Return Bond 11.72
11.11
11.34
9.75
INVESCO Equity $17.06
Income 16.51
13.99
12.50
9.75
Founders Capital $17.66
Appreciation 17.81
16.80
14.25
10.84
T. Rowe Price $13.25
International Equity 12.09
12.07
10.65
9.62
T. Rowe Price $10.23
International Bond 10.11
10.90
10.60
9.68
</TABLE>
- --------------------------------------------------------------------------------
(1) Annualized.
(3) Commenced operations on January 4, 1994.
(4) Commenced operations on May 3, 1994.
* Unaudited.
See Notes to Financial Statements.
121
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
- ---------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
- ------ ------------- --------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
4.07% $561,769 21% 0.95%(1) 0.95%(1) 8.17%(1) 8.17%(1)
13.59% 434,420 28% 0.98% 0.98% 8.83% 8.83%
13.58% 205,262 43% 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)
10.84% $268,309 6% 1.10%(1) 1.10%(1) 2.81%(1) 2.81%(1)
18.40% 213,075 10% 1.13% 1.13% 2.95% 2.95%
13.14% 120,149 31% 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)
4.09% $697,088 130% 0.84%(1) 0.84%(1) 5.34%(1) 5.34%(1)
9.87% 572,100 320% 0.86% 0.86% 5.56% 5.56%
3.42% 360,010 403% 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)
10.49% $747,227 34% 0.93%(1) 0.93%(1) 2.12%(1) 2.12%(1)
23.33% 602,105 73% 0.95% 0.95% 2.54% 2.54%
17.09% 348,680 58% 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)
3.79% $269,622 59% 1.12%(1) 1.12%(1) (0.53%)(1) (0.53%)(1)
6.01% 278,258 77% 1.13% 1.13% (0.32%) (0.32%)
20.05% 220,068 69% 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)
12.84% $477,431 12% 1.25%(1) 1.25%(1) 1.25%(1) 1.25%(1)
1.36% 464,531 19% 1.26% 1.26% 0.71% 0.71%
14.17% 402,559 11% 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)
2.40% $141,074 48% 1.12%(1) 1.12%(1) 5.07%(1) 5.07%(1)
(3.42%) 130,408 173% 1.11% 1.11% 4.73% 4.73%
5.98% 98,235 241% 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>
126
<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
VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS
- --------------------------- -------- --------- ---------- ------------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Neuberger&Berman 06/30/98* $16.61 $(0.01) $ 2.98 $ 2.97 $(0.01) $(2.60) $(2.61)
Mid-Cap Growth 12/31/97 14.39 0.01 2.36 2.37 (0.02) (0.13) (0.15)
12/31/96 12.40 0.01 2.01 2.02 (0.03) -- (0.03)
12/31/95 9.97 0.04 2.40 2.44 (0.01) -- (0.01)
12/31/94(5) 10.00 0.01 (0.04) (0.03) -- -- --
Founders Passport 06/30/98* $11.78 $ 0.03 $ 2.60 $ 2.63 $(0.03) $ -- $(0.03)
12/31/97 11.63 0.05 0.19 0.24 (0.08) (0.01) (0.09)
12/31/96 10.33 0.09 1.24 1.33 (0.03) -- (0.03)
12/31/95(6) 10.00 0.03 0.30 0.33 -- -- --
T. Rowe Price 06/30/98* $14.57 $ 0.07 $ 0.29 $ 0.36 $(0.14) $(0.87) $(1.01)
Natural Resources 12/31/97 14.47 0.14 0.35 0.49 (0.07) (0.32) (0.39)
12/31/96 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04)
12/31/95(6) 10.00 0.04 1.07 1.11 -- -- --
PIMCO Limited 06/30/98* $11.02 $ 0.30 $(0.05) $ 0.25 $(0.53) $ -- $(0.53)
Maturity Bond 12/31/97 10.81 0.55 0.22 0.77 (0.56) -- (0.56)
12/31/96 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07)
12/31/95(6) 10.00 0.05 0.42 0.47 -- -- --
Robertson Stephens 06/30/98* $12.62 $(0.05) $ 2.29 $ 2.24 $ -- $ -- $ --
Value + Growth 12/31/97 10.99 (0.05) 1.68 1.63 -- -- --
12/31/96(7) 10.00 (0.01) 1.00 0.99 -- -- --
AST Janus Overseas 06/30/98* $11.87 $ 0.06 $ 2.68 $ 2.74 $(0.05) $ -- $(0.05)
Growth 12/31/97(8) 10.00 0.02 1.85 1.87 -- -- --
AST Putnam Value 06/30/98* $12.23 $ 0.05 $ 0.98 $ 1.03 $(0.07) $(0.18) $(0.25)
Growth & Income 12/31/97(8) 10.00 0.07 2.16 2.23 -- -- --
Twentieth Century 06/30/98* $11.34 $ 0.07 $ 1.48 $ 1.55 $(0.08) $ -- $(0.08)
Strategic Balanced 12/31/97(8) 10.00 0.11 1.23 1.34 -- -- --
Twentieth Century 06/30/98* $11.52 $ 0.08 $ 2.76 $ 2.84 $ -- $ -- $ --
International Growth 12/31/97(8) 10.00 (0.03) 1.55 1.52 -- -- --
T. Rowe Price Small 06/30/98* $12.88 $ 0.03 $ 0.28 $ 0.31 $(0.05) $(0.06) $(0.11)
Company Value 12/31/97(8) 10.00 0.06 2.82 2.88 -- -- --
Marsico Capital Growth 06/30/98* $10.03 $ -- $ 3.17 $ 3.17 $ -- $ -- $ --
12/31/97(9) 10.00 0.01 0.02 0.03 -- -- --
<CAPTION>
- --------------------------- ---------
NET ASSET
VALUE
END
PORTFOLIO OF PERIOD
- --------------------------- ---------
<S> <C>
Neuberger&Berman $16.97
Mid-Cap Growth 16.61
14.39
12.40
9.97
Founders Passport $14.38
11.78
11.63
10.33
T. Rowe Price $13.92
Natural Resources 14.57
14.47
11.11
PIMCO Limited $10.74
Maturity Bond 11.02
10.81
10.47
Robertson Stephens $14.86
Value + Growth 12.62
10.99
AST Janus Overseas $14.56
Growth 11.87
AST Putnam Value $13.01
Growth & Income 12.23
Twentieth Century $12.81
Strategic Balanced 11.34
Twentieth Century $14.36
International Growth 11.52
T. Rowe Price Small $13.08
Company Value 12.88
Marsico Capital Growth $13.20
10.03
</TABLE>
- --------------------------------------------------------------------------------
(1) Annualized.
(5) Commenced operations on October 20, 1994.
(6) Commenced operations on May 2, 1995.
(7) Commenced operations on May 2, 1996.
(8) Commenced operations on January 2, 1997.
(9) Commenced operations on December 22, 1997.
* Unaudited.
See Notes to Financial Statements.
127
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
---------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
18.63% $217,779 143% 1.02%(1) 1.02%(1) (0.10%)(1) (0.10%)(1)
16.68% 185,050 305% 0.99% 0.99% 0.07% 0.07%
16.34% 136,247 156% 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)
22.32% $134,062 26% 1.32%(1) 1.32%(1) 0.46%(1) 0.46%(1)
2.03% 117,938 73% 1.35% 1.35% 0.43% 0.43%
12.91% 117,643 133% 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)
2.54% $100,490 32% 1.16%(1) 1.16%(1) 0.83%(1) 0.83%(1)
3.39% 111,954 44% 1.16% 1.16% 0.98% 0.98%
30.74% 88,534 31% 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)
2.39% $300,682 128% 0.87%(1) 0.87%(1) 5.84%(1) 5.84%(1)
7.46% 288,642 54% 0.88% 0.88% 5.71% 5.71%
3.90% 209,013 247% 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)
17.75% $286,750 95% 1.21%(1) 1.21%(1) (0.65%)(1) (0.65%)(1)
14.83% 235,648 219% 1.23% 1.23% (0.59%) (0.59%)
9.90% 48,790 77% 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
23.15% $501,294 45% 1.25%(1) 1.25%(1) 1.01%(1) 1.01%(1)
18.70% 255,705 94% 1.35%(1) 1.35%(1) 0.36%(1) 0.36%(1)
8.43% $164,716 51% 1.05%(1) 1.05%(1) 1.01%(1) 1.01%(1)
22.30% 117,438 81% 1.23%(1) 1.23%(1) 1.24%(1) 1.24%(1)
13.74% $ 50,462 55% 1.18%(1) 1.18%(1) 1.78%(1) 1.78%(1)
13.40% 28,947 76% 1.25%(1) 1.35%(1) 2.02%(1) 1.92%(1)
24.85% $ 63,449 120% 1.72%(1) 1.72%(1) 1.26%(1) 1.26%(1)
15.10% 33,082 171% 1.75%(1) 1.75%(1) (0.58%)(1) (0.58%)(1)
2.38% $309,444 6% 1.11%(1) 1.11%(1) 0.72%(1) 0.72%(1)
28.80% 199,896 7% 1.16%(1) 1.16%(1) 1.20%(1) 1.20%(1)
31.62% $313,995 69% 1.11%(1) 1.11%(1) 0.31%(1) 0.31%(1)
0.30% 7,299 -- 1.00%(1) 1.00%(1) 3.62%(1) 3.62%(1)
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM
INVESTMENT OPERATIONS
--------------------------------------
NET ASSET NET
VALUE INVESTMENT NET REALIZED TOTAL FROM
PERIOD BEGINNING INCOME & UNREALIZED INVESTMENT
PORTFOLIO ENDED OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS
- ----------------------------- -------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Cohen & Steers Realty 06/30/98(10) $10.00 $ 0.11 $(0.64) $(0.53)
Lord Abbett Small Cap Value 06/30/98(10) $10.00 $(0.01) $ 0.86 $ 0.85
Bankers Trust Enhanced 500 06/30/98(10) $10.00 $ 0.05 $ 1.65 $ 1.70
Stein Roe Venture 06/30/98(10) $10.00 $(0.01) $(0.81) $(0.82)
<CAPTION>
- ----------------------------- -------------------------------------------------
LESS DISTRIBUTIONS
-------------------------------------
NET ASSET
FROM NET FROM NET VALUE
INVESTMENT REALIZED TOTAL END
PORTFOLIO INCOME GAINS DISTRIBUTIONS OF PERIOD
- ----------------------------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C>
Cohen & Steers Realty $ -- $ -- $ -- $ 9.47
Lord Abbett Small Cap Value $ -- $ -- $ -- $10.85
Bankers Trust Enhanced 500 $ -- $ -- $ -- $11.70
Stein Roe Venture $ -- $ -- $ -- $ 9.18
</TABLE>
- --------------------------------------------------------------------------------
(1) Annualized.
(10) Commenced operations on January 2, 1998 (Unaudited).
See Notes to Financial Statements.
129
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
SUPPLEMENTAL DATA TO AVERAGE NET ASSETS (LOSS) TO AVERAGE NET ASSETS
---------------------------------- -------------------------------- --------------------------------
AFTER ADVISORY BEFORE ADVISORY AFTER ADVISORY BEFORE ADVISORY
NET ASSETS AT PORTFOLIO FEE WAIVER FEE WAIVER FEE WAIVER FEE WAIVER
TOTAL END OF PERIOD TURNOVER AND EXPENSE AND EXPENSE AND EXPENSE AND EXPENSE
RETURN (IN 000'S) RATE REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------ ------------- --------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(5.20%) $ 26,088 33% 1.27%(1) 1.27%(1) 4.04%(1) 4.04%(1)
8.50% $ 30,050 14% 1.32%(1) 1.32%(1) (0.33%)(1) (0.33%)(1)
17.00% $114,195 119% 0.80%(1) 0.93%(1) 1.23%(1) 1.10%(1)
(8.20%) $ 4,971 33% 1.35%(1) 2.13%(1) (0.46%)(1) (1.24%)(1)
</TABLE>
- --------------------------------------------------------------------------------
130
<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION
American Skandia Trust (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940, as amended. The
Trust was organized on October 31, 1988 as a Massachusetts business trust. The
Trust operates as a series company and, at June 30, 1998, issued 28 classes of
shares of beneficial interest: AST Putnam International Equity Portfolio
("Putnam International Equity"), Lord Abbett Growth and Income Portfolio
("Growth and Income"), JanCap Growth Portfolio ("Growth"), AST Money Market
Portfolio ("Money Market"), Neuberger&Berman Mid-Cap Value Portfolio ("Mid-Cap
Value") (formerly, Federated Utility Income Portfolio), AST Putnam Balanced
Portfolio ("Balanced"), Federated High Yield Portfolio ("High Yield"), T. Rowe
Price Asset Allocation Portfolio ("Asset Allocation"), PIMCO Total Return Bond
Portfolio ("Total Return Bond"), INVESCO Equity Income Portfolio ("Equity
Income"), Founders Capital Appreciation Portfolio ("Capital Appreciation"), T.
Rowe Price International Equity Portfolio ("T. Rowe International Equity"), T.
Rowe Price International Bond Portfolio ("International Bond"), Neuberger&Berman
Mid-Cap Growth Portfolio ("Mid-Cap Growth") (formerly, Berger Capital Growth
Portfolio), Founders Passport Portfolio ("Passport"), T. Rowe Price Natural
Resources Portfolio ("Natural Resources"), PIMCO Limited Maturity Bond Portfolio
("Limited Maturity Bond"), Robertson Stephens Value + Growth Portfolio ("Value +
Growth"), AST Janus Overseas Growth Portfolio ("Overseas Growth"), AST Putnam
Value Growth & Income Portfolio ("Value Growth & Income"), Twentieth Century
Strategic Balanced Portfolio ("Strategic Balanced"), Twentieth Century
International Growth Portfolio ("International Growth"), T. Rowe Price Small
Company Value Portfolio ("Small Company Value"), Marsico Capital Growth
Portfolio ("Capital Growth"), Cohen & Steers Realty Portfolio ("Realty"), Lord
Abbett Small Cap Value Portfolio ("Small Cap Value"), Bankers Trust Enhanced 500
Portfolio ("Enhanced 500"), and Stein Roe Venture Portfolio ("Venture")
(collectively the "Portfolios").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Trust, in conformity with generally accepted accounting principals, in the
preparation of its financial statements. The preparation of financial statements
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security Valuation
Portfolio securities are valued at the close of trading on the New York Stock
Exchange. Equity securities are valued at the last reported sales price on the
securities exchange on which they are primarily traded, or at the last reported
sales price on the NASDAQ National Securities Market. 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.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service. Debt
securities of Money Market are valued at amortized cost, which approximates
market value. 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. For Portfolios other than Money Market, debt securities
which mature in 60 days or less are valued at cost (or market value 60 days
prior to maturity), adjusted for amortization to maturity of any premium or
discount.
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Securities for which market quotations are not readily available are valued at
fair value as determined in accordance with procedures adopted by the Board of
Trustees.
Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign
currencies are converted each business day into U.S. dollars based on the
prevailing rates of exchange. Purchases and sales of portfolio securities and
income and expenses are converted into U.S. dollars on the respective dates of
such transactions.
Gains and losses resulting from changes in exchange rates applicable to foreign
securities are not reported separately from gains and losses arising from
movements in securities prices.
Net realized foreign exchange gains and losses include gains and losses from
sales and maturities of foreign currency exchange contracts, gains and losses
realized between the trade and settlement dates of foreign securities
transactions, and the difference between the amount of net investment income
accrued on foreign securities and the U.S. dollar amount actually received. Net
unrealized foreign exchange gains and losses include gains and losses from
changes in the value of assets and liabilities other than portfolio securities,
resulting from changes in exchange rates.
Foreign Currency Exchange Contracts
A foreign currency exchange contract ("FCEC") is a commitment to purchase or
sell a specified amount of a foreign currency at a specified future date, in
exchange for either a specified amount of another foreign currency or U.S.
dollars.
FCECs are valued at the forward exchange rates applicable to the underlying
currencies, and changes in market value are recorded as unrealized gains and
losses until the contract settlement date.
Risks could arise from entering into FCECs if the counterparties to the
contracts were unable to meet the terms of their contracts. In addition, the use
of FCECs may not only hedge against losses on securities denominated in foreign
currency, but may also reduce potential gains on securities from favorable
movements in exchange rates.
Futures Contracts and Options
A financial futures contract calls for delivery of a particular security at a
specified price and future date. 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 date. Such contracts require an initial
deposit, in cash or cash equivalents, equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Portfolio each
day, depending on the daily change in the value of the contract. Futures
contracts are valued based on their quoted daily settlement prices. Fluctuations
in value are recorded as unrealized gains and losses until such time that the
contracts are terminated.
An option is a right to buy or sell a particular security at a specified price
within a limited period of time. The buyer of the option, in return for a
premium paid to the seller, has the right to buy (in the case of a call option)
or sell (in the case of a put option) the underlying security of the contract.
The premium received in cash from writing options is recorded as an asset with
an equal liability that is adjusted to reflect the option's value. The premium
received from
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- --------------------------------------------------------------------------------
writing options which expire is recorded as realized gains. The premium 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. Options are valued based on their quoted daily
settlement prices.
Risks could arise from entering into futures and written options transactions
from the potential inability of counterparties to meet the terms of their
contracts, the potential inability to enter into a closing transaction because
of an illiquid secondary market, and from unexpected movements in interest or
exchange rates or securities values.
Repurchase Agreements
A repurchase agreement is a commitment to purchase government securities from a
seller who agrees to repurchase the securities at an agreed-upon price and date.
The excess of the resale price over the purchase price determines the yield on
the transaction. Under the terms of the agreement, the market value, including
accrued interest, of the government securities will be at least equal to their
repurchase price. Repurchase agreements are recorded at cost, which, combined
with accrued interest, approximates market value.
Repurchase agreements entail a risk of loss in the event that the seller
defaults on its obligation to repurchase the securities. In such case, the
Portfolio may be delayed or prevented from exercising its right to dispose of
the securities.
Swap Agreements
A swap agreement is a two-party contract under which an agreement is made to
exchange returns from predetermined investments or instruments, including a
particular interest rate, foreign currency, or "basket" of securities
representing a particular index. The gross returns to be exchanged or "swapped"
between the parties are calculated based on a "notional amount", which, each
business day, is valued to determine each party's obligation under the contract.
Fluctuations in value are recorded as unrealized gains and losses during the
term of the contract.
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.
Risks could arise from entering into swap agreements from the potential
inability of counterparties to meet the terms of their contracts, and from the
potential inability to enter into a closing transaction. It is possible that
developments in the swaps market, including potential governmental regulation,
could affect the Portfolios's ability to terminate existing swap agreements or
to realize amounts to be received under such agreements.
Investment Transactions and Investment Income
Securities transactions are accounted for on the trade date. Realized gains and
losses from securities sold 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,
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as soon as reliable information is available from the Trust's sources. Interest
income is recorded on the accrual basis and includes the accretion of discount
and amortization of premium.
Distributions to Shareholders
Dividends, if any, from net investment income are declared and paid at least
annually by all Portfolios other than Money Market. In the case of Money Market,
dividends are declared daily and paid monthly. Net realized gains from
investment transactions, if any, are distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
3. AGREEMENTS AND OTHER 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 Equity, Balanced,
and Value Growth & Income; Lord Abbett & Co. for Growth and Income and Small Cap
Value; Janus Capital Corporation for Growth and Overseas Growth; J. P. Morgan
Investment Management Inc. for Money Market; Federated Investment Counseling for
High Yield; T. Rowe Price Associates, Inc. for Asset Allocation, Natural
Resources, and Small Company Value; Pacific Investment Management Co. for Total
Return Bond and Limited Maturity Bond; INVESCO Funds Group, Inc. for Equity
Income; Founders Asset Management LLC for Capital Appreciation and Passport;
Rowe Price-Fleming International, Inc., a United Kingdom Corporation, for T.
Rowe International Equity and International Bond; Neuberger&Berman Management
Incorporated for Mid-Cap Value and Mid-Cap Growth; Robertson, Stephens & Company
Investment Management, L.P. for Value + Growth; American Century Investment
Management, Inc. for Strategic Balanced and International Growth; Marsico
Capital Management, LLC for Capital Growth; Cohen & Steers Capital Management,
Inc. for Realty; Bankers Trust Company for Enhanced 500; and Stein Roe & Farnham
Incorporated for Venture.
The Investment Manager receives a fee, computed daily and paid monthly, based on
an annual rate of 1.00%, .75%, .90%, .50%, .90%, .75%, .75%, .85%, .65%, .75%,
.90%, 1.00%, .80%, .90%, 1.00%, .90%, .65%, 1.00%, 1.00%, .75%, .85%, 1.00%,
.90%, .90%, 1.00%, 0.95%, .60%, and .95% of the average daily net assets of the
Putnam International Equity, Growth and Income, Growth, Money Market, Mid-Cap
Value, Balanced, High Yield, Asset Allocation, Total Return Bond, Equity Income,
Capital Appreciation, T. Rowe International Equity, International Bond, Mid-Cap
Growth, Passport, Natural Resources, Limited Maturity Bond, Value + Growth,
Overseas Growth, Value Growth & Income, Strategic Balanced, International
Growth, Small Company Value, Capital Growth, Realty, Small Cap Value, Enhanced
500, and Venture Portfolios, respectively. The fees for Putnam International
Equity are at the rate of .85% for average daily net assets in excess of $75
million, for Mid-Cap Value are at the rate of .85% for average daily net assets
in excess of $1 billion, for Balanced are at the rate of .70% for average daily
net assets in excess of $300 million, and for Mid-Cap Growth are at the rate of
.85% for average daily net assets in excess of $1 billion. During the six months
ended June 30, 1998, the Investment Manager voluntarily waived .05% from its fee
for the Money Market Portfolio, 0.05% from its fee for the Growth Portfolio on
average daily net assets in excess of $1 billion, and, since
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February 11, 1998, .05% from its fee for the Growth and Income Portfolio on
average daily net assets in excess of $1 billion.
The Investment Manager pays each Sub-advisor a fee, computed daily and paid
monthly, based on an annual rate of .65%, .50%, .60%, .25%, .50%, .45%, .50%,
.50%, .30%, .50%, .65%, .75%, .40%, .45%, .60%, .60%, .30%, .60%, .65%, .45%,
.50%, .70%, .60%, .45%, .60%, .50%, .17%, and .50% of the average daily net
assets of the Putnam International Equity, Growth and Income, Growth, Money
Market, Mid-Cap Value, Balanced, High Yield, Asset Allocation, Total Return
Bond, Equity Income, Capital Appreciation, T. Rowe International Equity,
International Bond, Mid-Cap Growth, Passport, Natural Resources, Limited
Maturity Bond, Value + Growth, Overseas Growth, Value Growth & Income, Strategic
Balanced, International Growth, Small Company Value, Capital Growth, Realty,
Small Cap Value, Enhanced 500, and Venture Portfolios, respectively. The
Sub-advisors for the Growth, Money Market, and T. Rowe International Equity
Portfolios are currently voluntarily waiving a portion of their fee payable 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,
Capital Growth, Small Cap Value, and Venture, are reduced for Portfolio net
assets in excess of specified levels.
On April 29, 1998 the shareholders of the Federated Utility Income and Berger
Capital Growth Portfolios approved new Investment Management and Sub-Advisory
Agreements, effective May 1, 1998. Under the new Sub-Advisory Agreements,
Neuberger&Berman Management Incorporated became Sub-advisor to both Portfolios.
Effective May 1, 1998, the names of the Portfolios were changed from Federated
Utility Income Portfolio to Neuberger&Berman Mid-Cap Value Portfolio and from
Berger Capital Growth Portfolio to Neuberger&Berman Mid-Cap Growth Portfolio.
Prior to May 1, 1998, Federated Investment Counseling served as Sub-advisor to
Federated Utility Income Portfolio and Berger Associates, Inc. served as
Sub-advisor to Berger Capital Growth Portfolio. Prior to May 1, 1998, the
Investment Manager received a fee, computed daily and paid monthly, based on an
annual rate of 0.75% for both the Federated Utility Income and Berger Capital
Growth Portfolios. The fees for Federated Utility Income Portfolio were reduced
to .60% for average daily net assets in excess of $50 million. The Investment
Manager paid each Sub-advisor a fee, computed daily and paid monthly, based on
an annual rate of .50% and .55% of the average daily net assets of the Federated
Utility Income and Berger Capital Growth 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.
By the terms of the Investment Management Agreement, during the six months ended
June 30, 1998, the Investment Manager reimbursed Money Market in the amount of
$94,845 to prevent its expenses from exceeding an annual rate of .60% of average
daily net assets. In addition, the Investment Manager voluntarily reimbursed
Enhanced 500 and Venture in the amount of $52,444 and $9,240, respectively.
Voluntary payments of Portfolio expenses by the Investment Manager are subject
to reimbursement by the Portfolio within the two year period following such
payments. During the six months ended June 30, 1998, Strategic Balanced paid
$3,660 as reimbursement to the Investment Manager.
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.
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Certain officers and Trustees of the Trust are officers or directors of the
Investment Manager. The Trust pays no compensation directly to its officers or
interested Trustees.
4. TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company under the
Internal Revenue Code and to distribute all of its taxable income, including any
net realized gains on investments, to shareholders. Accordingly, no provision
for federal income or excise tax has been made.
Income and capital gains of the Portfolios are determined in accordance with
both tax regulations and generally accepted accounting principles. Such may
result in temporary and permanent differences between tax basis earnings and
earnings reported for financial statement purposes. Temporary differences that
result in over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Permanent differences in the recognition of earnings are reclassified to
additional paid-in capital. Distributions in excess of tax-basis earnings are
recorded as a return of capital.
Capital Loss Carryforwards
At June 30, 1998, the following Portfolios had, for federal income tax purposes,
capital loss carryforwards available to offset future net realized capital
gains.
<TABLE>
<CAPTION>
EXPIRATION
DECEMBER 31,
----------------------
AMOUNT 2004 2005
---------- -------- ----------
<S> <C> <C> <C>
Capital Appreciation........................................ $3,166,259 $ -- $3,166,259
Limited Maturity Bond....................................... 606,299 606,299 --
Value + Growth.............................................. 3,619,886 7,892 3,611,994
Overseas Growth............................................. 1,943,421 -- 1,943,421
Strategic Balanced.......................................... 355,092 -- 355,092
International Growth........................................ 225,626 -- 225,626
</TABLE>
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5. PORTFOLIO SECURITIES
Purchases and sales of securities, other than short-term obligations, during the
period ended June 30, 1998, were as follows ($ in thousands):
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER SECURITIES
-------------------------- ---------------------
PURCHASES SALES PURCHASES SALES
---------- ------------ --------- --------
<S> <C> <C> <C> <C>
Putnam International Equity.......................... $ -- $ -- $290,138 $271,313
Growth and Income.................................... -- -- 434,894 352,592
Growth............................................... -- -- 602,205 348,415
Mid-Cap Value........................................ -- -- 269,903 250,882
Balanced............................................. 117,944 121,728 164,048 142,758
High Yield........................................... -- -- 225,299 100,838
Asset Allocation..................................... 2,813 -- 42,327 13,985
Total Return Bond.................................... 681,574 572,741 266,556 153,470
Equity Income........................................ 13,606 9,751 278,274 209,659
Capital Appreciation................................. -- -- 139,019 136,082
T. Rowe International Equity......................... -- -- 56,478 100,122
International Bond................................... -- -- 60,176 63,312
Mid-Cap Growth....................................... -- -- 348,154 360,010
Passport............................................. -- -- 26,050 30,022
Natural Resources.................................... -- -- 31,821 41,597
Limited Maturity Bond................................ 422,101 380,203 70,886 8,430
Value + Growth....................................... -- -- 284,764 274,542
Overseas Growth...................................... -- -- 285,795 138,229
Value Growth & Income................................ -- -- 102,710 64,457
Strategic Balanced................................... 11,794 7,663 23,375 18,561
International Growth................................. -- -- 67,745 50,570
Small Company Value.................................. -- -- 98,952 13,719
Capital Growth....................................... -- -- 332,220 81,918
Realty............................................... -- -- 26,193 1,175
Small Cap Value...................................... -- -- 27,994 1,733
Enhanced 500......................................... 1,361 -- 168,488 76,601
Venture.............................................. -- -- 5,827 709
</TABLE>
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At June 30, 1998, the cost and unrealized appreciation or depreciation in value
of the investments owned by the Portfolios, for federal income tax purposes,
were as follows ($ in thousands):
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
AGGREGATE UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Putnam International Equity..................... $ 425,204 $102,853 $(12,463) $ 90,390
Growth and Income............................... 941,393 182,937 (14,209) 168,728
Growth.......................................... 1,380,192 862,156 (9,665) 852,491
Money Market.................................... 816,316 -- -- --
Mid-Cap Value................................... 222,380 5,674 (12,018) (6,344)
Balanced........................................ 364,032 39,617 (5,628) 33,989
High Yield...................................... 539,234 19,735 (6,172) 13,563
Asset Allocation................................ 213,180 58,470 (5,117) 53,353
Total Return Bond............................... 856,035 6,321 (610) 5,711
Equity Income................................... 631,938 130,076 (7,096) 122,980
Capital Appreciation............................ 226,176 57,777 (11,310) 46,467
T. Rowe International Equity.................... 359,253... 126,273 (33,925) 92,348
International Bond.............................. 133,480 4,194 (5,544) (1,350)
Mid-Cap Growth.................................. 219,583 13,641 (7,864) 5,777
Passport........................................ 99,780 36,511 (2,605) 33,906
Natural Resources............................... 103,110 15,562 (18,753) (3,191)
Limited Maturity Bond........................... 398,397 2,142 (744) 1,398
Value + Growth.................................. 246,445 49,258 (5,378) 43,880
Overseas Growth................................. 437,272 87,932 (7,481) 80,451
Value Growth & Income........................... 151,974 14,135 (4,526) 9,609
Strategic Balanced.............................. 45,488 6,137 (402) 5,735
International Growth............................ 63,016 6,794 (830) 5,964
Small Company Value............................. 293,153 32,486 (16,467) 16,019
Capital Growth.................................. 296,894 27,056 (1,269) 25,787
Realty.......................................... 25,669 268 (1,088) (820)
Small Cap Value................................. 29,978 1,116 (1,525) (409)
Enhanced 500.................................... 106,149 6,540 (1,737) 4,803
Venture......................................... 5,572 126 (604) (478)
</TABLE>
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6. WRITTEN OPTIONS TRANSACTIONS
Written options transactions, during the six months ended June 30, 1998, were as
follows:
<TABLE>
<CAPTION>
TOTAL RETURN BOND CAPITAL GROWTH
-------------------- ---------------------
NOTIONAL
AMOUNT NUMBER OF
(000) PREMIUM CONTRACTS PREMIUM
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period.......................... $ -- $ -- -- $ --
Written................................................. 95,000 143,336 117 215,858
Expired................................................. -- -- -- --
Exercised............................................... -- -- -- --
Closed.................................................. -- -- (117) (215,858)
------- -------- ---- --------
Balance at end of period................................ $95,000 $143,336 -- $ --
======= ======== ==== ========
</TABLE>
At June 30, 1998, Total Return Bond had sufficient cash and/or securities at
least equal to the value of written options.
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,
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
and Income Portfolio, Twentieth Century Strategic Balanced Portfolio, Twentieth
Century International Growth Portfolio, T. Rowe Price Small Company Value
Portfolio, and Marsico Capital Growth Portfolio (collectively, the "Portfolios")
of American Skandia Trust ("the Trust") as of December 31, 1997, 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, 1997 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 the Portfolios of
the Trust as of December 31, 1997, 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 10, 1998
<PAGE>
AMERICAN SKANDIA TRUST
SCHEDULES OF INVESTMENTS
DECEMBER 31, 1997
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
MARSICO CAPITAL GROWTH PORTFOLIO
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCK -- 94.3%
AUSTRALIA -- 1.8%
Australia & New Zealand Banking
Group Ltd. ..................... 491,079 $ 3,244,508
QBE Insurance Group Ltd. ......... 901,065 4,055,133
----------
7,299,641
----------
AUSTRIA -- 0.5%
VA Technologie AG ................ 13,694 2,076,154
----------
BRAZIL -- 0.4%
Petroleo Brasileiro SA [ADR]
144A* .......................... 63,600 1,502,550
----------
CANADA -- 7.7%
Bank of Nova Scotia .............. 130,100 6,123,070
Bombardier, Inc. Cl-B ............ 205,000 4,211,681
CAE, Inc. ........................ 203,000 1,588,797
Magna International, Inc. Cl-A ... 64,800 4,070,250
National Bank of Canada .......... 325,541 5,368,735
Newbridge Networks Corp.* ........ 74,900 2,619,631
Northern Telecom Ltd. ............ 59,200 5,260,080
Royal Bank of Canada ............. 49,900 2,636,190
----------
31,878,434
----------
FINLAND -- 0.4%
Nokia AB Cl-A .................... 22,861 1,624,688
----------
FRANCE -- 14.2%
Banque Nationale de Paris ........ 49,600 2,637,535
Cetelem .......................... 20,400 2,780,650
Compagnie Generale des Eaux ...... 55,214 7,709,581
Compagnie Generale des Eaux
Warrants* ...................... 18,820 12,795
Lafarge SA ....................... 78,200 5,133,294
Michelin C.G.D.E. Cl-B ........... 109,230 5,501,572
Scor SA .......................... 136,100 6,511,052
SGS-Thomson Microelectronics NV
[ADR]* ......................... 88,100 5,379,606
Societe Generale ................. 51,451 7,013,099
Societe Nationale Elf Aquitaine
SA ............................. 64,876 7,548,912
Societe Television Francaise ..... 14,470 1,479,265
Total SA Cl-B .................... 61,170 6,660,120
----------
58,367,481
----------
GERMANY -- 7.4%
Altana AG ........................ 49,120 3,242,722
Bayer AG ......................... 115,866 4,301,381
Bayerische Motoren Werke AG ...... 8,543 6,390,478
Deutsche Bank AG ................. 88,500 6,191,909
Deutsche Telekom AG .............. 184,900 3,424,379
Mannesmann AG .................... 10,400 5,223,021
Veba AG .......................... 27,226 1,854,900
----------
30,628,790
----------
HONG KONG -- 2.2%
Dao Heng Bank Group Ltd. ......... 450,500 1,125,048
Guoco Group Ltd. ................. 142,000 347,290
HSBC Holdings PLC ................ 142,903 3,522,654
Hutchison Whampoa Ltd. ........... 667,000 4,183,669
----------
9,178,661
----------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
IRELAND -- 4.0%
Allied Irish Banks PLC ........... 521,427 $ 5,053,811
Bank of Ireland PLC .............. 369,100 5,692,302
CRH PLC .......................... 481,957 5,646,726
----------
16,392,839
----------
ITALY -- 1.4%
Ente Nazionale Idrocarburi SPA ... 1,027,164 5,827,192
----------
JAPAN -- 10.4%
Canon, Inc. ...................... 175,000 4,091,644
Circle K Japan Co. Ltd. .......... 60,500 2,908,182
Hirose Electric Ltd. ............. 22,200 1,138,846
Kao Corp. ........................ 279,000 4,034,115
Murata Manufacturing Co. Ltd. .... 64,000 1,614,507
Nikko Securities Co. Ltd. ........ 796,000 2,118,241
Nomura Securities Co. Ltd. ....... 283,000 3,787,232
Promise Co. Ltd. ................. 59,750 3,327,076
Ricoh Co. Ltd. ................... 147,000 1,831,549
Rohm Co. ......................... 42,000 4,296,226
Sankyo Co. Ltd. .................. 107,000 2,427,683
Santen Pharmaceutical Ltd. ....... 700 8,076
Sony Corp. ....................... 88,200 7,868,877
Tokyo Electron Ltd. .............. 103,000 3,311,309
----------
42,763,563
----------
MEXICO -- 0.7%
Cemex SA de CV* .................. 658,700 2,990,448
----------
NETHERLANDS -- 5.6%
ABN Amro Holding NV .............. 163,384 3,183,491
AKZO Nobel NV .................... 30,226 5,212,536
ING Groep NV ..................... 147,182 6,200,255
Philips Electronics NV ........... 108,270 6,494,395
Vendex International NV .......... 35,300 1,948,506
----------
23,039,183
----------
PHILIPPINES -- 0.0%
Philippine Long Distance Telephone
Co. ............................ 6,500 143,363
----------
POLAND -- 0.1%
Bank Handlowy W. Warszawie
144A* .......................... 24,900 329,427
----------
PORTUGAL -- 2.4%
Banco Totta & Acores SA .......... 122,500 2,408,096
Electricidade de Portugal SA ..... 221,868 4,205,785
Portugal Telecom SA .............. 67,300 3,126,241
----------
9,740,122
----------
SINGAPORE -- 2.4%
DBS Land Ltd. .................... 491,000 751,825
Developmental Bank of Singapore
Ltd. Cl-F ...................... 199,000 1,700,713
Keppel Land Ltd. ................. 711,000 978,978
Overseas -- Chinese Banking Corp.
Ltd. ........................... 312,000 1,814,664
Overseas Union Bank Ltd. Cl-F .... 702,000 2,687,277
United Overseas Bank Ltd. ........ 380,000 2,108,680
----------
10,042,137
----------
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SWEDEN -- 3.1%
Astra AB Cl-A .................... 76,975 $ 1,333,953
Ericsson, (L.M.) Telephone Co.
Cl-B ........................... 151,045 5,682,491
Pharmacia & Upjohn, Inc. ......... 79,898 2,940,403
Sandvik AB Cl-B .................. 105,750 3,025,480
----------
12,982,327
----------
SWITZERLAND -- 9.8%
ABB AG ........................... 550 691,954
Ciba Specialty Chemicals AG* ..... 33,885 4,042,364
Georg Fischer AG ................. 2,400 3,290,940
Julius Baer Holdings AG Cl-B ..... 2,870 5,332,488
Nestle SA ........................ 5,591 8,391,004
Novartis AG ...................... 3,172 5,154,187
Publi Groupe SA .................. 11,786 2,577,720
Union Bank of Switzerland ........ 6,473 9,372,991
Zurich
Versicherungs-Gesellschaft ..... 2,895 1,381,454
----------
40,235,102
----------
UNITED KINGDOM -- 19.8%
Avis Europe PLC .................. 1,513,531 4,308,365
B.A.T. Industries PLC ............ 749,728 6,834,213
Bass PLC ......................... 367,100 5,705,075
British Petroleum Co. PLC ........ 392,034 5,160,464
BTR PLC .......................... 1,431,337 4,333,460
Burmah Castrol PLC ............... 201,400 3,502,753
Cookson Group PLC ................ 326,200 1,049,315
Dixons Group PLC ................. 201,600 2,026,781
General Electric Co. PLC ......... 496,775 3,224,644
Glaxo Wellcome PLC ............... 259,242 6,142,468
Molins PLC ....................... 84,700 415,312
Peninsular & Oriental Steam
Navigation Co. ................. 178,300 2,031,637
Rolls-Royce PLC .................. 1,350,904 5,223,570
Rio Tinto PLC .................... 312,000 3,845,134
Securicor PLC .................... 460,800 2,172,262
Shell Transport & Trading Co.
PLC ............................ 692,700 5,015,023
Siebe PLC ........................ 70,300 1,382,287
Smith Industries PLC ............. 231,700 3,232,935
Tomkins PLC ...................... 478,790 2,292,520
Unilever PLC ..................... 504,400 4,324,021
Vodafone Group PLC ............... 1,328,385 9,595,410
----------
81,817,649
----------
TOTAL FOREIGN STOCK
(COST $352,657,161)................. 388,859,751
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 4.1%
UBS Securities Funding,
Inc., 6.45%, dated
12/31/97, repurchase
price $16,957,074
(Collateralized by
U.S. Treasury Notes,
par value $12,679,000,
market value
$17,316,740 due
02/15/19)
(COST $16,951,000)... 01/02/98 $16,951 $ 16,951,000
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.2%
Federal Home Loan
Mortgage Corp. 5.62%
(COST $4,989,853).... 01/14/98 5,000 4,989,853
TOTAL INVESTMENTS -- 99.6%
(COST $374,598,014)................. 410,800,604
------------
OTHER ASSETS LESS
LIABILITIES -- 0.4%................. 1,469,177
------------
NET ASSETS -- 100.0%.................. $412,269,781
============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy FRF 5,438,535 $ 909,454 $ 906,574 $ (2,880)
02/98 Buy FRF 234,069,000 39,874,118 39,043,256 (830,862)
01/98 Buy GBP 156,393 260,944 257,271 (3,673)
01/98 Buy JPY 75,583,744 581,749 581,813 64
01/98 Buy PTE 136,608,608 749,940 743,209 (6,731)
----------- ----------- -------
$42,376,205 $41,532,123 $ (844,082)
========== ========== ===============
</TABLE>
<PAGE>
AST PUTNAM INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Sell ATS 9,036,123 $ 724,048 $ 714,357 $ 9,691
01/98 Sell CHF 1,867,672 1,281,629 1,281,635 (6)
02/98 Sell FRF 234,069,000 37,814,055 39,043,255 (1,229,200)
01/98 Sell ITL 575,943,732 325,548 325,849 (301)
01/98 Sell JPY 6,544,620 50,289 50,372 (83)
06/98 Sell JPY 3,274,000,000 25,957,434 25,802,146 155,288
01/98 Sell MXP 1,558,642 192,771 193,314 (543)
----------- ----------- --------------
$66,345,774 $67,410,928 $ (1,065,154)
========== ========== ===============
</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 0.4% 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> <C>
COMMON STOCK -- 93.8%
AEROSPACE -- 0.1%
Raytheon Co. Cl-A ............... 15,305 $ 754,718
----------
AUTOMOBILE MANUFACTURERS -- 1.6%
General Motors Corp. ............ 240,000 14,550,000
----------
AUTOMOTIVE PARTS -- 1.0%
Eaton Corp. ..................... 110,000 9,817,500
----------
BUILDING MATERIALS -- 0.3%
Georgia Pacific Timber Group .... 110,000 2,495,625
----------
CHEMICALS -- 2.8%
Dow Chemical Co. ................ 65,000 6,597,500
Lyondell Petrochemical Co. ...... 270,000 7,155,000
Rohm & Haas Co. ................. 130,000 12,447,500
----------
26,200,000
----------
CLOTHING & APPAREL -- 1.8%
Liz Claiborne, Inc. ............. 250,000 10,453,125
VF Corp. ........................ 140,000 6,431,250
----------
16,884,375
----------
COMPUTER HARDWARE -- 5.9%
EMC Corp.* ...................... 330,000 9,054,375
Hewlett-Packard Co. ............. 360,000 22,500,000
International Business Machines
Corp. ......................... 150,000 15,684,375
Seagate Technology, Inc.* ....... 400,000 7,700,000
----------
54,938,750
----------
CONGLOMERATES -- 2.1%
Minnesota Mining & Manufacturing
Co. ........................... 235,000 19,284,688
----------
CONSUMER PRODUCTS & SERVICES -- 5.6%
Corning, Inc. ................... 370,000 13,736,250
Crown Cork & Seal Co., Inc. ..... 100,000 5,012,500
Fortune Brands, Inc. ............ 425,000 15,751,562
International Flavors &
Fragrances, Inc. .............. 185,000 9,527,500
Whirlpool Corp. ................. 150,000 8,250,000
----------
52,277,812
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.5%
Emerson Electric Co. ............ 250,000 14,109,375
----------
FINANCIAL-BANK & TRUST -- 8.5%
BankAmerica Corp. ............... 90,000 6,570,000
BankBoston Corp. ................ 125,000 11,742,187
Chase Manhattan Corp. ........... 100,000 10,950,000
Comerica, Inc. .................. 100,000 9,025,000
First Chicago NBD Corp. ......... 150,000 12,525,000
First Union Corp. ............... 190,000 9,737,500
Mellon Bank Corp. ............... 150,000 9,093,750
Providian Financial Corp. ....... 230,000 10,393,125
----------
80,036,562
----------
FINANCIAL SERVICES -- 3.3%
Morgan Stanley, Dean Witter,
Discover & Co. ................ 225,000 13,303,125
Washington Mutual, Inc. ......... 276,900 17,669,681
----------
30,972,806
----------
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
FOOD -- 6.9%
Archer-Daniels-Midland Co. ...... 370,000 $ 8,024,375
Conagra, Inc. ................... 510,000 16,734,375
Heinz, (H.J.) Co. ............... 390,000 19,816,875
Pioneer Hi-Bred International,
Inc. .......................... 75,000 8,043,750
Sara Lee Corp. .................. 220,000 12,388,750
----------
65,008,125
----------
INSURANCE -- 9.7%
Aegon N.V. [ADR] ................ 69,999 6,273,660
Aetna, Inc. ..................... 80,000 5,645,000
American General Corp. .......... 275,000 14,867,188
Chubb Corp. ..................... 330,000 24,956,250
CIGNA Corp. ..................... 40,000 6,922,500
Safeco Corp. .................... 220,000 10,725,000
St. Paul Companies, Inc. ........ 110,000 9,026,875
Transamerica Corp. .............. 120,000 12,780,000
----------
91,196,473
----------
MACHINERY & EQUIPMENT -- 3.9%
Deere & Co. ..................... 440,000 25,657,500
Snap-On, Inc. ................... 250,000 10,906,250
----------
36,563,750
----------
MEDICAL SUPPLIES & EQUIPMENT -- 2.0%
Baxter International, Inc. ...... 380,000 19,166,250
----------
METALS & MINING -- 0.6%
USX-U.S. Steel Group, Inc. ...... 180,000 5,625,000
----------
OIL & GAS -- 8.9%
Chevron Corp. ................... 80,000 6,160,000
Coastal Corp. ................... 210,000 13,006,875
Consolidated Natural Gas Co. .... 220,000 13,310,000
ENI Co. SPA [ADR] ............... 240,000 13,695,000
Mobil Corp. ..................... 260,000 18,768,750
Sonat, Inc. ..................... 400,000 18,300,000
----------
83,240,625
----------
PAPER & FOREST PRODUCTS -- 6.4%
Bowater, Inc. ................... 275,000 12,220,313
Fort James Corp. ................ 290,000 11,092,500
Georgia Pacific Corp. ........... 110,000 6,682,500
International Paper Co. ......... 260,000 11,212,500
Kimberly-Clark Corp. ............ 380,000 18,738,750
----------
59,946,563
----------
PHARMACEUTICALS -- 4.4%
American Home Products Corp. .... 210,000 16,065,000
Pharmacia & Upjohn, Inc. ........ 200,000 7,325,000
Smithkline Beecham PLC [ADR] .... 220,000 11,316,250
Warner-Lambert Co. .............. 50,000 6,200,000
----------
40,906,250
----------
</TABLE>
<PAGE>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
PRINTING & PUBLISHING -- 1.0%
Deluxe Corp. .................... 270,000 $ 9,315,000
----------
RETAIL & MERCHANDISING -- 2.3%
Penney, (J.C.) Co., Inc. ........ 22,900 1,381,156
Toys 'R' Us, Inc.* .............. 220,000 6,916,250
Wal-Mart Stores, Inc. ........... 335,000 13,211,563
----------
21,508,969
----------
SEMICONDUCTORS -- 1.6%
Motorola, Inc. .................. 260,000 14,836,250
----------
TELECOMMUNICATIONS -- 2.8%
Bell Atlantic Corp. ............. 130,000 11,830,000
SBC Communications, Inc. ........ 200,000 14,650,000
----------
26,480,000
----------
UTILITIES -- 8.8%
Baltimore Gas & Electric Co. .... 390,000 13,284,375
Carolina Power & Light Co. ...... 340,000 14,428,750
Cinergy Corp. ................... 340,000 13,026,250
Duke Energy Corp. ............... 230,000 12,736,250
Firstenergy Corp.* .............. 300,000 8,700,000
FPL Group, Inc. ................. 225,000 13,317,188
PacifiCorp ...................... 270,000 7,374,375
----------
82,867,188
----------
TOTAL COMMON STOCK
(COST $725,978,973)................ 878,982,654
----------
SHARES VALUE
---------- ------------
PREFERRED STOCK -- 2.9%
INSURANCE -- 1.4%
Aetna, Inc. Cl-C 6.25% [CVT] .... 190,000 $ 13,585,000
----------
OIL & GAS -- 1.5%
Occidental Petroleum Corp.
$3.875 [CVT] .................. 210,000 13,545,000
----------
TOTAL PREFERRED STOCK
(COST $27,631,007)................. 27,130,000
----------
SHORT-TERM INVESTMENTS -- 3.4%
Temporary Investment Cash
Fund .......................... 15,995,986 15,995,986
Temporary Investment Fund ....... 15,995,986 15,995,986
----------
(COST $31,991,972)............... 31,991,972
----------
TOTAL INVESTMENTS -- 100.1%
(COST $785,601,952)................ 938,104,626
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%)................... (1,118,749)
----------
NET ASSETS -- 100.0%................. $936,985,877
==========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
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 -- 82.0%
AEROSPACE -- 1.6%
Textron, Inc. ................... 388,850 $ 24,303,125
------------
AIRLINES -- 3.5%
UAL Corp.*....................... 564,575 52,223,187
------------
BEVERAGES -- 7.7%
Coca-Cola Co. ................... 497,200 33,125,950
Coca-Cola Enterprises, Inc. ..... 2,353,275 83,688,342
------------
116,814,292
------------
CHEMICALS -- 6.9%
Cytec Industries, Inc.*.......... 743,950 34,919,153
Monsanto Co. .................... 1,438,675 60,424,350
Solutia, Inc. ................... 307,735 8,212,678
------------
103,556,181
------------
COMPUTER HARDWARE -- 6.9%
Compaq Computer Corp. ........... 660,125 37,255,805
Dell Computer Corp.* ............ 789,300 66,301,200
------------
103,557,005
------------
COMPUTER SERVICES & SOFTWARE -- 9.0%
America Online, Inc.*............ 314,100 28,013,794
Cisco Systems, Inc.*............. 278,950 15,551,462
Edwards, (J.D.) & Co.* .......... 470,475 13,879,013
Microsoft Corp.* ................ 588,950 76,121,788
Sapient Corp.* .................. 34,000 2,082,500
------------
135,648,557
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.9%
AES Corp.*....................... 384,600 17,931,975
General Electric Co. ............ 781,550 57,346,231
Texas Instruments, Inc. ......... 296,650 13,349,250
------------
88,627,456
------------
FARMING & AGRICULTURE -- 1.1%
Delta & Pine Land Co. ........... 525,300 16,021,650
------------
FINANCIAL-BANK & TRUST -- 5.0%
Citicorp ........................ 403,445 51,010,577
Mercantile Bancorporation,
Inc. .......................... 166,800 10,258,200
Wells Fargo & Co. ............... 40,758 13,834,794
------------
75,103,571
------------
FINANCIAL SERVICES -- 9.6%
Fannie Mae ...................... 776,135 44,288,203
Freddie Mac ..................... 692,300 29,033,331
Merrill Lynch & Co., Inc. ....... 493,400 35,987,363
SLM Holding Corp. ............... 252,825 35,174,278
------------
144,483,175
------------
OIL & GAS -- 7.1%
Diamond Offshore Drilling,
Inc. .......................... 629,850 30,311,531
Schlumberger Ltd. ............... 755,300 60,801,650
TransCoastal Marine Services,
Inc. .......................... 30,925 440,681
Transocean Offshore, Inc. ....... 331,150 15,957,291
------------
107,511,153
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PHARMACEUTICALS -- 11.6%
Lilly, (Eli) & Co. .............. 1,033,350 $ 71,946,994
Pfizer, Inc. .................... 785,475 58,566,980
Warner-Lambert Co. .............. 362,925 45,002,700
------------
175,516,674
------------
REAL ESTATE -- 1.1%
Starwood Lodging Trust [REIT] ... 298,575 17,280,028
------------
RETAIL & MERCHANDISING -- 0.7%
Meyer, (Fred), Inc.* ............ 278,500 10,130,438
------------
TELECOMMUNICATIONS -- 4.3%
Lucent Technologies, Inc. ....... 565,325 45,155,334
Qwest Communications
International, Inc.* .......... 339,050 20,173,475
------------
65,328,809
------------
TOTAL COMMON STOCK
(COST $870,204,211)................ 1,236,105,301
------------
FOREIGN STOCK -- 1.5%
AUTOMOBILE MANUFACTURERS -- 1.5%
Porsche AG Pfd. -- (DEM) ........ 13,419 22,538,641
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.0%
Philips Electronics
NV -- (NLG) ................... 8,827 529,473
------------
TOTAL FOREIGN STOCK
(COST $8,934,875).................. 23,068,114
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 3.3%
Venetian Casino Notes 144A
12.25%
(COST $49,805,844) ...... 11/15/04 $ 49,725 49,973,625
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.9%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 6.6%
5.61%.................... 1/16/98 25,000 24,941,563
5.70%.................... 1/21/98 25,000 24,920,833
5.55%.................... 2/23/98 50,000 49,584,649
-----------
99,447,045
-----------
FEDERAL MORTGAGE CORP. DISC.
NOTES -- 3.3%
5.70%.................... 01/02/98 50,000 49,992,083
-----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $149,445,937).......... 149,439,128
-----------
</TABLE>
<PAGE>
JANCAP GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 4.3%
General Electric Capital
Corp.
6.70%.................. 01/02/98 $ 15,600 $ 15,597,097
Prudential Funding Corp.
6.40%.................. 01/02/98 50,000 49,991,111
--------------
TOTAL COMMERCIAL PAPER
(COST $65,588,208)......... 65,588,208
--------------
TOTAL INVESTMENTS -- 100.8%
(COST $1,143,979,075)...... 1,524,174,376
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.8%)..... (12,611,467)
--------------
NET ASSETS -- 100.0%......... $1,511,562,909
=============
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy DEM 5,000,000 $ 2,815,791 $ 2,781,920 $ (33,871)
02/98 Buy DEM 5,000,000 2,922,951 2,788,514 (134,437)
03/98 Buy DEM 10,500,000 6,025,439 5,858,394 (167,045)
04/98 Buy DEM 14,000,000 8,200,851 7,832,080 (368,771)
01/98 Buy NLG 47,200,000 23,609,678 23,293,768 (315,910)
03/98 Buy NLG 8,950,000 4,575,921 4,433,507 (142,414)
04/98 Buy NLG 2,000,000 1,025,641 991,955 (33,686)
05/98 Buy GBP 3,200,000 5,265,288 5,230,304 (34,984)
---------- ---------- ----------
$54,441,560 $53,210,442 $ (1,231,118)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Sell DEM 5,000,000 $ 2,877,367 $ 2,781,920 $ 95,447
02/98 Sell DEM 8,000,000 4,503,110 4,461,622 41,488
03/98 Sell DEM 36,200,000 20,744,259 20,197,512 546,747
04/98 Sell DEM 20,300,000 11,779,381 11,356,516 422,865
05/98 Sell DEM 3,200,000 1,810,877 1,791,453 19,424
01/98 Sell NLG 50,087,012 24,762,887 24,718,305 44,582
03/98 Sell NLG 9,350,000 4,672,026 4,631,812 40,214
04/98 Sell NLG 2,000,000 1,018,900 991,955 26,945
05/98 Sell GBP 3,200,000 5,307,521 5,230,297 77,224
---------- ---------- ----------
$77,476,328 $76,161,392 $1,314,936
========== ========== ==========
</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 3.3% of net assets.
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> <C>
CORPORATE OBLIGATIONS -- 14.0%
FINANCIAL-BANK & TRUST
Abbey National Treasury
Services PLC
5.75% [VR].............. 02/05/98 $ 4,000 $ 4,000,000
CoreStates Bank NA
6.38917% [VR]........... 04/21/98 5,000 5,000,000
5.6475%................. 03/16/98 20,000 20,000,000
First USA Bank
6.015%.................. 05/07/98 27,000 27,008,257
Key Bank NA
5.6125%................. 07/31/98 25,000 24,990,129
Old Kent Bank
5.70%................... 11/04/98 25,000 25,000,000
------------
TOTAL CORPORATE OBLIGATIONS
(COST $105,998,386)................... 105,998,386
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.2%
Federal Home Loan Bank
5.75%
(COST $9,391,500)........... 01/02/98 9,393 9,391,500
------------
CERTIFICATES OF DEPOSIT -- 21.2%
Bank of Boston N.A.
5.87%................... 10/14/98 15,000 14,994,379
Bank of Tokyo
6.50%................... 03/04/98 30,000 30,000,000
Canadian Imperial Bank of
Commerce
5.80%................... 03/18/98 30,000 30,000,000
Deutsche Bank
5.79%................... 03/04/98 10,000 10,000,000
NationsBank N.A.
5.83%................... 12/22/98 5,000 4,997,208
Norinchukin Bank NY
6.02%................... 02/13/98 26,000 26,000,306
Rabobank Nederland NV NY
5.99%................... 03/24/98 10,000 9,998,927
Short Term Card Account
Trust 144A
5.98%................... 01/15/98 20,000 20,000,000
Swiss Bank Corp.
5.76%................... 03/19/98 15,000 15,000,000
------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $160,990,820)................... 160,990,820
------------
COMMERCIAL PAPER -- 63.6%
CHEMICALS -- 3.6%
Bayer Co.
5.75%................... 02/20/98 27,250 27,032,378
------------
FINANCIAL-BANK & TRUST -- 12.2%
Abbey National North
America Corp.
5.735%.................. 03/10/98 25,000 24,729,181
Cregem North America, Inc.
5.69%................... 02/23/98 29,000 28,757,069
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
NationsBank Corp.
5.75%................... 02/23/98 $ 30,000 $ 29,746,042
SunTrust Banks, Inc.
5.87%................... 01/23/98 10,000 9,964,128
------------
93,196,420
------------
FINANCIAL SERVICES -- 40.5%
American Express Co.
6.45%................... 01/02/98 38,000 37,993,192
Ameritech Capital
Funding Corp.+
5.90%................... 01/28/98 30,000 29,867,250
Associates Corp.
5.72%................... 03/10/98 25,000 24,729,889
Bankers Trust NY
5.6125% [VR]............ 07/07/98 7,000 6,996,188
5.69%................... 04/23/98 20,000 19,997,030
Bayerische Landesbank NY
5.71%................... 02/06/98 10,000 9,999,716
Bayerische Landesbank NY
5.87% [VR].............. 06/26/98 10,000 9,996,249
British Gas International
Finance
5.66%................... 03/23/98 35,000 34,554,275
Ford Motor Credit Corp.
5.70%................... 03/26/98 20,735 20,459,224
General Electric Capital
Corp.
5.70%................... 02/06/98 15,000 14,914,500
KFW International Finance
Inc.
5.74%................... 01/29/98 12,000 11,946,427
5.70%................... 02/12/98 25,000 24,883,750
Landesbank Hess
6.08%................... 06/09/98 10,000 9,998,336
National Australia
Funding, Inc.
5.74%................... 02/18/98 30,000 29,770,400
National Westminster Bank
NY
6.06%................... 05/26/98 5,000 4,999,621
Providence of Quebec
5.615%.................. 03/06/98 5,500 5,445,098
Rabobank Nederland NV NY
5.55%................... 04/29/98 12,000 11,781,700
------------
308,282,845
------------
PHARMACEUTICALS -- 3.3%
Pfizer Inc.+
5.95%................... 01/28/98 25,000 24,888,437
------------
</TABLE>
<PAGE>
AST MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
UTILITIES -- 4.0%
Southern Co.+
5.70%................... 02/23/98 $ 30,500 $ 30,244,054
------------
TOTAL COMMERCIAL PAPER
(COST $483,644,134)................... 483,644,134
------------
TOTAL INVESTMENTS -- 100.0%
(COST $760,024,840)................... 760,024,840
LIABILITIES IN EXCESS OF OTHER
ASSETS -- 0.0%........................ (136,725)
------------
NET ASSETS -- 100.0%.................... $759,888,115
===========
</TABLE>
- --------------------------------------------------------------------------------
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 2.6% 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
11.2% of net assets.
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 -- 84.7%
MACHINERY & EQUIPMENT -- 0.7%
Federal Signal Corp. .............. 64,900 $ 1,403,462
----------
METALS & MINING -- 0.5%
Barrick Gold Corp. ................ 50,500 940,562
----------
OIL & GAS -- 4.3%
Atlantic Richfield Co. ............ 11,400 913,425
Burlington Resources, Inc. ........ 33,100 1,483,294
Sonat, Inc. ....................... 82,300 3,765,225
Ultramar Diamond Shamrock Corp. ... 80,100 2,553,187
----------
8,715,131
----------
REAL ESTATE -- 8.6%
Associated Estates Realty Corp.
[REIT] .......................... 74,900 1,774,194
Avalon Properties, Inc. [REIT] .... 56,000 1,732,500
Boston Properties, Inc. [REIT] .... 58,500 1,934,156
Duke Realty Investments, Inc.
[REIT] .......................... 98,100 2,378,925
Equity Residential Properties Trust
[REIT] .......................... 34,300 1,734,294
Liberty Property Trust [REIT] ..... 56,700 1,619,494
Meditrust Corp. Paired Stock
[REIT] .......................... 99,250 3,635,031
Security Capital Pacific Trust
[REIT] .......................... 73,500 1,782,375
The Price REIT, Inc. [REIT] ....... 18,200 745,062
----------
17,336,031
----------
TELECOMMUNICATIONS -- 16.1%
Ameritech Corp. ................... 25,600 2,060,800
Bell Atlantic Corp. ............... 40,000 3,640,000
BellSouth Corp. ................... 49,600 2,793,100
Cincinnati Bell, Inc. ............. 33,500 1,038,500
GTE Corp. ......................... 76,500 3,997,125
MCI Communications Corp. .......... 78,700 3,369,344
SBC Communications, Inc. .......... 66,500 4,871,125
Sprint Corp. ...................... 98,500 5,774,562
U.S. West Communications Group .... 105,800 4,774,225
----------
32,318,781
----------
UTILITIES -- COMBINATION -- 10.3%
Enron Corp. ....................... 104,754 4,353,838
LG&E Corporation .................. 36,200 895,950
MAPCO, Inc. ....................... 19,900 920,375
Montana Power Co. ................. 59,600 1,896,025
New Century Energies, Inc. ........ 49,000 2,348,937
PECO Energy Co. ................... 27,100 657,175
Public Service Enterprise Group,
Inc. ............................ 56,100 1,777,669
Puget Sound Energy, Inc. .......... 88,500 2,671,594
SCANA Corp. ....................... 69,000 2,065,687
Union Electric Co. ................ 47,500 2,054,375
UtiliCorp United, Inc. ............ 27,900 1,082,869
----------
20,724,494
----------
UTILITIES -- ELECTRIC -- 34.0%
Central & South West Corp. ........ 44,000 1,190,750
Cinergy Corp. ..................... 72,500 2,777,656
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
CMS Energy Corp. .................. 143,000 $ 6,300,937
DPL, Inc. ......................... 125,800 3,616,750
DQE, Inc. ......................... 117,000 4,109,625
Duke Energy Corp. ................. 86,000 4,762,250
Entergy Corp. ..................... 170,000 5,089,375
Florida Progress Corp. ............ 52,600 2,064,550
FPL Group, Inc. ................... 94,400 5,587,300
Houston Industries, Inc. .......... 74,500 1,988,219
NIPSCO Industries, Inc. ........... 100,500 4,968,469
Pacificorp ........................ 194,500 5,312,281
PG&E Corp. ........................ 95,500 2,906,781
Pinnacle West Capital Co. ......... 87,300 3,699,337
Potomac Electric Power Co. ........ 60,500 1,561,656
Southern Co. ...................... 130,000 3,363,750
Teco Energy, Inc. ................. 131,000 3,684,375
Texas Utilities Co. ............... 129,000 5,361,563
----------
68,345,624
----------
UTILITIES -- GAS -- 10.2%
AGL Resources, Inc. ............... 3,400 69,488
Columbia Gas System, Inc. ......... 11,000 864,188
Consolidated Natural Gas Co. ...... 80,800 4,888,400
El Paso Natural Gas Co. ........... 77,500 5,153,750
KeySpan Energy Corp. .............. 10,100 371,806
MCN Energy Group, Inc. ............ 139,500 5,632,313
Pacific Enterprises ............... 96,200 3,619,525
----------
20,599,470
----------
TOTAL COMMON STOCK
(COST $145,739,371).................. 170,383,555
----------
PREFERRED STOCK -- 5.9%
FINANCIAL-BANK & TRUST -- 0.7%
Unocal Corp. 6.25% [CVT] .......... 26,100 1,458,338
----------
FINANCIAL SERVICES -- 2.1%
Merrill Lynch & Co., Inc. 6.25%
[CVT] ........................... 45,600 1,573,200
Salomon Smith Barney Holdings, Inc.
6.25% [CVT] ..................... 45,400 2,689,950
----------
4,263,150
----------
METALS & MINING -- 0.4%
Coeur D'alene Mines Corp. 7.00%
[CVT] ........................... 59,900 726,288
----------
OIL & GAS -- 2.2%
Williams Companies, Inc. $3.50
[CVT] ........................... 32,400 4,372,186
----------
UTILITIES -- ELECTRIC -- 0.1%
Cal Energy Co., Inc. 6.25%
[CVT] ........................... 3,000 135,375
----------
UTILITIES -- GAS -- 0.5%
MCN Energy Group, Inc. 8.00%
[CVT] ........................... 15,700 983,213
----------
TOTAL PREFERRED STOCK
(COST $10,934,858)................... 11,938,550
----------
</TABLE>
<PAGE>
FEDERATED UTILITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FOREIGN STOCK -- 1.0%
UTILITIES - COMBINATION
Viag AG -- (DEM)
(COST $1,636,861) .................. 3,500 $ 1,917,366
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 8.2%
Greenwich Capital
Markets, Inc., 6.10%,
dated 12/31/97,
repurchase price
$16,591,621
(Collateralized by
U.S. Treasury Notes,
par value
$16,374,000, market
value $16,932,747 due
02/15/98)
(COST $16,586,000)... 01/02/98 $16,586 16,586,000
TOTAL INVESTMENTS -- 99.8% -------------
(COST $174,897,090).............. 200,825,471
OTHER ASSETS LESS
LIABILITIES -- 0.2%................ 317,701
-------------
NET ASSETS -- 100.0%................. $ 201,143,172
=============
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
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 -- 48.8%
ADVERTISING -- 0.2%
Omnicom Group, Inc. ............... 15,400 $ 652,575
----------
AEROSPACE -- 1.1%
Boeing Co. ........................ 33,035 1,616,650
General Motors Corp. Cl-H ......... 18,943 699,707
Northrop Grumman Corp. ............ 9,978 1,147,470
Raytheon Co. Cl-A ................. 11,047 544,766
----------
4,008,593
----------
AIRLINES -- 0.4%
Delta Air Lines, Inc. ............. 10,766 1,281,154
----------
AUTOMOBILE MANUFACTURERS -- 0.2%
Chrysler Corp. .................... 19,765 695,481
----------
AUTOMOTIVE PARTS -- 1.8%
Dana Corp. ........................ 34,345 1,631,387
Eaton Corp. ....................... 11,455 1,022,359
Goodyear Tire & Rubber Co. ........ 29,448 1,873,629
Magna International, Inc. Cl-A .... 8,769 550,803
TRW, Inc. ......................... 22,823 1,218,178
----------
6,296,356
----------
BEVERAGES -- 0.4%
Pepsico, Inc. ..................... 37,445 1,364,402
----------
BROADCASTING -- 0.4%
Chancellor Media Corp. Cl-A* ...... 7,000 522,375
Clear Channel Communications,
Inc.* ........................... 6,300 500,456
Sinclair Broadcasting Group, Inc.
A* .............................. 7,200 335,700
----------
1,358,531
----------
BUILDING MATERIALS -- 0.6%
Lowe's Companies, Inc. ............ 29,135 1,389,375
Masco Corp. ....................... 16,750 852,156
Terex Corp. Appreciation Rights* .. 600 12,300
----------
2,253,831
----------
BUSINESS SERVICES -- 0.3%
Accustaff, Inc.* .................. 11,600 267,162
Norrell Corp. ..................... 10,700 212,662
Quintiles Transnational Corp.* .... 9,200 351,900
Robert Half International, Inc.* .. 8,700 348,000
----------
1,179,724
----------
CHEMICALS -- 1.0%
Dupont, (E.I.) de Nemours & Co. ... 21,125 1,268,820
Eastman Chemical Co. .............. 20,522 1,222,342
Witco Corp. ....................... 26,723 1,090,632
----------
3,581,794
----------
CLOTHING & APPAREL -- 0.2%
Jones Apparel Group, Inc.* ........ 9,800 421,400
WestPoint Stevens, Inc.* .......... 8,200 387,450
----------
808,850
----------
COMPUTER HARDWARE -- 1.5%
Hewlett-Packard Co. ............... 38,140 2,383,750
International Business Machines
Corp. ........................... 23,036 2,408,702
Seagate Technology, Inc.* ......... 31,400 604,450
----------
5,396,902
----------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMPUTER SERVICES & SOFTWARE -- 1.7%
BMC Software, Inc.* ............... 7,600 $ 498,750
Computer Associates International,
Inc. ............................ 39,175 2,071,378
Compuware Corp.* .................. 15,100 483,200
Fiserv, Inc.* ..................... 6,700 329,137
HNC Software, Inc.* ............... 5,900 253,700
NCR Corp.* ........................ 29,765 827,839
Peoplesoft, Inc.* ................. 15,000 585,000
Security Dynamics Technologies,
Inc.* ........................... 6,400 228,800
SIPEX Corp.* ...................... 8100 245,025
VERITAS Software Corp.* ........... 3,600 183,600
Viasoft, Inc.* .................... 3,100 130,975
----------
5,837,404
----------
CONGLOMERATES -- 1.3%
Minnesota Mining & Manufacturing
Co. ............................. 15,348 1,259,495
Philip Morris Companies, Inc. ..... 41,937 1,900,270
Tenneco, Inc. ..................... 39,340 1,553,930
----------
4,713,695
----------
CONSUMER PRODUCTS & SERVICES -- 1.7%
Apollo Group, Inc. Cl-A* .......... 9,300 439,425
Clorox Co. ........................ 11,205 885,895
Colgate-Palmolive Co. ............. 1,600 117,600
Eastman Kodak Co. ................. 27,915 1,697,581
Hedstrom Holdings 144A* ........... 303 379
Rexall Sundown, Inc.* ............. 10,400 313,950
RJR Nabisco Holdings Corp. ........ 28,950 1,085,625
Sunbeam Oster Corp. ............... 7,900 332,787
Whitman Corp. ..................... 51,671 1,346,675
----------
6,219,917
----------
CONTAINERS & PACKAGING -- 0.7%
Owens-Illinois, Inc.* ............. 54,425 2,064,748
Temple-Inland, Inc. ............... 8,296 433,984
----------
2,498,732
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.2%
AES Corp.* ........................ 11,400 531,525
Altera Corp.* ..................... 6,400 212,000
Diebold, Inc. ..................... 7,600 384,750
Emerson Electric Co. .............. 24,405 1,377,357
Genrad, Inc.* ..................... 7,900 238,481
Linear Technology Corp. ........... 4,000 230,500
Maxim Integrated Products,
Inc.* ........................... 7,600 262,200
Molex, Inc. ....................... 8,650 277,881
Polaroid Corp. .................... 30,753 1,497,287
SCI Systems, Inc.* ................ 7,700 335,431
SGS-Thomson Microelectronics
NV [ADR]* ....................... 4,700 286,994
Solectron Corp.* .................. 7,000 290,937
Teradyne, Inc.* ................... 10,500 336,000
Texas Instruments, Inc. ........... 39,035 1,756,575
----------
8,017,918
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
ENTERTAINMENT & LEISURE -- 0.2%
Harley-Davidson, Inc. ............. 13,300 $ 364,087
Royal Caribbean Cruises Ltd. ...... 6,400 341,200
----------
705,287
----------
ENVIRONMENTAL SERVICES -- 0.5%
Browning-Ferris Industries,
Inc. ............................ 36,055 1,334,035
USA Waste Services, Inc.* ......... 7,225 283,581
----------
1,617,616
----------
FARMING & AGRICULTURE -- 0.1%
Dekalb Genetics Corp. Cl-B ........ 8,700 341,475
----------
FINANCIAL-BANK & TRUST -- 5.1%
Banc One Corp. .................... 22,365 1,214,699
BankBoston Corp. .................. 8,100 760,894
Bankers Trust New York Corp. ...... 12,617 1,418,624
Crestar Financial Corp. ........... 800 45,600
First Chicago NBD Corp. ........... 14,440 1,205,740
First Tennessee National Corp. .... 6,790 453,232
Firstar Corp. ..................... 6,600 280,087
GreenPoint Financial Corp. ........ 6,200 449,887
Mercantile Bancorporation, Inc. ... 18,670 1,148,205
Morgan, (J.P.) & Co., Inc. ........ 12,539 1,415,340
National City Corp. ............... 10,585 695,964
Northern Trust Corp. .............. 7,300 509,175
PNC Bank Corp. .................... 55,353 3,158,581
Providian Financial Corp. ......... 8,300 375,056
Regions Financial Corp. ........... 14,600 615,937
Star Banc Corp. ................... 7,900 453,262
State Street Boston Corp. ......... 7,300 424,769
Summit Bancorp .................... 13,795 734,584
Suntrust Banks, Inc. .............. 8,330 594,554
Union Planters Corp. .............. 12,985 882,168
Wells Fargo & Co. ................. 3,500 1,188,031
Westamerica Bancorporation ........ 3,400 347,650
----------
18,372,039
----------
FINANCIAL SERVICES -- 1.4%
Ahmanson, (H.F.) & Co. ............ 29,765 1,992,395
Beneficial Corp. .................. 9,800 814,625
Capital One Financial Corp. ....... 5,900 319,706
Esat Holdings Ltd. Warrants* ...... 35 0
Finova Group, Inc. ................ 10,200 506,812
Lehman Brothers, Inc. ............. 4,100 209,100
SunAmerica, Inc. .................. 10,700 457,425
Washington Mutual, Inc. ........... 10,200 650,887
----------
4,950,950
----------
FOOD -- 2.1%
General Mills, Inc. ............... 26,746 1,915,682
Giant Food, Inc. Cl-A ............. 5,500 185,281
Heinz, (H.J.) Co. ................. 28,000 1,422,750
International Home Foods, Inc.* ... 10,100 282,800
Quaker Oats Co. ................... 29,480 1,555,070
Ralston Purina Group .............. 9,750 906,141
Sara Lee Corp. .................... 23,160 1,304,197
----------
7,571,921
----------
HEALTHCARE SERVICES -- 0.6%
Health Care & Retirement Corp.* ... 7,800 313,950
Health Management Associates,
Inc.* ........................... 15,750 397,687
Healthsouth Corp.* ................ 12,900 $ 357,975
Omnicare, Inc. .................... 18,300 567,300
Wellpoint Health Networks, Inc. ... 7,200 304,200
----------
1,941,112
----------
HOTELS & MOTELS -- 0.3%
ITT Corp.* ........................ 13,300 1,102,237
----------
INDUSTRIAL PRODUCTS -- 0.0%
Cellnet Data Systems Warrants* .... 95 10
----------
INSURANCE -- 1.8%
American General Corp. ............ 28,866 1,560,568
AON Corp. ......................... 25,351 1,486,202
CIGNA Corp. ....................... 7,347 1,271,490
Hartford Life, Inc. Cl-A* ......... 7,400 335,312
Reliastar Financial Corp. ......... 8,400 345,975
USF&G Corp. ....................... 62,973 1,389,342
----------
6,388,889
----------
MACHINERY & EQUIPMENT -- 1.1%
Caterpillar, Inc. ................. 23,245 1,128,835
Cooper Industries, Inc. ........... 25,020 1,225,980
Deere & Co. ....................... 16,585 967,113
Precision Castparts Corp. ......... 6,800 410,125
Smith International, Inc.* ........ 4,300 263,912
----------
3,995,965
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.4%
Baxter International, Inc. ........ 38,176 1,925,502
Gulf South Medical Supply,
Inc.* ........................... 2,900 108,025
Johnson & Johnson Co. ............. 25,545 1,682,777
Mentor Corp. ...................... 8,700 317,550
Schein, (Henry), Inc.* ............ 6,900 241,500
Sofamor Danek Group, Inc. ......... 5,400 351,337
Stryker Corp. ..................... 8,700 324,075
Urohealth System, Inc. Warrants
144A*............................ 30 75
----------
4,950,841
----------
OFFICE EQUIPMENT -- 1.3%
Pitney Bowes, Inc. ................ 16,055 1,443,947
Xerox Corp. ....................... 42,156 3,111,640
----------
4,555,587
----------
OIL & GAS -- 4.5%
Amoco Corp. ....................... 18,272 1,555,404
Atlantic Richfield Co. ............ 18,170 1,455,871
British Petroleum Co. PLC [ADR] ... 15,966 1,272,291
Camco International, Inc. ......... 6,900 439,444
Coastal Corp. ..................... 18,275 1,131,908
Enron Corp. ....................... 10,300 428,094
Ensco International, Inc. ......... 10,000 335,000
Exxon Corp. ....................... 21,831 1,335,784
Global Marine, Inc.* .............. 10,500 257,250
Kerr-McGee Corp. .................. 12,220 773,679
Mobil Corp. ....................... 19,066 1,376,327
Occidental Petroleum Corp. ........ 39,831 1,167,546
Petroleo Brasileiro SA [ADR]
144A* ........................... 5,100 119,274
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Societe Nationale Elf Aquitaine
SA [ADR] ........................ 34,780 $ 2,038,977
Tosco Corp. ....................... 38,430 1,453,134
Western Atlas, Inc.* .............. 5,300 392,200
YPF SA [ADR] ...................... 19,900 680,331
----------
16,212,514
----------
PAPER & FOREST PRODUCTS -- 1.2%
Boise Cascade Corp. ............... 35,665 1,078,866
Kimberly-Clark Corp. .............. 43,567 2,148,398
Willamette Industries, Inc. ....... 27,615 888,858
----------
4,116,122
----------
PERSONAL SERVICES -- 0.0%
Sylvan Learning Systems, Inc.* .... 1,100 42,900
----------
PHARMACEUTICALS -- 3.4%
American Home Products Corp. ...... 25,718 1,967,427
Biochem Pharma, Inc. .............. 11,000 229,625
Bristol-Meyers Squibb Co. ......... 22,597 2,138,241
Dura Pharmaceutical, Inc.* ........ 7,000 321,125
Elan Corp. PLC [ADR]* ............. 7,700 394,144
Glaxo Wellcome PLC [ADR] .......... 15,240 729,615
ICN Pharmaceuticals, Inc. ......... 5,700 278,231
Incyte Pharmaceuticals, Inc. ...... 6,000 270,000
McKesson Corp. .................... 4,200 454,387
Merck & Co., Inc. ................. 23,485 2,495,281
Pharmacia & Upjohn, Inc. .......... 78,132 2,861,584
----------
12,139,660
----------
PRINTING & PUBLISHING -- 0.6%
Belo, (A.H.) Corp. Cl-A ........... 7,900 443,387
Central Newspapers, Inc. Cl-A ..... 3,800 280,962
McGraw-Hill Co., Inc. ............. 15,295 1,131,830
Times Mirror Co. Cl-A ............. 7,200 442,800
----------
2,298,979
----------
RAILROADS -- 0.7%
Canadian National Railway Co. ..... 15,280 721,980
Norfolk Southern Corp. ............ 487 15,006
Union Pacific Corp. ............... 27,186 1,697,426
----------
2,434,412
----------
RESTAURANTS -- 0.1%
AmeriKing, Inc.* .................. 25 1,250
CKE Restaurants, Inc. ............. 7,900 332,787
----------
334,037
----------
RETAIL & MERCHANDISING -- 2.3%
Arbor Drugs, Inc. ................. 11,550 213,675
Bed, Bath & Beyond, Inc.* ......... 7,400 284,900
Borders Group, Inc.* .............. 12,000 375,750
Consolidated Stores Corp.* ........ 10,106 444,032
Family Dollar Stores, Inc. ........ 16,700 489,519
Kmart Corp.* ...................... 106,350 1,229,672
Kohls Corp.* ...................... 6,400 436,000
Linens 'N Things, Inc.* ........... 6,900 301,012
Meyer, (Fred), Inc.* .............. 10,100 367,387
Miller, (Herman), Inc. ............ 6,400 349,200
Payless Shoesource, Inc.* ......... 5,500 369,187
SHARES VALUE
------- ------------
Penney (J.C.) Co., Inc. ........... 900 $ 54,281
Pier 1 Imports, Inc. .............. 22,650 512,456
Rite Aid Corp. .................... 7,500 440,156
Starbucks Corp. ................... 6,900 264,787
TJX Companies, Inc. ............... 16,700 574,062
Toys 'R' Us, Inc.* ................ 51,025 1,604,098
----------
8,310,174
----------
SEMICONDUCTORS -- 0.7%
Intel Corp. ....................... 30,085 2,113,471
Xilinx, Inc.* ..................... 5,900 206,869
----------
2,320,340
----------
TELECOMMUNICATIONS -- 3.3%
ADC Telecommunications, Inc.* ..... 11,100 463,425
AT&T Corp. ........................ 22,215 1,360,669
Bell Atlantic Corp. ............... 17,485 1,591,135
BellSouth Corp. ................... 30,293 1,705,875
Globalstar Telecommunications
Warrants 144A* .................. 45 489
Intercel, Inc. Warrants 144A* ..... 640 4,608
Jacor Communications, Inc.* ....... 3,800 201,875
McCaw International Ltd.
Warrants* ....................... 10 0
Nextel Communications, Inc.
Cl-A* ........................... 503 13,078
SBC Communications, Inc. .......... 23,309 1,707,384
Sprint Corp. ...................... 38,611 2,263,570
Tele-Communications TCI Ventures
Group Cl-A ...................... 11,000 311,437
Teleport Communications Group, Inc.
Cl-A* ........................... 9,600 526,800
Tellabs, Inc.* .................... 6,500 343,687
U.S. West Communications Group .... 32,340 1,459,342
----------
11,953,374
----------
TRANSPORTATION -- 0.4%
Consolidated Freightways, Inc. .... 4,500 172,687
Expeditors International of
Washington, Inc. ................ 7,300 281,050
Ryder Systems, Inc. ............... 33,400 1,093,850
----------
1,547,587
----------
TOTAL COMMON STOCK
(COST $149,677,775).................. 174,369,887
----------
PREFERRED STOCK -- 0.1%
BROADCASTING -- 0.0%
American Radio Systems Corp.
$11.375 Cl-B [PIK] .............. 2 232
Capstar Broadcasting 12.00%
[PIK] ........................... 200 23,000
Chancellor Media Corp. 12.00%
[PIK] ........................... 423 48,433
Citadel Broadcasting Co. 13.25%
[PIK] 144A ...................... 200 23,300
Echostar Communications Corp.
12.125% 144A .................... 100 10,450
----------
105,415
----------
ENTERTAINMENT & LEISURE -- 0.1%
Time Warner, Inc. Cl-M 10.25% ..... 120 135,297
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
INDUSTRIAL PRODUCTS -- 0.0%
Anvil Holding, Inc. 13.00%
[PIK] ........................................... 13 $ 312
----------
RESTAURANTS -- 0.0%
AmeriKing, Inc. 13.00% ............................ 1,135 29,123
----------
TELECOMMUNICATIONS -- 0.0%
Cablevision Systems Corp. Cl-M
11.125% [PIK] ................................... 345 40,405
Nextlink Communications, Inc.
14.00% [PIK] .................................... 425 26,350
----------
66,755
----------
UTILITIES -- 0.0%
El Paso Electric Co. 11.40%
[PIK] ........................................... 414 45,954
Public Service Co. of New Hampshire
Cl-A 10.60% ..................................... 1,410 34,897
----------
80,851
----------
TOTAL PREFERRED STOCK
(COST $351,967)...................................... 417,753
----------
FOREIGN STOCK -- 8.5%
AEROSPACE -- 0.1%
Rolls-Royce PLC -- (GBP) .......................... 49,251 190,441
----------
AUTOMOBILE MANUFACTURERS -- 0.1%
Bayerische Motoren Werke AG --
(DEM) ........................................... 653 488,468
----------
AUTOMOTIVE PARTS -- 0.2%
Bridgestone Corp. -- (JPY) ........................ 7,000 152,360
Michelin C.G.D.E. Cl-B -- (FRF) ................... 9,077 457,180
Renault SA -- (FRF) ............................... 1,710 48,123
----------
657,663
----------
BEVERAGES -- 0.2%
Bass PLC -- (GBP) ................................. 28,204 438,316
Fomento Economico Mexicano SA
Cl-B -- (MXP) ................................... 21,900 174,943
----------
613,259
----------
BUILDING MATERIALS -- 0.3%
Cemex SA de CV -- (MXP) ........................... 42,861 194,586
CRH PLC -- (IEP) .................................. 38,634 452,645
Lafarge SA -- (FRF) ............................... 5,087 333,927
----------
981,158
----------
CHEMICALS -- 0.3%
AKZO Nobel NV -- (NLG) ............................ 2,612 450,445
Bayer AG -- (DEM) ................................. 11,514 427,443
Ciba Specialty Chemicals AG --
(CHF)* .......................................... 2,744 327,350
----------
1,205,238
----------
CLOTHING & APPAREL -- 0.0%
Onward Kashiyama Co.
Ltd. -- (JPY) ................................... 8,000 92,908
----------
CONGLOMERATES -- 0.7%
Alfa SA de C.V. -- (MXP) .......................... 43,909 297,381
B.A.T. Industries PLC -- (GBP) .................... 62,646 571,055
BTR PLC -- (GBP) .................................. 93,090 281,836
Compagnie Generale des Eaux --
(FRF) ........................................... 2,998 418,613
SHARES VALUE
------- ------------
Compagnie Generale des Eaux
Warrants -- (FRF)* .............................. 480 $ 326
Hutchison Whampoa Ltd. -- (HKD) ................... 26,000 163,082
Securicor PLC -- (GBP) ............................ 31,236 147,250
Smith Industries PLC -- (GBP) ..................... 22,697 316,694
Tomkins PLC -- (GBP) .............................. 80,495 385,422
----------
2,581,659
----------
CONSUMER PRODUCTS & SERVICES -- 0.4%
Bombardier, Inc. Cl-B -- (CAD) .................... 11,800 243,253
Cookson Group PLC -- (GBP) ........................ 26,000 83,636
Fuji Photo Film Co. -- (JPY) ...................... 7,000 269,187
Kao Corp. -- (JPY) ................................ 23,000 332,561
Unilever PLC -- (GBP) ............................. 40,400 346,333
----------
1,274,970
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.7%
General Electric Co. PLC -- (GBP) ................. 59,197 384,257
Hirose Electric Ltd. -- (JPY) ..................... 2,400 123,118
Murata Manufacturing Co. Ltd. -- (JPY) ............ 4,000 100,907
Omron Corp. -- (JPY) .............................. 16,000 251,036
Philips Electronics NV -- (NLG) .................. 7,030 421,683
Rohm Co. -- (JPY) ................................. 2,000 204,582
SGS-Thomson Microelectronics -- (FRF)* ............ 5,643 349,413
Siebe PLC -- (GBP) ................................ 5600 110,111
Sony Corp. -- (JPY) ............................... 4,700 419,317
Tokyo Electron Ltd. -- (JPY) ...................... 4,000 128,595
----------
2,493,019
----------
ENERGY SERVICES -- 0.1%
VA Technologie AG -- (ATS) ........................ 1,884 285,634
----------
FINANCIAL-BANK & TRUST -- 1.3%
ABN Amro Holding NV -- (NLG) ...................... 7,221 140,699
Allied Irish Banks PLC -- (IEP) ................... 45,730 443,228
Bank of Nova Scotia -- (CAD) ...................... 8,173 384,657
Banque Nationale de Paris -- (FRF) ................ 3,160 168,036
Commonwealth Bank of Australia -- (AUD) ........... 14,575 167,140
Dao Heng Bank Group Ltd. -- (HKD) ................. 26,500 66,179
Deutsche Bank AG -- (DEM) ......................... 5550 388306
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD) .............................. 22,000 188,019
HSBC Holdings PLC -- (HKD) ........................ 17,165 423,129
ING Groep NV -- (NLG) ............................. 11,355 478,346
Julius Baer Holdings AG Cl-B -- (CHF) ............. 188 349,306
Overseas-Chinese Banking Corp. Ltd. (SGD) ......... 12,000 69,795
Overseas Union Bank Ltd. C1-F (SGD) ............... 19,000 72,733
Royal Bank of Canada -- (CAD) ..... 3,250 171,696
Union Bank of Switzerland -- (CHF) ................ 452 654,502
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
United Overseas Bank
Ltd. -- (SGD) ................... 43,000 $ 238,614
Westpac Banking Corp.
Ltd. -- (AUD) ................... 53,400 341,535
----------
4,745,920
----------
FINANCIAL SERVICES -- 0.4%
Bank of Ireland PLC -- (IEP) ...... 32,499 501,203
Cetelem -- (FRF) .................. 1,634 222,725
Guoco Group Ltd. -- (HKD) ......... 23,000 56,251
Nikko Securities Co.
Ltd. -- (JPY) ................... 46,000 122,411
Promise Co. Ltd. -- (JPY) ......... 3,190 177,630
Societe Generale -- (FRF) ......... 1,944 264,980
----------
1,345,200
----------
FOOD -- 0.4%
Goodman Fielder Ltd. -- (AUD) ..... 114,923 182,707
Greencore Group PLC -- (IEP) ...... 35,697 167,904
Ito-Yokado Co. Ltd. -- (JPY) ...... 5,000 255,728
Nestle SA -- (CHF) ................ 503 754,905
----------
1,361,244
----------
INSURANCE -- 0.1%
QBE Insurance Group
Ltd. -- (AUD).................... 14,350 62,443
Royal & Sun Alliance Insurance
Group PLC -- (GBP) ............. 8,300 83,717
Zurich
Versicherungs-Gesellschaft --
(CHF) ........................... 314 149,836
----------
295,996
----------
MACHINERY & EQUIPMENT -- 0.3%
ABB AG -- (CHF) ................... 66 83,035
Kurita Water Industries
Ltd. -- (JPY) ................... 6,000 61,375
Mannesmann AG -- (DEM) ............ 800 401,771
Rieter Holdings AG -- (CHF)* ...... 236 100,966
Sandvik AB Cl-A -- (SEK) .......... 976 27,800
Sandvik AB Cl-B -- (SEK) .......... 9,858 282,035
----------
956,982
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.2%
Glaxo Wellcome PLC -- (GBP) ....... 16,554 392,230
Novartis AG -- (CHF) .............. 192 311,981
Sankyo Co. Ltd. -- (JPY) .......... 6,000 136,132
----------
840,343
----------
METALS & MINING -- 0.1%
Rio Tinto PLC -- (GBP) ............ 25,909 319,306
----------
OFFICE EQUIPMENT -- 0.1%
Canon, Inc. -- (JPY) .............. 15,000 350,712
Ricoh Co. Ltd. -- (JPY) ........... 7,000 87,217
----------
437,929
----------
OIL & GAS -- 0.8%
British Petroleum Co.
PLC -- (GBP) .................... 29,622 389,923
Burmah Castrol PLC -- (GBP) ....... 24,221 421,252
Ente Nazionale Idrocarburi SPA --
(ITL) ........................... 82,472 467,871
Hong Kong & China Gas Co. Ltd. --
(HKD) ........................... 50,200 97,183
Shell Transport & Trading Co.
PLC -- (GBP) .................... 53,150 384,796
SHARES VALUE
------- ------------
Societe Nationale Elf Aquitaine
SA -- (FRF) ..................... 4,069 $ 473,465
Total SA Cl-B -- (FRF) ............ 4,653 506,613
----------
2,741,103
----------
PAPER & FOREST PRODUCTS -- 0.1%
Svenska Cellulosa AB
Cl-B -- (SEK) ................... 13,112 294,982
----------
PHARMACEUTICALS -- 0.1%
Astra AB Cl-A -- (SEK) ............ 6,080 105,365
Pharmacia & Upjohn,
Inc. -- (SEK) ................... 4,804 176,797
Santen Pharmaceutical
Ltd. -- (JPY) ................... 700 8,076
Yamanouchi Pharmaceutical Co.
Ltd. -- (JPY) ................... 7,000 150,745
----------
440,983
----------
PRINTING & PUBLISHING -- 0.1%
Dai Nippon Printing Co.
Ltd. -- (JPY) ................... 16,000 301,490
----------
REAL ESTATE -- 0.1%
Amoy Properties Ltd. -- (HKD) ..... 132,000 115,845
Cheung Kong Holdings
Ltd. -- (HKD) ................... 39,000 255,444
Sun Hung Kai Properties Ltd. --
(HKD) ........................... 15,000 104,539
----------
475,828
----------
RETAIL & MERCHANDISING -- 0.1%
Dixons Group PLC -- (GBP) ......... 16,000 160,856
Vendex International
NV -- (NLG) ..................... 5,652 311,982
----------
472,838
----------
TELECOMMUNICATIONS -- 0.7%
Deutsche Telekom AG -- (DEM) ...... 28,619 530,029
Ericsson, (L.M.) Telephone Co.
Cl-B -- (SEK) ................... 7,401 278,434
Newbridge Networks
Corp. -- (CAD)* ................. 4,000 139,900
Nokia AB Cl-A -- (FIM) ............ 4,663 331,391
Northern Telecom Ltd. -- (CAD) .... 3,674 326,445
Philippine Long Distance Telephone
Co. -- (PHP) .................... 500 11,028
Portugal Telecom SA -- (PTE) ...... 5,310 246,662
Vodafone Group PLC -- (GBP) ....... 104,002 751,244
----------
2,615,133
----------
TRANSPORTATION -- 0.1%
Peninsular & Oriental Steam
Navigation Co. -- (GBP) ......... 14,200 161,802
Yamato Transport Co.
Ltd. -- (JPY) ................... 12,000 161,512
----------
323,314
----------
UTILITIES -- 0.4%
Electricidade de Portugal
SA -- (PTE) ..................... 17,700 335,526
Hong Kong Electric Holdings Ltd. --
(HKD) ........................... 15,000 57,013
Scottish Power PLC -- (GBP) ....... 57,359 507,760
Veba AG -- (DEM) .................. 7,805 531,753
----------
1,432,052
----------
TOTAL FOREIGN STOCK
(COST $27,328,180)................... 30,265,060
----------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 13.0%
ADVERTISING -- 0.1%
Lamar Advertising Co. Sr.
Sub. Notes 8.625%
144A ................... 09/15/07 $ 25 $ 25,719
9.625%.................. 12/01/06 35 37,800
Outdoor Communications Sr.
Sub. Notes
9.25%................... 08/15/07 10 10,250
Outdoor Systems, Inc. Sr.
Sub. Notes
8.875%.................. 06/15/07 75 78,562
Universal Outdoor, Inc.
Sr. Sub. Notes
9.75%................... 10/15/06 43 48,375
------------
200,706
------------
AEROSPACE -- 0.2%
Argo-Tech Corp. Sr. Sub.
Notes 144A
8.625%.................. 10/01/07 10 10,000
BE Aerospace, Inc. Sr.
Sub. Notes
9.875%.................. 02/01/06 35 37,012
K&F Industries Sr. Sub.
Notes 144A
9.25%................... 10/15/07 10 10,275
Lockheed Martin Corp.
Notes
7.25%................... 05/15/06 455 481,731
------------
539,018
------------
AIRLINES -- 0.1%
Continental Airlines
Series 97CI
7.42%................... 04/01/07 175 176,969
Trans World Airlines Sr.
Notes 144A
11.50%.................. 12/15/04 10 10,050
------------
187,019
------------
AUTOMOBILE MANUFACTURERS -- 0.0%
Consorcio Grupo Dina SA
[ZCB]
6.251%.................. 11/15/02 20 18,025
------------
AUTOMOTIVE PARTS -- 0.0%
Delco Remy International,
Inc. Sr. Notes
8.625%.................. 12/15/07 10 10,125
Hayes Wheel International,
Inc. Cl-B*
9.125%.................. 07/15/07 85 88,187
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Lear Corp. Sub. Notes
9.50%................... 07/15/06 $ 35 $ 38,500
Safety Components
International Sr. Sub.
Notes Cl-B
10.125%................. 07/15/07 10 10,337
------------
147,149
------------
BEVERAGES -- 0.0%
Canandaigua Wine Sr. Sub.
Notes
8.875%.................. 12/15/03 55 56,237
------------
BROADCASTING -- 0.5%
Acme Television Finance
Sr. Disc. Notes [STEP]
144A
11.164%................. 09/30/04 15 11,025
Antenna TV SA Sr. Notes
9.00%................... 08/01/07 10 10,012
Argyle Television, Inc.
Sr. Sub. Notes
9.75%................... 11/01/05 56 62,160
Capstar Broadcasting Sr.
Disc. Notes [STEP]
10.789%................. 02/01/09 60 42,750
Central European Media
Enterprises Sr. Notes
9.375%.................. 08/15/04 10 9,700
Citadel Broadcasting Co.
Sr. Sub. Notes 144A
10.25%.................. 07/01/07 10 10,800
Fox Liberty Networks LLC
Sr. Notes 144A
8.875%.................. 08/15/07 40 40,000
Frontiervision Holdings
[STEP]
10.287%................. 09/15/07 100 73,750
Granite Broadcasting Corp.
Sr. Sub. Debs.
10.375%................. 05/15/05 75 78,469
News America Holdings
Debs.
7.70%................... 10/30/25 835 874,662
7.75%................... 12/01/45 365 381,881
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 80 84,200
Spanish Broadcasting
System Sr. Notes
12.50%.................. 06/15/02 50 57,375
Spanish Broadcasting
System Sr. Notes Cl-B
11.00%.................. 03/15/04 25 27,562
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Sullivan Broadcasting
Holdings Co. Sr. Sub.
Notes
10.25%.................. 12/15/05 $ 75 $ 80,156
Young Broadcasting, Inc.
Sr. Sub. Notes Cl-B
9.00%................... 01/15/06 5 4,987
------------
1,849,489
------------
BUILDING MATERIALS -- 0.1%
Atrium Companies, Inc. Sr.
Sub. Notes
10.50%.................. 11/15/06 10 10,487
Building Materials Corp.
Sr. Notes
8.625%.................. 12/15/06 10 10,300
Cemex SA 144A
12.75%.................. 07/15/06 10 12,025
Koppers Industry, Inc. Sr.
Sub. Notes 144A
9.875%.................. 12/01/07 10 10,300
Polytama International
Notes
11.25%.................. 06/15/07 25 21,250
Southdown, Inc. Sr. Sub.
Notes
10.00%.................. 03/01/06 75 81,844
Terex Corp. Sr. Notes
13.25%.................. 05/15/02 23 26,277
------------
172,483
------------
BUSINESS SERVICES -- 0.1%
Affinity Group Holdings
Sr. Notes
11.00%.................. 04/01/07 65 69,306
Affinity Group Holdings
Sr. Sub. Notes
11.50%.................. 10/15/03 55 58,781
Iron Mountain, Inc. Sr.
Sub. Notes 144A
8.75%................... 09/30/09 20 20,550
Outsourcing Solutions
Corp. Sr. Sub. Notes
Cl-B
11.00%.................. 11/01/06 20 22,100
Primark Corp. Sr. Notes
8.75%................... 10/15/20 75 76,219
------------
246,956
------------
CHEMICALS -- 0.3%
Harris Chemical North
American Sr. Sub. Notes
10.75%.................. 10/15/03 40 42,800
Huntsman Corp. Sr. Sub.
Notes 144A
9.1875%................. 01/01/98 40 42,000
Solutia, Inc. Bonds
6.72%................... 10/15/37 890 903,350
Sovereign Specialty
Chemicals Sr. Sub. Notes
144A
9.50%................... 08/01/07 $ 20 $ 20,600
Sterling Chemicals
Holdings Sr. Disc. Notes
[STEP]
12.408%................. 08/15/08 35 23,756
Trikem SA 144A
10.625%................. 07/24/07 15 13,687
------------
1,046,193
------------
CLOTHING & APPAREL -- 0.0%
GFSI, Inc. Sr. Sub. Notes
Cl-B
9.625%.................. 03/01/07 10 10,300
Glenoit Corp. Sr. Sub.
Notes 144A
11.00%.................. 04/15/07 10 10,775
Sassco Fashions Ltd. Sr.
Notes
12.75%.................. 03/31/04 25 26,562
Worldtex, Inc. Senior
Notes 144A
9.625%.................. 12/15/07 10 10,300
------------
57,937
------------
COMPUTER SERVICES & SOFTWARE -- 0.0%
DecisionOne Corp. Sr. Sub.
Notes
9.75%................... 08/01/07 5 5,212
Printpack, Inc. Sr. Notes
9.875%.................. 08/15/04 25 26,625
------------
31,837
------------
CONGLOMERATES -- 0.5%
Perez Companc SA 144A
9.00%................... 01/30/04 15 15,337
Philip Morris Co., Inc.
Debs.
7.50%................... 01/15/02 425 440,406
7.50%................... 04/01/04 710 745,500
7.75%................... 01/15/27 480 520,200
------------
1,721,443
------------
CONSTRUCTION -- 0.0%
Altos Hornos de Mexico
11.875%................. 04/30/04 15 15,675
American Architectural Sr.
Notes 144A
11.75%.................. 12/01/07 10 10,050
MDC Holdings Notes Cl-B
11.125%................. 12/15/03 25 27,688
Newport News Shipbuilding,
Inc. Sr. Notes
8.625%.................. 12/01/06 20 21,100
------------
74,513
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
CONSUMER PRODUCTS & SERVICES -- 0.1%
Alaris Medical Systems Sr.
Notes
9.75%................... 12/01/06 $ 40 $ 41,850
Consumers International
Corp. Sr. Notes 144A
10.25%.................. 04/01/05 10 10,950
Foamex L.P. Sr. Sub. Notes
9.875%.................. 06/15/07 10 10,100
French Fragrances, Inc.
Sr. Notes
10.375%................. 05/15/07 10 10,550
Herff Jones, Inc. Sr. Sub.
Notes
11.00%.................. 08/15/05 45 48,825
MacAndrews & Forbes Debs.
13.00%.................. 03/01/99 100 100,000
Pierce Leahy Corp. Sr.
Sub. Notes
11.125%................. 07/15/06 3 3,405
Polymer Group Holdings
Notes
10.75%.................. 11/15/06 35 37,275
Polymer Group Holdings Sr.
Sub. Notes
9.00%................... 07/01/07 15 15,000
------------
277,955
------------
CONTAINERS & PACKAGING -- 0.0%
AEP Industries, Inc. Sr.
Sub. Notes 144A
9.875%.................. 11/15/07 15 15,450
Huntsman Packaging Corp.
Sr. Sub. Notes 144A
9.125%.................. 10/01/07 15 15,488
Owens-Illinois, Inc. Sr.
Notes
8.10%................... 05/15/07 20 21,450
Riverwood International
Co. Notes
10.25%.................. 04/01/06 50 50,375
10.875%................. 04/01/08 10 9,650
Stone Container Corp.
First Mtge.
10.75%.................. 10/01/02 5 5,175
------------
117,588
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Celestica International
Sr. Sub. Notes
10.50%.................. 12/31/03 20 21,700
Details, Inc. Sr. Sub.
Notes 144A
10.00%.................. 11/15/05 15 15,413
DII Group, Inc. Sr. Sub.
Notes 144A
8.50%................... 09/15/07 10 9,850
PAR
MATURITY (000) VALUE
--------- -------- ------------
Flextronics International
Ltd. Sr. Sub. Notes 144A
8.75%................... 10/15/07 $ 10 $ 9,975
HCC Industries, Inc. Sr.
Sub. Notes
10.75%.................. 05/15/07 15 15,600
Pioneer Americas
Acquistics Sr. Notes
9.25%................... 06/15/07 10 10,025
Raytheon Co. Notes
6.45%................... 08/15/02 905 912,919
RCN Corp. Sr. Notes 144A
10.00%.................. 10/15/07 10 10,325
Tracor, Inc. Sr. Sub.
Notes
8.50%................... 03/01/07 5 5,075
Viasystems, Inc. Sr. Sub.
Notes
9.75%................... 06/01/07 10 10,337
Wavetek Corp. Sr. Sub.
Notes
10.125%................. 06/15/07 10 10,388
------------
1,031,607
------------
ENTERTAINMENT &
LEISURE -- 0.7%
AMC Entertainment, Inc.
Sr. Sub. Notes
9.50%................... 03/15/09 40 41,450
Boyd Gaming Corp. Sr. Sub.
Notes
9.50%................... 07/15/07 50 52,625
Cinemark USA, Inc. Sr.
Sub. Notes
9.625%.................. 08/01/08 65 67,600
Coast Hotels & Casino
Notes Cl-B
13.00%.................. 12/15/02 55 62,150
Colorado Gaming &
Entertainment Corp.
[PIK]
12.00%.................. 06/01/03 159 172,190
Fitzgeralds Gaming Corp.
Sr. Sub. Notes 144A
12.25%.................. 12/15/04 40 40,400
Fox Kids Worldwide, Inc.
Sr. Disc. Notes [STEP]
144A
10.675%................. 11/01/07 40 23,800
Fox Kids Worldwide, Inc.
Sr. Notes 144A
9.25%................... 11/01/07 50 48,500
Greate Bay Property
Funding First Mtge.
10.875%................. 01/15/04 25 21,250
Lady Luck Gaming First
Mtge.
11.875%................. 03/01/01 45 45,900
Louisiana Casino Cruises
First Mtge.
11.50%.................. 12/01/98 100 101,750
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Mohegan Tribal Gaming Cl-B
Sr. Notes
13.50%.................. 11/15/02 $ 30 $ 38,813
Players International Sr.
Notes
10.875%................. 04/15/05 25 27,000
Premier Parks Corp. Sr.
Notes Cl-A
12.00%.................. 08/15/03 40 44,500
Showboat Marina Casinos
First Mtge.
13.50%.................. 03/15/03 25 29,750
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
10.324%................. 06/15/05 90 94,050
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 385 403,769
8.875%.................. 10/01/12 425 501,500
8.375%.................. 07/15/33 590 674,813
------------
2,491,810
------------
ENVIRONMENTAL SERVICES -- 0.3%
Allied Waste Industries
Sr. Disc. Notes [STEP]
9.57%................... 06/01/07 50 35,313
Allied Waste North America
Notes
10.25%.................. 12/01/06 35 38,325
WMX Technologies, Inc.
Notes
7.10%................... 08/01/26 925 967,781
------------
1,041,419
------------
EQUIPMENT SERVICES -- 0.0%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 10 11,075
------------
FINANCIAL-BANK & TRUST -- 1.2%
Allstate Financing II
7.83%................... 12/01/45 125 131,719
Banponce Corp. Medium-Term
Notes
7.125%.................. 05/02/02 410 421,788
Chevy Chase Savings Bank
Sub. Debs.
9.25%................... 12/01/05 45 46,238
Dime Capital Trust I Cl-A
9.33%................... 05/06/27 10 11,313
First Nationwide Holdings
Sr. Notes
12.50%.................. 04/15/03 55 62,700
First Nationwide Holdings
Sr. Sub. Notes
10.625%................. 10/01/03 35 39,200
Greenpoint Bank Sr. Notes
6.70%................... 07/15/02 290 291,813
PAR
MATURITY (000) VALUE
--------- -------- ------------
Greenpoint Capital Trust I
9.10%................... 06/01/27 $ 10 $ 11,038
Korea Development Bank
Notes
7.125%.................. 09/17/01 25 20,344
7.90%................... 02/01/02 350 301,875
Long Island Savings Bank
Notes
7.00%................... 06/13/02 690 703,800
Merita Bank Ltd. Sub.
Notes
6.50%................... 01/15/06 500 497,500
North Fork Bancorp
8.70%................... 12/15/26 5 5,363
Peoples Bank-Bridgeport
Sub. Notes
7.20%................... 12/01/06 305 311,481
Provident Capital Trust
8.60%................... 12/01/26 20 21,300
Riggs Capital Trust 144A
8.625%.................. 12/31/26 15 15,919
Societe Generale 144A
7.85%................... 04/30/07 130 136,988
Sovereign Capital Trust I
Capital Securities
9.00%................... 04/01/27 15 16,297
St. Paul Bancorp. Sr.
Notes
7.125%.................. 02/15/04 350 357,875
State Development Bank of
China Notes
7.375%.................. 02/01/07 495 493,763
Swedbank Sub. Notes 144A
7.50%................... 11/29/49 360 369,263
Williams Scotsman, Inc.
Sr. Notes
9.875%.................. 06/01/07 15 15,525
------------
4,283,102
------------
FINANCIAL SERVICES -- 3.1%
Aames Financial Corp. Sr.
Notes
9.125%.................. 11/01/03 40 39,400
AFC Capital Trust I Cl-B
8.207%.................. 02/03/27 270 300,038
American General Institute
Capital Trust Co.
Guarantee 144A
8.125%.................. 03/15/46 765 845,325
APP Global Finance V Ltd.
[CVT] 144A
2.00%................... 07/25/00 20 16,800
CIA Latino Americana 144A
11.625%................. 06/01/04 10 10,000
Colonial Capital I Notes
Guaranteed
8.92%................... 01/15/27 15 16,481
Commercial Credit Notes
7.75%................... 03/01/05 430 463,325
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Consorcio Equatoriano
Notes 144A
14.00%.................. 05/01/02 $ 10 $ 10,163
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 45 47,475
Delta Financial Corp. Sr.
Notes
9.50%................... 08/01/04 15 15,000
Dine S.A. de C.V. 144A
8.75%................... 10/05/07 10 9,700
Dollar Financial Group Sr.
Notes
10.875%................. 11/15/06 15 16,069
Esat Holdings Ltd. [STEP]
10.565%................. 02/01/07 35 24,675
First Financial Caribbean
Corp. Sr. Notes
7.84%................... 10/10/06 200 208,500
Firstar Bank Milwaukee Sr.
Notes
6.25%................... 12/01/02 380 380,000
FRD Acquisition Sr. Notes
Cl-B
12.50%.................. 07/15/04 10 10,850
General Motor Acceptance
Corp. Medium-Term Notes
6.40%................... 05/19/99 835 839,175
Hartford Life Notes
7.10%................... 06/15/07 450 464,063
Imperial Credit Capital
Trust I 144A
10.25%.................. 06/14/02 20 19,800
Imperial Credit
Industries, Inc. Sr.
Notes
9.875%.................. 01/15/07 20 19,700
Intertek Finance PLC Sr.
Sub. Notes Cl-B
10.25%.................. 11/01/06 25 26,188
Isle of Capri Capital
Corp. 144A
13.00%.................. 08/31/04 10 10,138
Lehman Brothers Holdings,
Inc. Notes
6.40%................... 12/27/99 465 467,325
6.50%................... 10/01/02 550 551,375
Merrill Lynch & Co., Inc.
Medium-Term Notes
6.25%................... 09/02/99 1,835 1,841,881
Netia Holdings B.V. Sr.
Series 144A
10.25%.................. 11/01/07 10 9,475
Ocwen Capital Trust I
10.875%................. 08/01/27 10 10,838
Pindo Deli Financial
Mauritius 144A
10.75%.................. 10/01/07 25 21,500
PAR
MATURITY (000) VALUE
--------- -------- ------------
Quebec Province Debs.
7.125%.................. 02/09/24 $ 1,320 $ 1,364,550
Railcar Leasing LLC 144A
6.75%................... 07/15/06 653 663,153
Salomon, Inc. Sr. Notes
7.30%................... 05/15/02 465 479,885
Southern Investments UK
Sr. Notes
6.80%................... 12/01/06 790 805,800
The Money Store, Inc.
Notes
8.05%................... 04/15/02 710 736,625
Tjiwi Kimia Financial
Mauritius 144A
10.00%.................. 08/01/04 25 20,750
Travelers Capital II Corp.
7.75%................... 12/01/36 160 169,200
Vicap SA 144A
10.25%.................. 05/15/02 20 20,900
Webster Capital Trust I
144A
9.36%................... 01/29/27 10 11,175
------------
10,967,297
------------
FOOD -- 0.1%
Ameriserv Food Distributor
Notes
8.875%.................. 10/15/06 20 20,250
Ameriserv Food Distributor
Sr. Sub. Notes
10.125%................. 07/15/07 5 5,250
Aurora Foods, Inc. Sr.
Sub. Notes Cl-B
9.875%.................. 02/15/07 10 10,550
Chiquita Brands Sr. Notes
9.625%.................. 01/15/04 10 10,650
Del Monte Corp. Sr. Sub.
Notes Cl-B
12.25%.................. 04/15/07 10 10,788
Southern Foods Sr. Sub.
Notes 144A
9.875%.................. 09/01/07 10 10,388
Stater Brothers Holdings
Sr. Sub. Notes
9.00%................... 07/01/04 70 72,975
Stater Brothers, Inc. Sr.
Notes
11.00%.................. 03/01/01 100 110,000
Windy Hill Pet Food Co.
Sr. Sub. Notes
9.75%................... 05/15/07 5 5,213
------------
256,064
------------
FURNITURE -- 0.0%
Sealy Mattress Co. Sr.
Disc. Notes [STEP] 144A
10.561%................. 12/15/07 15 9,113
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
HEALTHCARE SERVICES -- 0.3%
Genesis Eldercare Co. Sr.
Sub. Notes 144A
9.00%................... 08/01/07 $ 20 $ 19,650
Genesis Health Ventures,
Inc. Sr. Sub. Notes
9.25%................... 10/01/06 45 46,013
Integrated Health
Services, Inc. Sr. Sub.
Notes 144A
9.25%................... 01/15/08 30 30,600
9.50%................... 09/15/07 25 25,813
Kinetic Concepts, Inc. Sr.
Sub. Notes 144A
9.625%.................. 11/01/07 10 10,175
Manor Care, Inc. Sr. Notes
7.50%................... 06/15/06 305 324,063
Merit Behavioral Care Sr.
Sub. Notes
11.50%.................. 11/15/05 40 46,150
National Health Investors,
Inc.
7.30%................... 07/16/07 295 308,275
Paracelsus Healthcare
Corp. Sr. Sub. Notes
10.00%.................. 08/15/06 40 41,100
Paragon Health Networks
Sr. Sub. Notes 144A
9.50%................... 11/01/07 50 50,125
Tenet Healthcare Corp. Sr.
Sub. Notes
8.00%................... 01/15/05 75 76,406
Urohealth Systems, Inc.
Sr. Sub. Notes
12.50%.................. 04/01/04 30 28,763
------------
1,007,133
------------
HOTELS & MOTELS -- 0.0%
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 40 42,600
Prime Hospitality Corp.
First Mtge.
9.25%................... 01/15/06 50 53,188
Prime Hospitality Corp.
Sr. Sub. Notes
9.75%................... 04/01/07 35 37,625
------------
133,413
------------
INDUSTRIAL PRODUCTS -- 0.1%
Carson, Inc. Sr. Sub.
Notes 144A
10.375%................. 11/01/07 20 20,425
Cellnet Data Systems, Inc.
Sr. Disc. Notes [STEP]
144A
14.63%.................. 10/01/07 95 47,500
PAR
MATURITY (000) VALUE
--------- -------- ------------
Concentric Network Corp.
Sr. Notes 144A
12.75%.................. 12/15/07 $ 10 $ 10,275
Continental Global Group
Sr. Notes Cl-B
11.00%.................. 04/01/07 25 26,750
FWT, Inc. Sr. Sub. Notes
144A
9.875%.................. 11/15/07 15 15,413
Hedstrom Corp. Sr. Sub.
Notes
10.00%.................. 06/01/07 15 15,150
Hedstrom Holdings, Inc.
Sr. Disc. Notes
11.788%................. 06/01/09 5 3,044
ITC Deltacom, Inc. Sr.
Notes
11.00%.................. 06/01/07 30 33,150
Jones Intercable, Inc. Sr.
Sub. Notes
9.625%.................. 03/15/02 50 53,688
Knology Holdings, Inc.
Units [STEP] 144A
12.425%................. 10/15/07 45 24,750
PCI Chemicals Canada, Inc.
Sr. Notes 144A
9.25%................... 10/15/07 50 50,063
Pharmaceutical Fine
Chemicals Sr. Sub. Notes
144A
9.75%................... 11/15/07 10 10,150
TransAmerican Refining
Corporation Units 144A
16.00%.................. 06/30/03 20 20,400
Unisys Corp. Sr. Sub.
Debs.
9.75%................... 09/15/16 75 75,281
------------
406,039
------------
INSURANCE -- 0.5%
Aegon NV Sub. Notes
8.00%................... 08/15/06 1,155 1,276,275
Conseco, Inc. Sr. Notes
10.50%.................. 12/15/04 430 515,463
------------
1,791,738
------------
MACHINERY & EQUIPMENT -- 0.1%
Agco Corp. Sr. Sub. Notes
8.50%................... 03/15/06 40 41,100
Johnstown America
Industries, Inc. Sr.
Sub. Notes Cl-C
11.75%.................. 08/15/05 15 16,500
Millipore Corp. Notes
7.20%................... 04/01/02 340 349,775
------------
407,375
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 0.0%
Fresenius Medical Care AG
Guaranteed
9.00%................... 12/01/06 $ 20 $ 20,900
Graphic Controls Corp. Sr.
Sub. Notes Cl-A
12.00%.................. 09/15/05 35 39,113
------------
60,013
------------
METALS & MINING -- 0.3%
Acindar Industria
Argentina de Aceros SA
11.25%.................. 02/15/04 10 9,850
AK Steel Corp. Sr. Notes
9.125%.................. 12/15/06 30 30,900
Anker Coal Group, Inc. Sr.
Notes 144A
9.75%................... 10/01/07 10 10,000
Freeport-McMoran C&G Sr.
Notes
7.50%................... 11/15/06 125 125,469
Hylsa SA de CV 144A
9.25%................... 09/15/07 30 30,000
Noranda, Inc. Debs.
7.00%................... 07/15/05 680 694,450
Potash Corp. Notes
7.125%.................. 06/15/07 300 310,125
WCI Steel, Inc. Sr. Notes
Cl-B
10.00%.................. 12/01/04 35 35,963
------------
1,246,757
------------
OFFICE EQUIPMENT -- 0.0%
Axiohm Transaction
Solutions, Inc. Sr. Sub.
Notes 144A
9.75%................... 10/01/07 10 10,175
United Stationery Supply
Sr. Sub. Notes
12.75%.................. 05/01/05 3 3,341
------------
13,516
------------
OIL & GAS -- 0.6%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%.................. 11/01/04 25 27,250
Citgo Petroleum Corp. Sr.
Notes
7.875%.................. 05/15/06 170 182,750
Dailey International, Inc.
Notes 144A
9.75%................... 08/15/07 5 5,231
Flores & Rucks, Inc. Sr.
Sub. Notes
9.75%................... 10/01/06 40 44,000
Newpark Resources, Inc.
Sr. Sub. Notes 144A
8.625%.................. 12/15/07 10 10,200
PAR
MATURITY (000) VALUE
--------- -------- ------------
Pacalta Resource Ltd. Sr.
Notes Cl-B
10.75%.................. 06/15/04 $ 10 $ 9,900
Panaco, Inc. Sr. Notes
144A
10.625%................. 10/01/04 10 10,075
Panda Global Energy Co.
Sr. Notes
12.50%.................. 04/15/04 10 9,300
Parker Drilling Corp.
Notes
9.75%................... 11/15/06 30 32,400
Petroleum Geo-Services
Notes
7.50%................... 03/31/07 175 185,500
Petsec Energy, Inc. Sr.
Sub. Notes Cl-B
9.50%................... 06/15/07 35 36,050
Pogo Producing Co. Sr.
Sub. Notes Cl-B
8.75%................... 05/15/07 5 5,069
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 15 16,163
Saga Petroleum ASA Debs.
7.25%................... 09/23/27 325 338,813
Snyder Oil Corp. Sr. Sub.
Notes
8.75%................... 06/15/07 15 15,225
Transamerican Energy Sr.
Disc. Notes [STEP] 144A
14.045%................. 06/15/02 160 128,000
Transamerican Energy Sr.
Notes 144A
11.50%.................. 06/15/02 70 68,775
Transtexas Gas Corp. Sr.
Sub. Notes Cl-D
13.75%.................. 12/31/01 75 83,906
Wiser Oil Co. Sr. Sub.
Notes
9.50%................... 05/15/07 10 9,800
YPF Sociedad Anonima
7.75%................... 08/27/07 920 933,800
------------
2,152,207
------------
PAPER & FOREST
PRODUCTS -- 0.0%
Florida Coast Paper LLC
First Mtge.
12.75%.................. 06/01/03 35 37,275
Maxxam Group Holdings,
Inc. Sr. Notes
12.00%.................. 08/01/03 5 5,431
Radnor Holdings Sr. Notes
10.00%.................. 12/01/03 5 5,200
------------
47,906
------------
PHARMACEUTICALS -- 0.0%
ICN Pharmaceuticals, Inc.
Sr. Notes Cl-B
9.25%................... 08/15/05 15 15,938
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
PRINTING & PUBLISHING -- 0.0%
America Media Operation
Sr. Sub. Notes
11.625%................. 11/15/04 $ 40 $ 43,400
Garden State Newspapers,
Inc. Sr. Sub. Notes 144A
8.75%................... 10/01/09 10 10,050
Hollinger International
Publishing Co. Notes
8.625%.................. 03/15/05 15 15,544
9.25%................... 03/15/07 15 15,825
Von Hoffman Press, Inc.
Sr. Sub. Notes 144A
10.375%................. 05/15/07 10 10,688
------------
95,507
------------
RAILROADS -- 0.6%
Norfolk Southern Corp.
6.95%................... 05/01/02 425 437,750
7.80%................... 05/15/27 815 924,006
7.05%................... 05/01/37 755 801,244
TFM SA de CV 144A
10.25%.................. 06/15/07 10 10,300
TFM SA de CV 144A [STEP]
11.135%................. 06/15/09 50 31,750
------------
2,205,050
------------
REAL ESTATE -- 0.0%
Continental Homes Holding
Corp. Sub. Notes
10.00%.................. 04/15/06 15 16,200
HMH Properties, Inc. Sr.
Notes Cl-B
8.875%.................. 07/15/07 25 26,375
------------
42,575
------------
RESORTS -- 0.0%
Club Regina Resorts Inc.
Sr. Notes 144A
13.00%.................. 12/01/04 20 20,500
------------
RETAIL & MERCHANDISING -- 0.3%
Federated Department
Stores Sr. Notes
8.50%................... 06/15/03 720 785,700
Fleming Co., Inc. Sr. Sub.
Notes. 144A
10.50%.................. 12/01/04 20 21,000
Ralph's Grocery Co.
10.45%.................. 06/15/04 5 5,625
Rite Aid Corp. Notes
6.70%................... 12/15/01 170 172,763
Southland Corp. Sr. Sub.
Debs. Cl-A
4.50%................... 06/15/04 95 77,188
Specialty Retailer Group,
Inc. Sr. Notes Cl-B
8.50%................... 07/15/05 10 10,200
PAR
MATURITY (000) VALUE
--------- -------- ------------
William Carter Holdings
Sr. Sub. Notes 144A
12.00%.................. 10/01/08 $ 20 $ 20,975
Zale Corp. Sr. Notes 144A
8.50%................... 10/01/07 20 19,800
------------
1,113,251
------------
SEMICONDUCTORS -- 0.0%
Fairchild Semiconductor
Sr. Sub. Notes
10.125%................. 03/15/07 75 79,313
Fairchild Semiconductor
Sr. Sub. Notes [PIK]
144A.................... 03/15/07 25 25,750
International Semi-Tech
Microelectronics Sr.
Disc. Notes [STEP]
25.644%................. 08/15/03 50 19,000
------------
124,063
------------
STEEL -- 0.0%
Armco, Inc. Sr. Notes
9.00%................... 09/15/07 10 9,825
------------
TELECOMMUNICATIONS -- 1.5%
Adelphia Communications
Corp. Cl-B Sr. Notes
10.25%.................. 07/15/00 10 10,450
American Communications
Services, Inc. Sr. Notes
144A
13.75%.................. 07/15/07 15 17,775
Benedek Communications Sr.
Disc. Notes [STEP]
10.871%................. 05/15/06 75 57,188
BTI Telecom Corp. Sr.
Notes 144A
10.50%.................. 09/15/07 20 20,500
Centennial Cellular Sr.
Notes
8.875%.................. 11/01/01 25 25,500
Century Communications
Corp. Sr. Notes
9.50%................... 03/01/05 35 36,925
Cia Telecom Chile Notes
7.625%.................. 07/15/06 995 1,019,875
Comcast Cellular Holdings
Sr. Notes C1-B
9.50%................... 05/01/07 45 47,138
Comcast U.K. Cable Corp.
Debs. [STEP]
9.659%.................. 11/15/07 60 49,275
Comcast U.K. Cable Corp.
Sr. Sub. Debs.
9.50%................... 01/15/08 25 26,625
Commodore Media, Inc. Sr.
Sub. Notes [STEP]
9.958%.................. 05/01/03 80 89,200
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Diamond Cable
Communications PLC Sr.
Disc. Notes [STEP]
10.383%................. 12/15/05 $ 60 $ 46,800
Dobson Communications
Corp. Sr. Notes
11.75%.................. 04/15/07 40 42,300
Esprit Telecom Group PLC
Sr. Notes
11.50%.................. 12/15/07 10 10,300
Globalstar LP/Capital Sr.
Notes
11.375%................. 02/15/04 45 45,450
Hermes Europe Railtel BV
Sr. Notes 144A
11.50%.................. 08/15/07 10 11,100
Innova S de R.L. Sr. Notes
12.875%................. 04/01/07 30 30,450
Intercel, Inc. Sr. Disc.
Notes [STEP]
11.243%................. 02/01/06 70 51,363
Intermedia Communications,
Inc. Sr. Notes 144A
8.50%................... 01/15/08 25 25,063
8.875%.................. 11/01/07 85 87,763
International Cabletel,
Inc. Sr. Notes [STEP]
10.102%................. 02/01/06 65 50,538
Iridium LLC Capital Corp.
Sr. Notes Cl-B
14.00%.................. 07/15/05 55 60,363
Iridium LLC Capital Corp.
Sr. Notes 144A
11.25%.................. 07/15/05 10 9,900
Jacor Communications Co.
Notes
9.75%................... 12/15/06 10 10,775
JCAC Communications, Inc.
Sr. Sub. Notes
10.125%................. 06/15/06 45 49,050
Jones Intercable Sr. Sub.
Debs.
10.50%.................. 03/01/08 30 32,850
Kitty Hawk, Inc. Senior
Notes 144A
9.95%................... 11/15/04 20 20,450
L-3 Communications Corp.
Sr. Sub. Notes Cl-B
10.375%................. 05/01/07 20 21,700
LCI International, Inc.
Sr. Notes
7.25%................... 06/15/07 610 634,400
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
10.86%.................. 08/01/04 50 46,500
McCaw International Ltd.
Sr. Disc. Notes [STEP]
12.942%................. 04/15/07 10 5,850
PAR
MATURITY (000) VALUE
--------- -------- ------------
McLeod USA, Inc. Sr. Disc.
Notes [STEP]
9.111%.................. 03/01/07 $ 55 $ 40,013
Metronet Communications
Corp. Sr. Disc. Notes
[STEP] 144A
10.557%................. 11/01/07 10 6,125
Millicom International
Cellular S.A. Sr. Disc.
Notes [STEP]
11.314%................. 06/01/06 80 59,400
Mobile Telecommunications
Corp. Sr. Notes
13.50%.................. 12/15/02 20 23,300
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
11.50%.................. 09/01/03 5 4,950
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
10.032%................. 08/15/04 205 182,450
Omnipoint Corp. Sr. Notes
11.625%................. 08/15/06 25 26,500
Orbcomm Global LP Cl-B Sr.
Notes
14.00%.................. 08/15/04 40 43,600
Pegasus Media &
Communications, Inc.
Notes
12.50%.................. 07/01/05 45 51,413
PriCellular Wireless Sr.
Notes
10.75%.................. 11/01/04 40 43,500
Qwest Communications
International, Inc. Sr.
Disc. Notes [STEP] 144A
8.792%.................. 10/15/07 20 13,600
Radio One, Inc.
7.00%................... 05/15/04 10 9,675
Radnor Holdings, Inc. Sr.
Notes
10.00%.................. 12/01/03 10 10,400
RCN Corp. Sr. Disc. Notes
[STEP] 144A
10.443%................. 10/15/07 40 25,200
Rogers Cablesystems Ltd.
Notes
11.00%.................. 12/01/15 60 69,600
South Korea Telecom
7.75%................... 04/29/04 185 143,838
TCI Satellite
Entertainment Sr. Sub.
Notes 144A
10.875%................. 02/15/07 5 5,300
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
8.776%.................. 07/01/07 40 32,800
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- ------------
<S> <C> <C> <C>
Telesystem International
Wireless, Inc. Sr. Disc.
Notes [STEP] 144A
11.621%................. 11/01/07 $ 10 $ 5,550
Transtel SA Sr. Notes 144A
12.50%.................. 11/01/07 15 14,100
U.S. West Capital Funding
Inc. Notes
6.95%................... 01/15/37 710 732,188
UIH Australia/Pacific Inc.
Sr. Disc. Notes [STEP]
144A
12.83%.................. 05/15/06 50 34,250
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 40 40,200
WinStar Communications,
Inc. 144A
15.0%................... 03/01/07 30 31,200
Worldcom, Inc. Sr. Notes
7.75%................... 01/01/07 965 1,037,375
------------
5,379,943
------------
TRANSPORTATION -- 0.0%
Atlantic Express Sr. Notes
144A
10.75%.................. 02/01/04 10 10,625
Chemical Leaman Corp. Sr.
Notes
10.375%................. 06/15/05 10 10,500
Eletson Holdings, Inc.
Mortgage Notes
9.25%................... 11/15/03 50 51,188
Trico Marine Services Sr.
Notes 144A
8.50%................... 08/01/05 10 10,075
------------
82,388
------------
UTILITIES -- 1.0%
AES China Generating Co.
Ltd. Sr. Notes
10.125%................. 12/15/06 10 9,725
AES Corp. Sr. Sub. Notes
8.375%.................. 08/15/07 20 20,000
Arizona Public Service Sr.
Notes
6.75%................... 11/15/06 415 423,819
Baltimore Gas & Electric
Medium-Term Notes
6.90%................... 02/01/05 705 730,556
Cleveland Electric
Illumination Co. First
Mtge. Cl-B
9.50%................... 05/15/05 25 27,906
Coho Energy, Inc. Sr. Sub.
Notes
8.875%.................. 10/15/07 10 10,050
Columbia Gas Systems, Inc.
Debs.
6.61%................... 11/28/02 480 487,800
Connecticut Light & Power
First Mtge.
7.875%.................. 06/01/01 290 299,425
PAR
MATURITY (000) VALUE
--------- -------- ------------
El Paso Electric Co. First
Mtge. Cl-E
9.40%................... 05/01/11 $ 10 $ 11,375
Enersis SA Notes
7.40%................... 12/01/16 520 540,800
6.60%................... 12/01/26 220 222,200
Espirito Santo Centrais
Sr. Notes 144A
10.00%.................. 07/15/07 15 13,650
Illinova Corp. Notes
7.125%.................. 02/01/04 385 393,663
Long Island Lighting Debs.
9.00%................... 11/01/22 40 44,550
Niagara Mohawk Power Corp.
Notes
9.95%................... 06/01/00 50 50,028
Northeast Utilities System
Notes
8.38%................... 03/01/05 31 30,667
8.58%................... 12/01/06 9 8,918
------------
3,325,132
------------
TOTAL CORPORATE OBLIGATIONS
(COST $45,043,997).......... 46,516,304
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 12.5%
FEDERAL HOME LOAN MORTGAGE CORP. -- 5.8%
5.77%................... 01/09/98 10,000 9,987,178
5.62%................... 01/14/98 5,000 4,989,853
5.72%................... 01/14/98 5,000 4,989,672
9.50%................... 05/01/05 386 406,766
8.50%................... 06/01/27 387 403,836
------------
20,777,305
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION. -- 1.9%
5.50%.......... 02/01/11-05/01/11 2,743 2,652,489
6.50%.......... 02/01/26-07/01/26 1,058 1,045,216
7.00%.......... 03/18/02-10/01/27 1,974 1,991,020
7.50%.......... 10/15/23-06/01/27 188 192,693
8.50%.................. 10/15/08 949 1,000,620
------------
6,882,038
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 4.8%
6.50%.................. 08/01/25 86 84,585
6.875%......... 11/20/21-10/20/25 1,294 1,324,673
7.00%.......... 08/15/10-11/15/25 3,028 3,076,573
7.375%......... 05/20/24-06/20/26 895 915,999
7.50%.......... 10/15/26-10/15/27 5,850 5,996,958
10.00%................. 06/15/13 498 543,538
5.50% [TBA]............ 02/16/28 2,930 2,926,338
5.50% [TBA]............ 03/15/28 585 584,269
6.00% [TBA]............ 01/16/28 685 661,881
7.00% [VR]............. 09/20/23 58 59,214
7.00% [TBA]............ 01/16/28 615 623,639
7.375% [VR]............ 04/20/23 310 317,748
------------
17,115,415
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $44,591,767).................. 44,774,758
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 7.4%
U.S. TREASURY BILLS -- 0.5%
5.205%#................ 01/22/98 $1,930 $ 1,924,392
------------
U.S. TREASURY BONDS -- 2.4%
6.625%................. 02/15/27 1,270 1,378,522
6.375%................. 08/15/27 6,670 7,042,652
------------
8,421,174
------------
U.S. TREASURY NOTES -- 4.5%
5.625%................. 10/31/99 3,305 3,302,720
6.25%.................. 06/30/02 7,405 7,555,618
5.75%.................. 10/31/02 2,920 2,923,387
5.75%.................. 11/30/02 1,900 1,902,280
6.125%................. 08/15/07 520 534,596
------------
16,218,601
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $26,014,713).................. 26,564,167
------------
COLLATERALIZED MORTGAGE & ASSET-BACKED OBLIGATIONS -- 3.2%
Advanta Mtge. Loan Trust
1997-2 Cl-A2
7.05%.................. 05/25/21 805 815,319
Advanta Mtge. Loan Trust
Series 1997-3 Cl-A3
6.69%.................. 04/25/17 655 659,557
Amresco Residential
Securities Mtge. Loan
Trust Series 1997-3
Cl-A3
6.60%.................. 01/25/18 440 441,925
Capital Equipment
Receivables Trust
Series 1996-1 Cl-A4
6.28%.................. 06/15/00 600 601,380
Carco Auto Loan Master
Trust Series 1997-1
Cl-A
6.689%................. 08/15/06 615 618,801
CMAC 97-Ml1 Cl-A2
6.57%.................. 12/15/30 255 257,231
CMAC 97-Ml1 Cl-A3
6.57%.................. 12/15/30 700 705,906
Federal National Mtge.
Assoc. REMIC Series
1989-71 Cl-J
8.50%.................. 10/25/19 880 953,150
Federal National Mtge.
Assoc. REMIC Series
1993-240 Cl-B
6.25%.................. 12/25/13 548 539,649
Federal National Mtge.
Assoc. REMIC Series
1997-61 Cl-ZC
7.00%.................. 02/25/23 317 310,818
First Union-Lehman Bros.
Commercial Mortgage
Series 1997-C2 Cl-A3
6.65%.................. 06/18/08 470 474,259
Green Tree Financial
Corp. Series 1997-2
Cl-A6
7.24%.................. 03/15/25 635 654,739
PAR
MATURITY (000) VALUE
-------- -------- ------------
Green Tree Financial
Corp. Series 1997-3
Cl-A4
6.93%.................. 07/15/28 $1,095 $ 1,124,154
Green Tree Recreational,
Equipment & Consumer
Trust Series 1997-B
Cl-A1
6.55%.................. 07/15/28 1,321 1,332,585
PNC Mtge. Securities
Corp. Series 1997-6
Cl-A2
6.60%.................. 01/01/00 551 554,811
Provident Bank Home
Equity Loan Trust
6.91%.................. 01/25/29 455 456,493
Securitized Asset Sales,
Inc.
6.808%................. 11/28/23 973 951,458
------------
TOTAL COLLATERALIZED MORTGAGE & ASSET-
BACKED OBLIGATIONS
(COST $11,286,177).................. 11,452,235
------------
SOVEREIGN ISSUES -- 0.0%
NETHERLANDS
Asia Pulp & Paper
International Finance
Co. Notes 11.75%
(COST $47,559)......... 10/01/05 45 41,625
------------
COMMERCIAL PAPER -- 2.8%
Corporate Receivables
Corp. 5.625% (COST
$9,982,583)............ 01/12/98 10,000 9,982,583
------------
REPURCHASE AGREEMENTS -- 3.7%
UBS Securities Funding, Inc.,
6.45% dated 12/31/97,
repurchase price
$13,089,689
(Collateralized by U.S.
Treasury Notes, par
value $9,787,000,
market value
$13,366,901, due
02/15/19)
(COST $13,085,000)..... 01/02/98 13,085 13,085,000
------------
SHARES
--------
SHORT-TERM INVESTMENTS -- 0.5%
Temporary Investment Cash
Fund .................. 877,099 877,099
Temporary Investment
Fund .................. 877,099 877,099
------------
(COST $1,754,198)........ 1,754,198
------------
TOTAL INVESTMENTS -- 100.5%
(COST $329,164,146)................. 359,223,570
------------
</TABLE>
<PAGE>
AST PUTNAM BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
SALE COMMITMENTS -- (0.1%)
Federal National Mortgage
Assoc. [TBA] 6.50%
(COST $(207,113)).......... 01/16/28 $210 $ (207,375)
LIABILITIES IN EXCESS OF
ASSETS -- (0.4%).................... (1,425,321)
------------
NET ASSETS -- 100.0%.................. $357,590,874
===========
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy JPY 327,231 $ 2,514 $ 2,518 $ 4
01/98 Buy FRF 219,328 36,893 36,561 (332)
02/98 Buy FRF 18,630,000 2,258,564 2,206,795 (51,769)
01/98 Buy GBP 20,014 33,388 32,918 (470)
01/98 Buy PTE 14,913,731 81,865 81,137 (728)
---------- ---------- ------
$2,413,224 $2,359,929 $(53,295)
========== ========== ===============
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Sell CHF 38,065 $ 26,121 $ 26,120 $ 1
02/98 Sell FRF 13,230,000 2,137,318 2,206,795 (69,477)
01/98 Sell ITL 64,667,366 36,553 36,836 (283)
06/98 Sell JPY 260,000,000 2,061,372 2,049,040 12,332
---------- ---------- ------
$4,261,364 $4,318,791 $(57,427)
========== ========== ===============
</TABLE>
#Securities with an aggregate market value of $1,804,740 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) DEPRECIATION
- ------------------------------------------------------------------------
<S> <C> <C> <C>
FTSE 100 Index....................... 03/98 2,050 $ (5,386)
NASDAQ 100........................... 03/98 1,800 (166,950)
Russell 2000......................... 03/98 4,500 (29,925)
S & P 500............................ 03/98 5,750 (75,038)
U.S. Treasury 10 Year Note
(Shorted)........................... 03/98 (1,800) (12,188)
------------
$ (289,487)
=============
</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 1.1% 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 -- 88.9%
ADVERTISING -- 1.2%
Larmar Advertising Co.
Sr. Sub. Notes
9.625%.................. 12/01/06 $ 1,700 $ 1,840,250
Outdoor Systems, Inc.
Sr. Sub. Notes
8.875%.................. 06/15/07 3,025 3,176,250
-------------
5,016,500
-------------
AEROSPACE -- 0.1%
United Defense Sr. Sub.
Notes 144A
8.75%................... 11/15/07 600 606,750
-------------
AUTOMOTIVE PARTS -- 2.0%
Aftermarket Technology,
Inc. Sr. Sub. Notes
12.00%.................. 08/01/04 1,938 2,160,870
Delco Remy International,
Inc. Sr. Notes
8.625%.................. 12/15/07 400 407,000
Exide Corp. Sr. Notes
10.00%.................. 04/15/05 1,225 1,304,625
Lear Corp. Sub. Notes
9.50%................... 07/15/06 2,500 2,762,500
Lear Seating Sub. Notes
8.25%................... 02/01/02 550 560,312
Oxford Automotive, Inc.
Notes
10.125%................. 06/15/07 1,300 1,378,000
-------------
8,573,307
-------------
BROADCASTING -- 7.8%
Acme Television Finance
Sr. Disc. Notes [STEP]
144A
11.017%................. 09/30/04 3,100 2,297,875
Australis Media Ltd. Sr.
Disc. Notes [STEP]
28.52%.................. 05/15/03 6 2,214
Australis Media Ltd. Units
[STEP]
15.83%.................. 05/15/03 625 250,000
Capstar Radio Broadcasting
Sr. Sub. Notes
9.25%................... 07/01/07 1,000 1,032,500
Chancellor Media Corp.
Notes Cl-B
8.75%................... 06/15/07 600 610,500
Chancellor Media Corp.
Sr. Sub. Notes.
8.125%.................. 12/15/07 1,000 980,000
9.375%.................. 10/01/04 1,150 1,198,875
Echostar Satellite
Broadcasting Co. Sr.
Disc. Notes [STEP]
10.944%................. 03/15/04 4,525 3,823,625
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Fox Liberty Networks LLC
Sr. Notes 144A
8.875%.................. 08/15/07 $ 1,125 $ 1,127,812
Fox Liberty Networks LLC
Sr. Notes [STEP] 144A
9.728%.................. 08/15/07 4,825 3,112,125
Frontiervision Holdings
[STEP] 144A
10.243%................. 09/15/07 2,100 1,554,000
Heritage Media Corp.
Sr. Sub. Notes
8.75%................... 02/15/06 3,200 3,465,888
Katz Media Corp. Sr. Sub.
Notes Cl-B
10.50%.................. 01/15/07 1,700 1,878,500
NWCG Holding Corp.
Sr. Disc. Notes [ZCB]
5.614%.................. 06/15/99 300 275,415
SCI Television, Inc. Sr.
Notes
11.00%.................. 06/30/05 1,150 1,193,228
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%.................. 05/15/06 1,175 1,295,437
Sinclair Broadcasting
Group Sr. Sub. Notes
10.00%.................. 09/30/05 2,000 2,130,000
9.00%................... 07/15/07 2,000 2,030,000
8.75%................... 12/15/07 1,100 1,102,750
Sullivan Broadcasting
Holdings Co.
Sr. Sub. Notes
10.25%.................. 12/15/05 1,800 1,935,000
13.25%.................. 12/15/06 150 158,250
TCI Communications, Inc.
Sr. Notes
6.875%.................. 02/15/06 550 552,959
Young Broadcasting Corp.
Sr. Sub. Notes
11.75%.................. 11/15/04 250 278,125
10.125%................. 02/15/05 1,175 1,245,500
Young Broadcasting Corp.
Sr. Sub Notes Cl-B
9.00%................... 01/15/06 500 502,500
-------------
34,033,078
-------------
BUILDING MATERIALS -- 0.6%
American Builders &
Contractors Notes Cl-B
10.625%................. 05/15/07 1,175 1,224,937
Falcon Building Products
Sr. Sub. Notes
9.50%................... 06/15/07 350 358,750
Falcon Building Products
[STEP] Cl-B
9.855%.................. 06/15/07 1,500 1,001,250
-------------
2,584,937
-------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
BUSINESS SERVICES -- 1.3%
Coinmach Corporation
Sr. Notes Cl-C 144A
11.75%.................. 11/15/05 $ 1,200 $ 1,338,000
Dialog Corp. PLC Sr. Sub.
Notes 144A
11.00%.................. 11/15/07 2,425 2,528,062
Outsourcing Solutions
Corp. Sr. Sub. Notes
Cl-B
11.00%.................. 11/01/06 1,575 1,752,187
-------------
5,618,249
-------------
CAPITAL GOODS -- 0.8%
Buckeye Cellulos Corp.
Sr. Sub. Notes
8.50%................... 12/15/05 1,500 1,530,000
9.25%................... 09/15/08 1,750 1,828,750
-------------
3,358,750
-------------
CHEMICALS -- 2.8%
Foamex Capital Corp.
Sr. Sub Notes
13.50%.................. 08/15/05 500 572,500
Harris Chemical North
America Sr. Notes
10.25%.................. 07/15/01 1,850 1,961,000
ISP Holdings, Inc.
Sr. Notes Cl-B
9.75%................... 02/15/02 1,000 1,061,250
9.00%................... 10/15/03 1,475 1,535,844
Polymer Group Holdings Sr.
Sub. Notes Cl-B
9.00%................... 07/01/07 4,275 4,296,375
RBX Corp. Notes Cl-B
11.25%.................. 10/15/05 1,000 890,000
Sterling Chemicals
Holdings Sr. Disc. Notes
[STEP]
13.87%.................. 08/15/08 2,350 1,421,750
Uniroyal Technology Corp.
Sr. Notes
11.75%.................. 06/01/03 425 444,125
-------------
12,182,844
-------------
CLOTHING & APPAREL -- 2.2%
Brylane L.P. Sr. Sub.
Notes Cl-B
10.00%.................. 09/01/03 1,325 1,412,781
Dyersburg Corp. Guarantee
Cl-B
9.75%................... 09/01/07 1,725 1,798,312
GFSI, Inc. Sr. Sub. Notes
Cl-B
9.625%.................. 03/01/07 850 875,500
Glenoit Corp. Sr. Sub.
Notes 144A
11.00%.................. 04/15/07 1,650 1,782,000
Hosiery Corp. of America,
Inc. Sr. Sub. Notes
13.75%.................. 08/01/02 500 542,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
Pillowtex Corp.
Sr. Sub. Notes
10.00%.................. 11/15/06 $ 1,950 $ 2,096,250
Pillowtex Corp. Sr. Sub.
Notes 144A
9.00%................... 12/15/07 850 875,500
-------------
9,382,843
-------------
COMPUTER SERVICES & SOFTWARE -- 0.3%
DecisionOne Corp.
Sr. Sub. Notes
9.75%................... 08/01/07 1,200 1,242,000
-------------
CONGLOMERATES -- 0.1%
Climachem, Inc.
Sr. Notes 144A
10.75%.................. 12/01/07 500 517,500
-------------
CONSTRUCTION -- 0.8%
American Architectural
Sr. Notes 144A
11.75%.................. 12/01/07 1,100 1,113,750
Building Materials Corp.
Sr. Notes 144A
8.00%................... 10/15/07 2,250 2,255,625
-------------
3,369,375
-------------
CONSUMER PRODUCTS & SERVICES -- 5.4%
American Safety Razor Co.
Sr. Notes
9.875%.................. 08/01/05 1,250 1,343,750
Amscan Holdings, Inc.
Sr. Sub. Notes 144A
9.875%.................. 12/15/07 550 565,125
Cabot Safety Corp.
Sr. Sub. Notes
12.50%.................. 07/15/05 1,500 1,687,500
Collins & Aikman
Floorcovering
Sr. Sub. Notes
10.00%.................. 01/15/07 1,025 1,081,375
Collins & Aikman Products
Sr. Sub. Notes
11.50%.................. 04/15/06 2,700 3,047,625
Herff Jones, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/05 550 600,875
NBTY, Inc. Sr. Sub. Notes
144A
8.625%.................. 09/15/07 2,350 2,361,750
Playtex Family Products
Corp. Sr. Sub. Notes
9.00%................... 12/15/03 2,100 2,142,000
Playtex Products, Inc.
Cl-B
8.875%.................. 07/15/04 350 358,750
Renaissance Cosmetics,
Inc. Sr. Notes
11.75%.................. 02/15/04 650 601,250
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Revlon Consumer Products
Corp. Sr. Notes Cl-B
9.375%.................. 04/01/01 $ 500 $ 517,500
10.50%.................. 02/15/03 1,375 1,457,500
Simmons Co. Sr. Sub. Notes
10.75%.................. 04/15/06 1,250 1,328,125
Syratech Corp. Sr. Notes
11.00%.................. 04/15/07 1,250 1,168,750
Westpoint Stevens, Inc.
Sr. Sub. Debs.
9.375%.................. 12/15/05 4,700 4,958,500
-------------
23,220,375
-------------
CONTAINERS & PACKAGING -- 1.5%
Container Corp. of America
Sr. Notes
9.75%................... 04/01/03 250 271,250
11.25%.................. 05/01/04 250 275,000
Four M Corp. Sr. Notes
12.00%.................. 06/01/06 1,300 1,384,500
Owens-Illinois, Inc. Sr.
Notes
8.10%................... 05/15/07 1,000 1,074,010
Plastic Containers, Inc.
Sr. Notes Cl-B
10.00%.................. 12/15/06 450 481,500
Stone Container Corp. Sr.
Notes
11.50%.................. 10/01/04 1,200 1,281,000
12.58% [VR]............. 08/01/16 1,550 1,712,750
-------------
6,480,010
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 1.0%
Advanced Micro Devices,
Inc. Sr. Notes
11.00%.................. 08/01/03 750 805,312
Amphenol Corp.
Sr. Sub. Notes
9.875%.................. 05/15/07 2,000 2,140,000
Electronic Retailing
Systems, Inc. Sr. Disc.
Notes [STEP]
15.94%.................. 02/01/04 875 586,250
Viasystems, Inc.
Sr. Sub. Notes
9.75%................... 06/01/07 725 752,187
-------------
4,283,749
-------------
ENTERTAINMENT &
LEISURE -- 2.7%
AMF Group, Inc. Sr. Disc.
Notes [STEP]
10.064%................. 03/15/06 3,137 2,482,151
Cobblestone Golf Group Sr.
Notes
11.50%.................. 06/01/03 750 817,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
KSL Recreation Group, Inc.
Sr. Sub. Notes Cl-B
10.25%.................. 05/01/07 $ 400 $ 430,000
Livent, Inc. Sr. Notes
144A
9.375%.................. 10/15/04 1,800 1,809,000
Premier Parks Corp. Sr.
Notes
9.75%................... 01/15/07 450 481,500
Premier Parks Corp.
Sr. Notes Cl-A
12.00%.................. 08/15/03 1,600 1,784,000
Six Flags Theme Parks
Sr. Sub. Notes
Cl-A [STEP]
9.87%................... 06/15/05 3,625 3,878,750
-------------
11,682,901
-------------
ENVIRONMENTAL SERVICES -- 1.8%
Allied Waste Industries,
Inc. Sr. Disc. Notes
[STEP] 144A
9.548%.................. 06/01/07 4,200 2,971,500
Allied Waste North America
Sr. Sub. Notes
10.25%.................. 12/01/06 2,700 2,976,750
Envirosource, Inc. Sr.
Notes
9.75%................... 06/15/03 1,400 1,429,750
ICF Kaiser International,
Inc. Sr. Sub. Notes
13.00%.................. 12/31/03 600 622,500
-------------
8,000,500
-------------
EQUIPMENT SERVICES -- 0.2%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 781 870,815
-------------
FARMING & AGRICULTURE -- 0.4%
Dimon, Inc. Sr. Notes
8.875%.................. 06/01/06 1,750 1,870,312
-------------
FINANCIAL-BANK & TRUST -- 1.2%
First Nationwide Holdings
Sr. Sub. Notes
9.125%.................. 01/15/03 275 288,750
10.625%................. 10/01/03 4,525 5,079,312
-------------
5,368,062
-------------
FINANCIAL SERVICES -- 1.0%
Contifinancial Corp. Sr.
Notes
8.375%.................. 08/15/03 1,500 1,566,000
Intertek Finance PLC
Sr. Sub. Notes Cl-B
10.25%.................. 11/01/06 1,000 1,055,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Unifrax Investment Corp.
Sr. Notes
10.50%.................. 11/01/03 $ 1,650 $ 1,707,750
-------------
4,328,750
-------------
FOOD -- 4.7%
Ameriserv Food Distributor
Sr. Sub. Notes
8.875%.................. 10/15/06 1,200 1,218,000
10.125%................. 07/15/07 2,800 2,954,000
Aurora Foods, Inc.
Sr. Sub. Notes Cl-B
9.875%.................. 02/15/07 1,775 1,881,500
Carr-Gottstein Foods Co.
Sr. Sub. Notes
12.00%.................. 11/15/05 900 999,000
Community Distributors,
Inc. Sr. Notes 144A
10.25%.................. 10/15/04 1,000 1,025,000
Curtice-Burns Foods, Inc.
Sr. Sub. Notes
12.25%.................. 02/01/05 1,100 1,218,250
Di Giorgio Corp.
Sr. Notes Cl-B
10.00%.................. 06/15/07 1,350 1,333,125
International Home Foods,
Inc. Sr. Sub. Notes
10.375%................. 11/01/06 2,750 3,038,750
Jitney-Jungle Stores
Sr. Sub. Notes
10.375%................. 09/15/07 2,000 2,100,000
Nebco Evans Holding Co.
Sr. Disc. Notes [STEP]
10.842%................. 07/15/07 1,250 818,750
PMI Acquisition Corp.
Sr. Sub. Notes
10.25%.................. 09/01/03 750 800,625
Stater Brothers Holdings,
Inc. Sr. Sub. Notes
9.00%................... 07/01/04 1,125 1,179,844
Van de Kamps, Inc.
Sr. Sub. Notes
12.00%.................. 09/15/05 1,450 1,624,000
-------------
20,190,844
-------------
FURNITURE -- 0.5%
Sealy Mattress Co.
Sr. Disc. Notes
10.513% [STEP] 144A..... 12/15/07 1,000 610,000
9.875% 144A............. 12/15/07 500 515,000
Werner Holdings Co., Inc.
Sr. Sub. Notes 144A
10.00%.................. 11/15/07 1,100 1,135,750
-------------
2,260,750
-------------
HEALTHCARE SERVICES -- 2.8%
Alliance Imaging
Sr. Sub. Notes
9.625%.................. 12/15/05 750 765,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Genesis Health Ventures,
Inc. Sr. Sub. Notes
9.75%................... 06/15/05 $ 1,250 $ 1,303,125
9.25%................... 10/01/06 350 358,312
Icon Fitness Corp. Sr.
Disc. Notes Cl-B [STEP]
14.165%................. 11/15/06 1,100 643,500
Icon Health & Fitness
Corp. Sr. Sub. Notes
Cl-B
13.00%.................. 07/15/02 530 594,925
Tenet Healthcare Corp.
Sr. Sub. Notes
8.00%................... 01/15/05 3,450 3,519,000
10.125%................. 03/01/05 1,700 1,861,500
8.625%.................. 01/15/07 3,000 3,105,000
-------------
12,150,362
-------------
HOTELS & MOTELS -- 0.4%
Courtyard by Marriott Sr.
Notes
10.75%.................. 02/01/08 1,500 1,642,500
-------------
INDUSTRIAL PRODUCTS -- 1.1%
Capstar Hotel Co.
Sr. Sub. Notes
8.75%................... 08/15/07 725 752,187
Continental Global Group,
Inc. Sr. Notes Cl-B
11.00%.................. 04/01/07 1,100 1,177,000
Elgin National Industries
Sr. Notes 144A
11.00%.................. 11/01/07 475 495,188
Leslie's Poolmart Sr.
Notes
10.375%................. 07/15/04 950 988,000
MMI Products, Inc.
Sr. Sub. Notes Cl-B
11.25%.................. 04/15/07 1,400 1,533,000
-------------
4,945,375
-------------
MACHINERY & EQUIPMENT -- 2.4%
Alvey Systems, Inc.
Sr. Sub. Notes
11.375%................. 01/31/03 1,750 1,868,125
Clark Materials Handling
Corp. Sr. Notes
10.75%.................. 11/15/06 1,925 2,069,375
Fairfield Manufacturing
Co. Sr. Sub. Notes
11.375%................. 07/01/01 900 954,000
Hawk Corp. Sr. Notes
10.25%.................. 12/01/03 250 267,500
International Knife & Saw,
Inc. Sr. Sub. Notes
11.375%................. 11/15/06 1,050 1,139,250
Johnstown America
Industries, Inc. Sr.
Sub. Notes Cl-C
11.75%.................. 08/15/05 700 770,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
National Equipment
Services, Sr. Sub. Notes
144A
10.00%.................. 11/30/04 $ 1,275 $ 1,268,625
Roller Bearing Co. Sr.
Sub. Notes 144A
9.625%.................. 06/15/07 500 506,250
Ryder TRS, Inc.
Sr. Sub. Notes
10.00%.................. 12/01/06 300 302,250
Tokheim Corp. Sr. Sub.
Notes Cl-B
11.50%.................. 08/01/06 1,100 1,254,000
-------------
10,399,375
-------------
MEDICAL SUPPLIES & EQUIPMENT -- 0.6%
Dade International, Inc.
Sr. Sub. Notes Cl-B
11.125%................. 05/01/06 2,225 2,469,750
-------------
METALS & MINING -- 2.5%
AEI Holding Co.
Sr. Notes 144A
10.00%.................. 11/15/07 1,250 1,293,750
Anker Coal Group, Inc.
Sr. Notes 144A
9.75%................... 10/01/07 450 457,875
Bayou Steel Corp. First
Mtge. Notes
10.25%.................. 03/01/01 750 776,250
Euramax International Ltd.
Sr. Sub. Notes
11.25%.................. 10/01/06 1,250 1,359,375
GS Technologies Operating
Corp. Sr. Notes
12.00%.................. 09/01/04 975 1,071,281
12.25%.................. 10/01/05 1,525 1,711,813
Neenah Corp.
Sr. Sub. Notes Cl-B
11.125%................. 05/01/07 1,375 1,515,938
Royal Oak Mines, Inc.
Sr. Sub. Notes
11.00%.................. 08/15/06 1,150 833,750
Ryerson Tull, Inc. Notes
8.50%................... 07/15/01 1,000 1,040,000
9.125%.................. 07/15/06 900 969,750
-------------
11,029,782
-------------
OFFICE EQUIPMENT -- 0.5%
Knoll, Inc. Sr. Sub. Notes
10.875%................. 03/15/06 910 1,032,850
United Stationers Supply
Co. Sr. Sub. Notes
12.75%.................. 05/01/05 1,169 1,335,583
-------------
2,368,433
-------------
OIL & GAS -- 4.6%
Abraxas Petroleum Corp.
Sr. Notes Cl-B
11.50%.................. 11/01/04 3,000 3,300,000
PAR
MATURITY (000) VALUE
--------- -------- -------------
Dailey International, Inc.
Notes 144A
9.75%................... 08/15/07 $ 975 $ 1,028,625
DI Industries, Inc. Sr.
Notes
8.875%.................. 07/01/07 1,500 1,567,500
Falcon Drilling Co., Inc.
Sr. Notes
9.75%................... 01/15/01 350 368,375
12.50%.................. 03/15/05 300 343,500
Forcenergy, Inc.
Sr. Sub. Notes
9.50%................... 11/01/06 2,650 2,828,875
8.50%................... 02/15/07 1,450 1,464,500
Giant Industries, Inc.
Sr. Sub. Notes
9.75%................... 11/15/03 550 569,250
Newpark Resources, Inc.
Sr. Sub. Notes 144A
8.625%.................. 12/15/07 250 255,000
Pacalta Resource Ltd.
Sr. Notes Cl-B
10.75%.................. 06/15/04 1,050 1,040,813
Petsec Energy, Inc.
Sr. Sub. Notes Cl-B
9.50%................... 06/15/07 700 721,875
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 2,500 2,700,000
United Meridian Corp.
Sr. Sub. Notes
10.375%................. 10/15/05 1,775 1,970,250
United Refining Co.
Sr. Notes 144A
10.75%.................. 06/15/07 1,000 1,057,500
XCL Ltd. Units 144A
13.50%.................. 05/01/04 750 903,750
-------------
20,119,813
-------------
PAPER & FOREST
PRODUCTS -- 0.4%
Repap New Brunswick Sr.
Notes
10.625%................. 04/15/05 500 477,500
S.D. Warren Co.
Sr. Sub. Notes
12.00%.................. 12/15/04 1,300 1,456,000
-------------
1,933,500
-------------
PRINTING & PUBLISHING -- 2.2%
Affiliated Newspaper
Investments, Inc. Sr.
Disc. Notes [STEP]
10.795%................. 07/01/06 2,200 2,101,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Garden State Newspapers,
Inc. Sr. Sub. Notes
12.00%.................. 07/01/04 $ 200 $ 225,000
8.75% 144A.............. 10/01/09 2,575 2,594,313
Hollinger International
Publishing Co. Notes
9.25%................... 02/01/06 800 848,000
9.25%................... 03/15/07 1,950 2,067,000
K-III Communications Corp.
Sr. Notes
8.50%................... 02/01/06 1,000 1,042,810
Petersen Publishing Co.
Sr. Sub. Notes Cl-B
11.125%................. 11/15/06 600 681,000
-------------
9,559,123
-------------
REAL ESTATE -- 0.4%
Trizec Finance Ltd. Sr.
Notes
10.875%................. 10/15/05 1,457 1,639,125
-------------
RETAIL & MERCHANDISING -- 1.0%
Ralph's Grocery Co. Sr.
Notes
10.45%.................. 06/15/04 3,675 4,148,156
-------------
SEMICONDUCTORS -- 0.4%
Fairchild Semiconductor
Corp. Sr. Sub. Notes
10.125%................. 03/15/07 1,600 1,700,000
-------------
TELECOMMUNICATIONS -- 25.2%
American Communications
Services, Inc.
Sr. Notes [STEP]
10.564%................. 04/01/06 1,400 1,085,000
13.75%.................. 07/15/07 875 1,045,625
Arch Communications Group
Sr. Disc. Notes [STEP]
12.758%................. 03/15/08 1,200 738,000
Brooks Fiber Properties,
Inc. Sr. Disc. Notes
[STEP]
8.52%................... 03/01/06 3,650 3,066,000
8.825%.................. 11/01/06 1,400 1,127,000
Cablevision Systems Corp.
Sr. Sub. Debs.
7.875%.................. 12/15/07 1,700 1,744,625
9.875%.................. 02/15/13 500 555,000
9.25%................... 11/01/05 3,750 3,993,750
9.875%.................. 05/15/06 300 330,000
Call-Net Enterprises, Inc.
Sr. Disc. Notes [STEP]
8.87%................... 08/15/07 3,100 2,108,000
CCPR Services, Inc.
Sr. Sub. Notes
10.00%.................. 02/01/07 500 482,500
PAR
MATURITY (000) VALUE
--------- -------- -------------
Cellular Communications
International, Inc.
Notes [ZCB]
6.952%.................. 08/15/00 $ 1,550 $ 1,263,250
CF Cable TV, Inc. Sr.
Notes
11.625%................. 02/15/05 500 568,960
Charter Communications
Southeast Holdings
Capital Corp. Cl-B
[STEP]
11.28%.................. 03/15/07 650 510,250
Charter Communications
Southeast Holdings
Capital Corp. L.P. Sr.
Notes Cl-B
11.25%.................. 03/15/06 1,150 1,282,250
Comcast Cellular Holdings
Sr. Notes Cl-B
9.50%................... 05/01/07 1,975 2,073,750
Comcast Corp. Sr. Sub.
Debs.
9.375%.................. 05/15/05 2,500 2,668,750
Comcast U.K. Cable Corp.
Debs. [STEP]
9.719%.................. 11/15/07 2,900 2,370,750
Diamond Cable
Communications PLC
Sr. Disc. Notes [STEP]
10.988%................. 09/30/04 250 225,000
10.432%................. 12/15/05 4,000 3,110,000
10.056%................. 02/15/07 1,125 770,625
Esprit Telecom Group PLC
Sr. Notes
11.50%.................. 12/15/07 1,000 1,035,000
Hermes Europe Railtel BV
Sr. Notes 144A
11.50%.................. 08/15/07 1,575 1,756,125
Highwaymaster
Communications, Inc. Sr.
Notes
13.75%.................. 09/15/05 1,050 1,073,625
Intermedia Communications
of Florida, Inc. Sr.
Disc. Notes [STEP]
9.979%.................. 05/15/06 4,650 3,673,500
Intermedia Communications
Inc. Sr. Notes 144A
8.875%.................. 11/01/07 1,000 1,030,000
9.128% [STEP]........... 07/15/07 500 361,250
International Cabletel,
Inc. Sr. Notes [STEP]
9.987%.................. 10/15/03 500 478,750
10.928%................. 04/15/05 1,050 879,375
9.864%.................. 02/01/06 38,000 3,002,000
Jacor Communications Co.
Notes
9.75%................... 12/15/06 500 540,000
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Lenfest Communications,
Inc. Sr. Sub. Notes
8.375%.................. 11/01/05 $ 2,150 $ 2,225,250
McLeodUSA, Inc.
Sr. Notes 144A
9.25%................... 07/15/07 1,300 1,361,750
McLeodUSA, Inc.
Sr. Disc. Notes [STEP]
9.111%.................. 03/01/07 2,150 1,564,125
Metronet Communications
Corp. Sr. Disc. Notes
[STEP] 144A
10.269%................. 11/01/07 1,925 1,207,938
Metronet Communications
Corp. Units 144A
12.00%.................. 08/15/07 1,525 1,765,188
Millicom International
Cellular S.A. Sr. Disc.
Notes [STEP]
11.462%................. 06/01/06 4,075 2,995,125
Nextel Communications,
Inc. Sr. Disc. Notes
[STEP]
9.876%.................. 08/15/04 3,100 2,766,750
8.402% 144A............. 09/15/07 1,575 994,219
Nextlink Communications,
Inc. Sr. Notes
9.625%.................. 10/01/07 1,250 1,290,625
Paging Network, Inc.
Sr. Sub. Notes
10.00%.................. 10/15/08 3,600 3,753,000
Pegasus Communications
Corp.
Sr. Notes 144A
9.625%.................. 10/15/05 1,050 1,076,250
Pegasus Media &
Communications, Inc.
Notes
12.50%.................. 07/01/05 975 1,116,375
Qwest Communications
International, Inc. Sr.
Disc. Notes [STEP] 144A
8.792%.................. 10/15/07 3,100 2,108,000
Qwest Communications
International, Inc.
Sr. Notes Cl-B
10.875%................. 04/01/07 1,750 1,986,250
RCN Corp. Sr. Disc. Notes
[STEP] 144A
9.53%................... 10/15/07 2,000 1,265,000
Rogers Cablesystems of
America Sr. Notes
10.00%.................. 03/15/05 2,500 2,775,000
10.00%.................. 12/01/07 1,350 1,491,750
11.00%.................. 12/01/15 750 870,000
Rogers Communications,
Inc. Sr. Notes
8.875%.................. 07/15/07 750 753,750
PAR
MATURITY (000) VALUE
--------- -------- -------------
Source Media, Inc.
Sr. Sec'd. Notes 144A
12.00%.................. 11/01/04 $ 350 $ 348,250
Sygnet Wireless, Inc. Sr.
Notes
11.50%.................. 10/01/06 1,425 1,546,125
Teleport Communications
Group, Inc. Sr. Notes
9.875%.................. 07/01/06 225 254,250
Teleport Communications
Group, Inc. Sr. Disc.
Notes [STEP]
8.678%.................. 07/01/07 5,375 4,441,094
Telesystem International
Wireless, Inc. Sr. Disc.
Notes [STEP] 144A
11.513%................. 11/01/07 800 448,000
Telesystem International
Wireless, Inc. [STEP]
144A
11.779%................. 06/30/07 3,425 2,157,750
Telewest Communication PLC
Debs. [STEP]
9.379%.................. 10/01/07 7,075 5,536,188
Teligent, Inc. Sr. Notes
11.50%.................. 12/01/07 1,750 1,763,125
UIH Australia Pacific,
Inc. Sr. Disc. Notes
[STEP]
13.271%................. 05/15/06 3,100 2,061,500
USA Mobile Communications
Holdings, Inc. Sr. Notes
9.50%................... 02/01/04 1,050 1,034,250
Vanguard Cellular Systems,
Inc. Debs.
9.375%.................. 04/15/06 2,000 2,090,000
Viacom, Inc. Sub. Debs.
8.00%................... 07/07/06 8,300 8,424,500
Videotron Holdings PLC Sr.
Notes
10.625%................. 02/15/05 1,000 1,115,000
-------------
109,535,087
-------------
TRANSPORTATION -- 3.0%
Allied Holdings, Inc.
Notes Cl-B
8.625%.................. 10/01/07 1,000 1,020,000
Ameritruck Distribution
Corp. Sr. Sub. Notes
12.25%.................. 11/15/05 1,950 1,940,250
Chemical Leaman Corp. Sr.
Notes
10.375%................. 06/15/05 1,000 1,065,000
Gearbulk Holding Ltd. Sr.
Notes
11.25%.................. 12/01/04 1,400 1,543,500
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Johnstown America
Industries, Inc.
Sr. Sub. Notes
11.75%.................. 08/15/05 $ 600 $ 660,000
Statia Terminals First
Mtge. Cl-A
11.75%.................. 11/15/03 1,000 1,050,000
Stena AB Sr. Notes
10.50%.................. 12/15/05 3,275 3,577,938
8.75%................... 06/15/07 1,125 1,139,063
Trism, Inc. Sr. Sub. Notes
10.75%.................. 12/15/00 1,250 1,231,250
-------------
13,227,001
-------------
UTILITIES -- 1.0%
California Energy Co.,
Inc. Disc. Notes
10.25%.................. 01/15/04 1,825 1,971,000
California Energy Co.,
Inc. Sr. Notes
9.50%................... 09/15/06 1,000 1,097,500
El Paso Electric Co. First
Mtge. Cl-E
9.40%................... 05/01/11 1,075 1,215,610
-------------
4,284,110
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $369,060,694)................... 386,194,693
-------------
U.S. TREASURY OBLIGATIONS -- 0.9%
U.S. Treasury Notes
5.75%
(COST $3,792,445)......... 08/15/03 4,000 4,005,040
-------------
</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 32,250
Uniroyal Technology Corp.
Warrants* ....................... 2,500 9,063
------------
41,313
------------
CLOTHING & APPAREL -- 0.0%
Hosiery Corp. of America, Inc.* ... 400 2,800
------------
ELECTRONIC COMPONENTS & EQUIPMENT --
0.0%
Electronic Retailing, Inc. 144A ... 875 17,500
------------
ENVIRONMENTAL SERVICES -- 0.0%
ICF Kaiser International, Inc.
Warrants* ....................... 1,200 300
------------
HEALTHCARE SERVICES -- 0.0%
Icon Health & Fitness Corp.
Warrants 144A* .................. 250 12,625
------------
<CAPTION>
SHARES VALUE
--------- -------------
<S> <C> <C>
METALS & MINING -- 0.0%
Bar Technologies, Inc. Warrants
144A*............................ 300 $ 18,000
------------
PRINTING & PUBLISHING -- 0.0%
Affiliated Newspaper Investments,
Inc.*............................ 1,000 110,500
------------
TELECOMMUNICATIONS -- 0.1%
Cellular Communications
International, Inc. Warrants* ... 1,100 22,000
HighwayMaster Communications, Inc.
Warrants* ....................... 1,050 1,050
Metronet Communications Corp.
Warrants*........................ 1,525 0
Nextel Communications, Inc.
Cl-A* ........................... 3,330 86,580
Pegasus Communications Corp.
144A............................. 1,128 22,983
Pegasus Communications Corp.
Warrants*........................ 1,500 49,500
Wireless One, Inc. Warrants*....... 1,500 0
------------
182,113
------------
TOTAL COMMON STOCK
(COST $85,722)....................... 410,351
------------
PREFERRED STOCK -- 4.3%
BROADCASTING -- 2.4%
American Radio Systems Corp.
$11.375 Cl-B [PIK] .............. 18,357 2,129,412
Capstar Broadcasting Partner 12.00%
[PIK] ........................... 6,500 749,125
Chancellor Broadcasting Co. 12.25%
[PIK]............................ 7,500 978,750
Chancellor Media Corp. 12.00%
[PIK] ........................... 19,376 2,218,552
Echostar Communications Corporation
12.125% 144A .................... 575 606,625
SFX Broadcasting, Inc. Cl-E 12.625%
[PIK] ........................... 16,106 1,864,301
Sinclair Broadcast Group, Inc.
Cl-A $11.625 .................... 18,500 2,025,750
------------
10,572,515
------------
FINANCIAL SERVICES -- 0.2%
California Federal Capital Corp.
9.125% Cl-A [PIK] ............... 30,000 793,140
------------
MACHINERY & EQUIPMENT -- 0.1%
Fairfield Manufacturing Co., Inc.
$11.25 .......................... 650 698,750
------------
PRINTING & PUBLISHING -- 0.4%
Primedia, Inc. $10.00 Cl-D ........ 10,750 1,131,438
Primedia, Inc. $9.20 144A ......... 5,000 502,500
------------
1,633,938
------------
REAL ESTATE -- 0.2%
Crown American Realty Trust $1.375
Cl-A ............................ 15,000 791,250
------------
TELECOMMUNICATIONS -- 0.7%
Nextel Communication, Inc. 13.00%
[PIK] ........................... 875 1,001,875
Pegasus Communications Corp. Cl-A
12.75% [PIK] .................... 1,904 2,065,840
------------
3,067,715
------------
</TABLE>
<PAGE>
FEDERATED HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------
<S> <C> <C>
UTILITIES -- 0.3%
El Paso Electric Co. 11.40%
[PIK] ........................... 11,523 $ 1,279,053
------------
TOTAL PREFERRED STOCK
(COST $16,711,678)................... 18,836,361
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 4.7%
Greenwich Capital
Markets, Inc., 6.10%
dated 12/31/97,
repurchase price
$20,383,905
(Collateralized by
U.S. Treasury Notes,
par value
$20,116,000, market
value $20,802,440 due
02/15/98)
(COST $20,377,000)... 01/02/98 $20,377 $ 20,377,000
------------
TOTAL INVESTMENTS -- 98.9%
(COST $410,027,539).......................... 429,823,445
OTHER ASSETS LESS LIABILITIES -- 1.1%.......... 4,596,237
------------
NET ASSETS -- 100.0%........................... $434,419,682
============
</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 13.1% 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> <C>
COMMON STOCK -- 46.8%
ADVERTISING -- 0.1%
Omnicom Group, Inc. ............... 3,800 $ 161,025
----------
AEROSPACE -- 0.8%
AlliedSignal, Inc. ................ 8,200 319,287
Boeing Co. ........................ 9,568 468,234
Lockheed Martin Corp. ............. 2,300 226,550
Northrop Grumman Corp. ............ 1,100 126,500
Primex Technologies, Inc. ......... 420 14,175
Raytheon Co. Cl-A.................. 536 26,415
Raytheon Co. Cl-B.................. 2,500 126,250
Rockwell International Corp. ...... 2,800 146,300
United Technologies Corp. ......... 3,600 262,125
----------
1,715,836
----------
AIRLINES -- 0.2%
Alaska Air Group, Inc.*............ 2,700 104,625
AMR Corp.*......................... 1,900 244,150
Delta Air Lines, Inc. ............. 800 95,200
----------
443,975
----------
AUTOMOBILE MANUFACTURERS -- 0.8%
Chrysler Corp. .................... 3,500 123,157
Ford Motor Co. .................... 13,600 662,150
General Motors Corp. .............. 8,400 509,250
Honda Motor Co. Ltd. [ADR]......... 4,800 354,600
----------
1,649,157
----------
AUTOMOTIVE PARTS -- 0.4%
Arvin Industries, Inc. ............ 1,300 43,306
Eaton Corp. ....................... 800 71,400
Echlin, Inc. ...................... 3,100 112,181
Federal-Mogul Corp. ............... 800 32,400
Genuine Parts Co. ................. 5,750 195,141
Goodyear Tire & Rubber Co. ........ 1,700 108,162
Mark IV Industries, Inc. .......... 1,600 35,000
Superior Industries International,
Inc. ............................ 700 18,769
TRW, Inc. ......................... 3,400 181,475
----------
797,834
----------
BEVERAGES -- 1.5%
Anheuser-Busch Companies, Inc. .... 5,400 237,600
Cadbury Schweppes PLC [ADR]........ 3,473 143,695
Coca-Cola Co. ..................... 25,500 1,698,937
Coca-Cola Enterprises, Inc. ....... 6,900 245,381
Diageo PLC [ADR]................... 4,800 181,800
PepsiCo, Inc. ..................... 17,300 630,369
----------
3,137,782
----------
BROADCASTING -- 0.2%
CBS Corp. ......................... 4,500 132,469
Chris-Craft Industries, Inc.*...... 1,339 70,046
Clear Channel Communications,
Inc.*............................ 2,200 174,762
TCA Cable TV, Inc. ................ 1,600 73,600
----------
450,877
----------
BUILDING MATERIALS -- 0.2%
Calmat Co. ........................ 1,700 47,387
Georgia Pacific Corp. ............. 1,500 34,031
Martin Marietta Materials Corp. ... 1,400 51,187
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C> <C>
Masco Corp. ....................... 3,600 $ 183,150
Modine Manufacturing Co. .......... 600 20,475
Vulcan Materials Co. .............. 600 61,275
----------
397,505
----------
BUSINESS SERVICES -- 0.2%
Cognizant Corp. ................... 3,500 155,969
Equifax, Inc. ..................... 2,500 88,594
Olsten Corp. ...................... 2,000 30,000
Robert Half International, Inc.*... 2,250 90,000
----------
364,563
----------
CHEMICALS -- 1.4%
AKZO Nobel NV [ADR]................ 1,000 86,875
Cabot Corp. ....................... 2,300 63,537
Crompton & Knowles Corp. .......... 3,800 100,700
Dexter Corp. ...................... 1,500 64,781
Dow Chemical Co. .................. 3,600 365,400
Dupont, (E.I.) de Nemours & Co. ... 12,600 756,787
FMC Corp.*......................... 1,600 107,700
Great Lakes Chemical Corp. ........ 2,500 112,187
Hanna, (M.A.) Co. ................. 2,100 53,025
IMC Global, Inc. .................. 2,000 65,500
Lubrizol Corp. .................... 2,200 81,125
Monsanto Co. ...................... 7,600 319,200
Morton International, Inc. ........ 4,500 154,687
Olin Corp. ........................ 2,100 98,437
Pall Corp. ........................ 5,400 111,712
PPG Industries, Inc. .............. 2,800 159,950
Rohm & Haas Co. ................... 1,600 153,200
Solutia, Inc. ..................... 1,160 30,957
Witco Corp. ....................... 3,100 126,519
----------
3,012,279
----------
CLOTHING & APPAREL -- 0.3%
Cintas Corp. ...................... 3,600 140,400
Jones Apparel Group, Inc.*......... 2,600 111,800
Nike, Inc. Cl-B.................... 2,800 109,900
Springs Industries, Inc. Cl-A...... 2,000 104,000
Unifi, Inc. ....................... 2,500 101,719
----------
567,819
----------
COMPUTER HARDWARE -- 1.3%
Bay Networks, Inc.*................ 2,800 71,575
Compaq Computer Corp. ............. 7,500 423,281
Dell Computer Corp.*............... 5,200 436,800
Digital Equipment Corp.*........... 2,400 88,800
Hewlett-Packard Co. ............... 10,800 675,000
International Business Machines
Corp. ........................... 9,900 1,035,169
Seagate Technology, Inc.*.......... 4,500 86,625
Stratus Computer, Inc.*............ 1,100 41,594
----------
2,858,844
----------
COMPUTER SERVICES & SOFTWARE -- 2.3%
Adobe Systems, Inc. ............... 600 24,750
America Online, Inc.* ............. 1,900 169,456
Automatic Data Processing, Inc. ... 4,000 245,500
BMC Software, Inc.* ............... 2,300 150,937
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Cadence Design Systems, Inc.* ..... 4,500 $ 110,250
Ceridian Corp.* ................... 2,600 119,112
Cisco Systems, Inc.* .............. 9,750 543,562
CompUSA, Inc.* .................... 2,400 74,400
Computer Associates International,
Inc. ............................ 6,562 346,966
Compuware Corp.* .................. 4,000 128,000
DST Systems, Inc.* ................ 900 38,419
First Data Corp. .................. 5,400 157,950
Informix Corp.* ................... 2,900 13,775
Microsoft Corp.* .................. 11,700 1,512,225
Network Associates, Inc.* ......... 1,300 68,737
Novell, Inc.* ..................... 9,500 71,250
Oracle Corp.* ..................... 10,950 244,322
Parametric Technology Corp.* ...... 2,500 118,437
Paychex, Inc. ..................... 3,600 182,250
Policy Management Systems
Corp.* .......................... 400 27,825
Quantum Corp.* .................... 2,900 58,181
Sterling Commerce, Inc.* .......... 2,200 84,562
Storage Technology Corp.* ......... 1,500 92,906
Structural Dynamics Research
Corp.* .......................... 1,300 29,250
Sun Microsystems, Inc.* ........... 4,900 195,387
----------
4,808,409
----------
CONGLOMERATES -- 0.9%
Hanson PLC [ADR] .................. 337 7,772
Minnesota Mining & Manufacturing
Co. ............................. 5,000 410,312
Philip Morris Companies, Inc. ..... 26,100 1,182,656
Tomkins PLC [ADR] ................. 6,000 114,750
Tyco International Ltd. ........... 4,000 180,250
----------
1,895,740
----------
CONSTRUCTION -- 0.0%
Granite Construction, Inc. ........ 1,100 25,300
Jacobs Engineering Group, Inc.* ... 1,700 43,137
----------
68,437
----------
CONSUMER PRODUCTS & SERVICES -- 1.6%
Cendant Corp. ..................... 12,169 418,309
Colgate-Palmolive Co. ............. 4,000 294,000
Corning, Inc. ..................... 3,900 144,787
Cross, (A.T.) Co. Cl-A ............ 1,400 14,175
Eastman Kodak Co. ................. 3,300 200,681
Fortune Brands, Inc. .............. 2,400 88,950
Gallaher Group PLC [ADR] .......... 2,400 51,300
Gillette Co. ...................... 6,400 642,800
Imperial Tobacco Group PLC
[ADR] ........................... 675 8,530
International Flavors & Fragrances,
Inc. ............................ 3,200 164,800
Lancaster Colony Corp. ............ 700 39,462
National Presto Industries,
Inc. ............................ 800 31,650
Ogden Corp. ....................... 1,000 28,187
Pittston Brink Group .............. 1,300 52,325
Procter & Gamble Co. .............. 14,600 1,165,262
Sotheby's Holdings, Inc. Cl-A ..... 1,000 18,500
Stewart Enterprises, Inc. ......... 900 41,962
----------
3,405,680
----------
SHARES VALUE
------- ------------
CONTAINERS & PACKAGING -- 0.2%
Bemis Co., Inc. ................... 2,700 $ 118,969
Owens-Illinois, Inc.* ............. 3,700 140,369
Sealed Air Corp.* ................. 2,400 148,200
----------
407,538
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 2.4%
AES Corp.* ........................ 2,600 121,225
Altera Corp.* ..................... 4,300 142,437
American Power Conversion
Corporation* .................... 2,700 63,787
Applied Materials, Inc.* .......... 5,200 156,650
Arrow Electronics, Inc.* .......... 2,500 81,094
Diebold, Inc. ..................... 2,700 136,687
Emerson Electric Co. .............. 6,000 338,625
General Electric Co. .............. 32,200 2,362,675
Hitachi Ltd. [ADR] ................ 2,400 166,050
Honeywell, Inc. ................... 2,000 137,000
Hubbell, Inc. Cl-B ................ 2,000 98,625
Linear Technology Corp. ........... 1,900 109,487
Maxim Integrated Products,
Inc.* ........................... 4,000 138,000
Molex, Inc. ....................... 4,375 140,547
Philips Electronics NV [ADR] ...... 3,600 217,800
Solectron Corp.* .................. 3,000 124,687
Sundstrand Corp. .................. 2,200 110,825
Symbol Technologies, Inc. ......... 1,050 39,637
Tandy Corp. ....................... 1,200 46,275
Teleflex, Inc. .................... 1,800 67,950
Teradyne, Inc.* ................... 1,800 57,600
Texas Instruments, Inc. ........... 3,000 135,000
Varian Associates, Inc. ........... 700 35,394
----------
5,028,057
----------
ENTERTAINMENT & LEISURE -- 0.8%
Brunswick Corp. ................... 2,000 60,625
Callaway Golf Co. ................. 1,900 54,269
Circus Circus Enterprises,
Inc.* ........................... 2,700 55,350
Disney, (Walt) Co. ................ 6,264 620,527
Harley-Davidson, Inc. ............. 3,800 104,025
Mattel, Inc. ...................... 2,800 104,300
Mirage Resorts, Inc.* ............. 3,800 86,450
President Casinos, Inc.
Warrants* ....................... 883 221
Time Warner, Inc. ................. 6,900 427,800
Viacom, Inc. Cl-B* ................ 5,000 207,187
----------
1,720,754
----------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries,
Inc. ............................ 1,840 68,080
Tetra Tech, Inc.* ................. 1,500 30,000
U.S. Filter Corp.* ................ 2,300 68,856
USA Waste Services, Inc.* ......... 5,000 196,250
Waste Management, Inc. ............ 5,323 146,382
----------
509,568
----------
EQUIPMENT SERVICES -- 0.0%
Agco, Corp. ....................... 2,100 61,425
----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FINANCIAL-BANK & TRUST -- 4.3%
Australia and New Zealand Banking
Group Ltd. [ADR] ................ 3,600 $ 118,350
Banc One Corp. .................... 7,300 396,481
Banco Bilbao Vizcaya [ADR] ........ 9,000 290,812
Banco Frances del Rio de la Plata
SA [ADR] ........................ 5,060 138,517
BankAmerica Corp. ................. 4,400 321,200
Chase Manhattan Corp. ............. 4,856 531,732
Citicorp .......................... 5,200 657,475
City National Corp. ............... 1,800 66,487
CoreStates Financial Corp. ........ 3,400 272,212
Crestar Financial Corp. ........... 2,600 148,200
Fifth Third Bancorp ............... 3,150 257,512
First Chicago NBD Corp. ........... 4,200 350,700
First of America Bank Corp. ....... 1,800 138,825
First Security Corp. .............. 4,725 197,859
First Tennessee National Corp. .... 2,700 180,225
First Union Corp. ................. 7,100 363,875
Firstar Corp. ..................... 2,400 101,850
Fleet Financial Group, Inc. ....... 3,600 269,775
Huntington Bancshares, Inc. ....... 3,600 129,600
Keycorp ........................... 4,000 283,250
Mellon Bank Corp. ................. 4,400 266,750
Mercantile Bancorporation, Inc. ... 2,100 129,150
Mercantile Bankshares Corp. ....... 2,700 105,637
Morgan, (J.P.) & Co., Inc. ........ 2,600 293,475
NationsBank Corp. ................. 8,600 522,987
Northern Trust Corp. .............. 3,600 251,100
Norwest Corp. ..................... 10,800 417,150
Pacific Century Financial Corp. ... 3,000 74,250
PNC Bank Corp. .................... 5,520 314,985
Regions Financial Corp. ........... 1,500 63,281
Silicon Valley Bancshares* ........ 700 39,375
Southtrust Corp. .................. 3,000 190,312
State Street Boston Corp. ......... 2,900 168,744
Summit Bancorp .................... 3,300 175,725
U.S. Bancorp ...................... 4,553 509,651
Union Planters Corp. .............. 1,200 81,525
Wells Fargo & Co. ................. 1,100 373,381
----------
9,192,415
----------
FINANCIAL SERVICES -- 1.7%
American Express Co. .............. 5,100 455,175
Bear Stearns Companies, Inc. ...... 2,415 114,712
Block, (H&R), Inc. ................ 2,500 112,031
Comdisco, Inc. .................... 2,850 95,297
Echelon International Corp.* ...... 846 18,982
Edwards, (A.G.), Inc. ............. 2,250 89,437
Fannie Mae ........................ 12,100 690,456
Finova Group, Inc. ................ 2,000 99,375
Franklin Resources, Inc. .......... 2,850 247,772
Freddie Mac ....................... 9,500 398,406
Green Tree Financial Corp. ........ 2,500 65,469
Grupo Financiero Bancomer [ADR]
144A* ........................... 1,400 18,025
Household International, Inc. ..... 1,600 204,100
SHARES VALUE
------- ------------
Merrill Lynch & Co., Inc. ......... 3,100 $ 226,106
Morgan Stanley, Dean Witter,
Discover & Co. .................. 5,485 324,301
Paine Webber Group, Inc. .......... 3,600 124,425
Schwab, (Charles) Corp. ........... 2,250 94,359
SunAmerica, Inc. .................. 4,200 179,550
Washington Mutual, Inc. ........... 2,500 159,531
----------
3,717,509
----------
FOOD -- 1.6%
American Stores Co. ............... 2,800 57,575
Archer-Daniels-Midland Co. ........ 7,782 168,772
Conagra, Inc. ..................... 6,800 223,125
CPC International, Inc. ........... 1,800 193,950
Dole Food Co. ..................... 1,700 77,775
Earthgrains Co. ................... 296 13,912
General Mills, Inc. ............... 2,500 179,062
Heinz, (H.J.) Co. ................. 5,250 266,766
IBP, Inc. ......................... 2,400 50,250
Kellogg Co. ....................... 5,800 287,825
Kroger Co.* ....................... 5,400 199,462
McCormick & Co., Inc. ............. 3,300 92,400
Ralston Purina Group .............. 2,100 195,169
Safeway, Inc.* .................... 2,280 144,210
Sara Lee Corp. .................... 6,200 349,137
Smucker, (J.M.) Co. ............... 1,600 37,800
Tyson Foods, Inc. ................. 5,300 108,650
Unilever PLC [ADR] ................ 8,400 524,475
Universal Corp. ................... 1,800 74,025
Universal Foods Corp. ............. 1,300 54,925
----------
3,299,265
----------
FURNITURE -- 0.0%
Leggett & Platt, Inc. ............. 2,400 100,500
----------
HEALTHCARE SERVICES -- 0.5%
Apria Healthcare Group, Inc.* ..... 2,000 26,875
Columbia-HCA Healthcare Corp. ..... 9,096 269,469
Concentra Managed Care, Inc.* ..... 1,600 54,000
Foundation Health Systems Cl-A* ... 1,800 40,275
Health Management Associates,
Inc.* ........................... 3,000 75,750
Healthsouth Corp.* ................ 6,200 172,050
Omnicare, Inc. .................... 2,800 86,800
Oxford Health Plans, Inc.* ........ 1,300 20,231
PacifiCare Health Systems, Inc.
Cl-A ............................ 400 20,100
PacifiCare Health Systems, Inc.
Cl-B* ........................... 1,000 52,375
United Healthcare Corp. ........... 3,400 168,937
Vencor, Inc.* ..................... 2,200 53,762
----------
1,040,624
----------
HOTELS & MOTELS -- 0.1%
ITT Corp.* ........................ 2,900 240,337
----------
INDUSTRIAL PRODUCTS -- 0.0%
Harsco Corp. ...................... 2,000 86,250
----------
INSURANCE -- 2.0%
Aetna, Inc. ....................... 2,502 176,547
AFLAC, Inc. ....................... 2,950 150,819
Allstate Corp. .................... 2,600 236,275
American Financial Group, Inc. .... 1,700 68,531
American General Corp. ............ 4,300 232,469
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
American International Group, Inc.. 7,550 $ 821,062
Chubb Corp. ....................... 2,600 196,625
CIGNA Corp. ....................... 1,300 224,981
General Re Corp. .................. 1,300 275,600
HSB Group, Inc. ................... 1,100 60,706
Loews Corp. ....................... 2,100 222,862
Progressive Corp. ................. 1,400 167,825
Provident Companies, Inc. ......... 2,800 108,150
Selective Insurance Group, Inc. ... 2,000 54,000
Torchmark Corp. ................... 4,600 193,487
Transatlantic Holdings, Inc. ...... 1,050 75,075
Travelers Group, Inc. ............. 12,670 682,596
UNUM Corp. ........................ 4,200 228,375
----------
4,175,985
----------
LUMBER & WOOD PRODUCTS -- 0.0%
Deltic Timber Corp. ............... 342 9,362
Rayonier, Inc. .................... 500 21,281
----------
30,643
----------
MACHINERY & EQUIPMENT -- 0.7%
Black & Decker Corp. .............. 2,700 105,469
Caterpillar, Inc. ................. 5,600 271,950
Danaher Corp. ..................... 1,800 113,625
Deere & Co. ....................... 4,000 233,250
Federal Signal Corp. .............. 1,700 36,762
Flowserve Corp. ................... 2,900 81,019
Gencorp, Inc. ..................... 2,800 70,000
Illinois Tool Works, Inc. ......... 4,200 252,525
Kennametal, Inc. .................. 500 25,906
Precision Castparts Corp. ......... 500 30,156
Sequa Corp. Cl-A* ................. 700 45,544
Tecumseh Products Co. Cl-A ........ 1,400 68,250
Thermo Electron Corp.* ............ 3,400 151,300
----------
1,485,756
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.0%
Baxter International, Inc. ........ 3,900 196,706
Beckman Instruments, Inc. ......... 500 20,000
Becton Dickinson & Co. ............ 3,400 170,000
Boston Scientific Corp.* .......... 3,400 155,975
Forest Laboratories, Inc.* ........ 1,000 49,312
Genzyme Corp.-Tissue Repair* ...... 63 433
Guidant Corp. ..................... 2,600 161,850
Hillenbrand Industries, Inc. ...... 1,500 76,781
Johnson & Johnson Co. ............. 12,600 830,025
Medtronic, Inc. ................... 5,000 261,562
Stryker Corp. ..................... 3,400 126,650
Sybron International Corp.* ....... 900 42,244
----------
2,091,538
----------
METALS & MINING -- 0.3%
Aluminum Company of America ....... 3,100 218,162
Barrick Gold Corp. ................ 8,000 149,000
Brush Wellman, Inc. ............... 1,300 31,850
Carpenter Technology Corp. ........ 2,200 105,737
Nucor Corp. ....................... 1,600 77,300
Placer Dome, Inc. ................. 4,700 59,631
----------
641,680
----------
SHARES VALUE
------- ------------
OFFICE EQUIPMENT -- 0.4%
Ikon Office Solutions, Inc. ....... 2,300 $ 64,687
Office Depot, Inc.* ............... 3,900 93,356
Pitney Bowes, Inc. ................ 1,900 170,881
Standard Register Co. ............. 1,700 59,075
Staples, Inc.* .................... 3,500 97,125
Viking Office Products, Inc.* ..... 2,100 45,806
Wallace Computer Service, Inc. .... 2,900 112,737
Xerox Corp. ....................... 3,900 287,869
----------
931,536
----------
OIL & GAS -- 4.7%
Amerada Hess Corp. ................ 4,700 257,912
Amoco Corp. ....................... 3,200 272,400
Anadarko Petroleum Corp. .......... 500 30,344
Apache Corp. ...................... 1,600 56,100
Atlantic Richfield Co. ............ 4,000 320,500
BJ Services Co.* .................. 4,100 294,944
British Petroleum Co. PLC [ADR] ... 3,000 239,063
Chevron Corp. ..................... 7,400 569,800
El Paso Natural Gas Co. ........... 1,400 93,100
Enron Corp. ....................... 4,400 182,875
Ensco International, Inc. ......... 4,200 140,700
Ente Nazionale Idrocarbure SPA
[ADR] ........................... 3,700 211,131
Exxon Corp. ....................... 25,400 1,554,163
Global Marine, Inc.* .............. 4,200 102,900
Halliburton Co. ................... 3,200 166,200
Helmerich & Payne, Inc. ........... 900 61,088
MCN Energy Group, Inc. ............ 2,400 96,900
Mobil Corp. ....................... 8,500 613,594
Murphy Oil Corp. .................. 1,800 97,538
Nabors Industries, Inc.* .......... 2,200 69,163
National Fuel Gas Co. ............. 1,600 77,900
Noble Affiliates, Inc. ............ 1,800 63,450
Noble Drilling Corp.* ............. 2,400 73,500
Occidental Petroleum Corp. ........ 6,600 193,463
Phillips Petroleum Co. ............ 4,000 194,500
Ranger Oil Ltd. ................... 5,400 37,125
Repsol SA [ADR] ................... 3,000 127,688
Royal Dutch Petroleum Co. ......... 26,200 1,419,713
Schlumberger Ltd. ................. 4,200 338,100
Shell Transport & Trading Co.
[ADR] ........................... 6,000 262,500
Societe Nationale Elf Aquitaine SA
[ADR] ........................... 2,000 117,250
Sonat, Inc. ....................... 3,300 150,975
Texaco, Inc. ...................... 6,200 337,125
Tidewater, Inc. ................... 2,700 148,838
Tosco Corp. ....................... 3,000 113,438
Total SA [ADR] .................... 3,000 166,500
Union Pacific Resources Group,
Inc. ............................ 5,509 133,593
Unocal Corp. ...................... 3,600 139,725
USX-Marathon Group ................ 5,400 182,250
Valero Energy Corp. ............... 2,900 91,169
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Washington Gas Light Co. .......... 2,200 $ 68,063
Weatherford Enterra, Inc.* ........ 1,300 56,875
----------
9,924,155
----------
PAPER & FOREST PRODUCTS -- 0.4%
Georgia Pacific Corp. ............. 1,500 91,125
Glatfelter, (P.H.) Co. ............ 2,600 48,425
International Paper Co. ........... 5,000 215,625
Kimberly-Clark Corp. .............. 7,000 345,188
Wausau Mosinee Paper Corp.* ....... 1,900 38,238
Weyerhaeuser Co. .................. 3,200 157,000
----------
895,601
----------
PERSONAL SERVICES -- 0.1%
Service Corp. International ....... 3,800 140,363
----------
PHARMACEUTICALS -- 3.4%
Abbott Laboratories ............... 8,000 524,500
American Home Products Corp. ...... 7,200 550,800
Amgen, Inc.* ...................... 3,800 205,675
Bristol-Meyers Squibb Co. ......... 10,200 965,175
Cardinal Health, Inc. ............. 900 67,613
Carter-Wallace, Inc. .............. 3,900 65,813
Centocor, Inc.* ................... 1,200 39,900
Genzyme Corp.* .................... 2,100 58,275
Glaxo Wellcome PLC [ADR] .......... 4,800 229,800
Ivax Corp.* ....................... 2,200 14,850
Lilly, (Eli) & Co. ................ 12,200 849,425
McKesson Corp. .................... 1,300 140,644
Merck & Co., Inc. ................. 11,300 1,200,625
Perrigo Co.* ...................... 3,600 48,150
Pfizer, Inc. ...................... 13,300 991,681
Pharmacia & Upjohn, Inc. .......... 6,400 234,400
Scherer, (R.P.) Corp.* ............ 1,000 61,000
Schering-Plough Corp. ............. 7,600 472,150
Warner-Lambert Co. ................ 3,300 409,200
Watson Pharmaceuticals, Inc.* ..... 3,000 97,313
----------
7,226,989
----------
PRINTING & PUBLISHING -- 0.3%
Banta Corp. ....................... 2,900 78,300
Belo, (A.H.) Corp. Cl-A ........... 1,300 72,963
Dun & Bradstreet Corp. ............ 1,500 46,406
Gannett Co., Inc. ................. 5,200 321,425
McGraw-Hill Co., Inc. ............. 2,900 214,600
----------
733,694
----------
RAILROADS -- 0.3%
Burlington Northern Santa Fe
Corp. ........................... 1,300 120,819
CSX Corp. ......................... 2,300 124,200
Kansas City Southern Industries,
Inc. ............................ 5,400 171,450
Norfolk Southern Corp. ............ 6,000 184,875
Union Pacific Corp. ............... 1,900 118,631
----------
719,975
----------
RESTAURANTS -- 0.3%
Brinker International, Inc.* ...... 7,300 116,800
Cracker Barrel Old Country Store,
Inc. ............................ 2,700 90,113
Darden Restaurants, Inc. .......... 6,500 81,250
McDonald's Corp. .................. 4,800 229,200
Outback Steakhouse, Inc.* ......... 1,900 54,625
Tricon Global Restaurants, Inc. ... 1,480 43,013
----------
615,001
----------
SHARES VALUE
------- ------------
RETAIL & MERCHANDISING -- 2.0%
Albertson's, Inc. ................. 4,200 $ 198,975
Bed, Bath & Beyond, Inc.* ......... 2,200 84,700
Circuit City Stores, Inc. ......... 900 32,006
Costco Companies, Inc.* ........... 3,900 174,038
CVS Corp. ......................... 2,000 128,125
Dayton-Hudson Corp. ............... 3,700 249,750
Dollar General Corp. .............. 2,250 81,563
Family Dollar Stores, Inc. ........ 1,300 38,106
Fastenal Co. ...................... 1,400 53,550
Federated Department Stores,
Inc.* ........................... 3,500 150,719
Gap, Inc. ......................... 4,350 154,153
Home Depot, Inc. .................. 9,000 529,875
Kohls Corp.* ...................... 2,800 190,750
Lands' End, Inc.* ................. 1,800 63,113
May Department Stores Co. ......... 3,900 205,481
Meyer, (Fred), Inc.* .............. 3,000 109,125
Micro Warehouse, Inc.* ............ 1,500 20,907
Payless Shoesource, Inc.* ......... 672 45,108
Penney, (J.C.) Co., Inc. .......... 3,500 211,094
Rite Aid Corp. .................... 1,300 76,294
Taylor, (Ann) Stores Corp.* ....... 1,600 21,400
Tiffany & Co. ..................... 1,200 43,275
TJX Companies, Inc. ............... 2,800 96,250
Toys 'R' Us, Inc.* ................ 4,620 145,241
Wal-Mart Stores, Inc. ............. 24,800 978,050
Walgreen Co. ...................... 7,700 241,588
----------
4,323,236
----------
SEMICONDUCTORS -- 0.9%
Analog Devices, Inc.* ............. 7,533 208,570
Atmel Corp.* ...................... 2,000 37,125
Intel Corp. ....................... 15,400 1,081,850
Motorola, Inc. .................... 6,100 348,081
Xilinx, Inc.* ..................... 4,100 143,756
----------
1,819,382
----------
TELECOMMUNICATIONS -- 4.4%
360 Communications Co.* ........... 2,300 46,431
ADC Telecommunications, Inc.* ..... 3,400 141,950
Airtouch Communications, Inc.* .... 6,000 249,375
Aliant Communications, Inc. ....... 1,800 56,475
Ameritech Corp. ................... 6,000 483,000
AT&T Corp. ........................ 16,500 1,010,625
Bell Atlantic Corp. ............... 8,157 742,287
BellSouth Corp. ................... 10,100 568,756
British Telecommunications PLC
[ADR] ........................... 3,200 257,000
Century Telephone Enterprises,
Inc. ............................ 2,800 139,475
Cia de Telecomunicaciones de Chile
SA [ADR] ........................ 1,700 50,788
Comcast Corp. Cl-A ................ 7,000 220,938
Ericsson, (L.M.) Telephone Co.
[ADR] ........................... 4,800 179,100
GTE Corp. ......................... 10,000 522,500
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Hong Kong Telecommunications Ltd.
[ADR] ........................... 9,245 $ 190,678
Lucent Technologies, Inc. ......... 7,276 581,171
MCI Communications Corp. .......... 7,700 329,656
Metronet Communications Corp.
Warrants* ....................... 100 0
Nextel Communications, Inc.
Cl-A* ........................... 3,600 93,600
Nokia Corp. Cl-A [ADR] ............ 1,800 126,000
Northern Telecom Ltd. ............. 3,400 302,600
Primus Telecommunications Group,
Inc. Warrants* .................. 150 1,500
SBC Communications, Inc. .......... 9,357 685,400
Southern New England
Telecommunications Corp. ........ 2,400 120,750
Sprint Corp. ...................... 5,400 316,575
Telebras SA [ADR] ................. 3,300 384,244
Telefonica de Espana [ADR] ........ 1,600 145,700
Telefonos de Mexico SA Cl-L
[ADR] ........................... 1,800 100,913
Telephone & Data Systems, Inc. .... 2,000 93,125
Tellabs, Inc.* .................... 2,800 148,050
U.S. West Communications Group .... 6,200 279,775
U.S. West, Inc. ................... 8,000 231,000
Vodafone Group PLC [ADR] .......... 3,200 232,000
Worldcom, Inc.* ................... 10,900 329,725
----------
9,361,162
----------
TRANSPORTATION -- 0.0%
Alexander & Baldwin, Inc. ......... 1,800 49,163
Consolidated Freightways, Inc. .... 900 34,538
----------
83,701
----------
UTILITIES -- 1.6%
Allegheny Energy, Inc. ............ 2,700 87,750
American Water Works Co., Inc. .... 2,100 57,356
Calenergy, Inc.* .................. 2,400 69,000
CMS Energy Corp. .................. 2,800 123,375
Duke Energy Corporation ........... 4,500 249,188
Edison International, Inc. ........ 7,800 212,063
Empresa Nacional de Electridad SA
[ADR] ........................... 2,000 35,375
Endesa SA [ADR] ................... 7,600 138,225
Energy Group PLC [ADR] ............ 337 15,039
Entergy Corp. ..................... 6,200 185,613
Florida Progress Corp. ............ 2,200 86,350
FPL Group, Inc. ................... 3,700 218,994
Idaho Power Co. ................... 2,600 97,825
Illinova Corp. .................... 2,700 72,731
IPALCO Enterprises, Inc. .......... 2,400 100,650
MidAmerican Energy Holdings Co. ... 3,800 83,600
New Century Energies, Inc. ........ 2,395 114,810
New York State Electric & Gas
Corp. ........................... 3,400 120,700
Niagara Mohawk Power Corp. ........ 12,700 133,350
NIPSCO Industries, Inc. ........... 2,300 113,706
PG&E Corp. ........................ 8,200 249,588
Potomac Electric Power Co. ........ 3,200 82,600
Public Service Co. of New
Mexico .......................... 1,000 23,688
SHARES VALUE
------- ------------
SCANA Corp. ....................... 2,700 $ 80,831
Southern Co. ...................... 10,500 271,688
Teco Energy, Inc. ................. 3,100 87,188
Texas Utilities Co. ............... 3,700 153,781
Unicom Corp. ...................... 4,200 129,150
----------
3,394,214
----------
TOTAL COMMON STOCK
(COST $71,122,073)................... 99,734,615
----------
FOREIGN STOCK -- 9.0%
ADVERTISING -- 0.1%
Asahi Tsushin -- (JPY) ............ 9,000 130,133
----------
AEROSPACE -- 0.0%
Mitsubishi Heavy Industries Ltd. --
(JPY) ........................... 22,000 92,047
----------
AIRLINES -- 0.1%
KLM Royal Dutch Airlines NV --
(NLG) ........................... 3,000 110,989
Singapore Airlines
Ltd. -- (SGD) ................... 7,000 45,699
----------
156,688
----------
AUTOMOBILE MANUFACTURERS -- 0.1%
MAN AG -- (DEM) ................... 1,000 288,926
----------
AUTOMOTIVE PARTS -- 0.1%
Bridgestone Corp. -- (JPY) ........ 15,000 326,485
----------
BEVERAGES -- 0.1%
Lion Nathan Ltd. -- (NZD) ......... 50,000 112,066
Louis Vuitton Moet
Hennesy -- (FRF) ................ 660 109,600
----------
221,666
----------
BUILDING MATERIALS -- 0.2%
Blue Circle Industries
PLC -- (GBP) .................... 26,513 148,979
Holderbank Financiere Glarus AG --
(CHF) ........................... 260 212,485
Malayan Cement BHD -- (MYR) ....... 51,250 34,892
----------
396,356
----------
CHEMICALS -- 0.3%
AKZO Nobel NV -- (NLG) ............ 400 68,981
BASF AG -- (DEM) .................. 6,700 239,227
Bayer AG -- (DEM) ................. 5,000 185,619
L'Air Liquide -- (FRF) ............ 1,260 197,298
Sumitomo Chemical Co. -- (JPY) .... 26,000 59,990
----------
751,115
----------
CLOTHING & APPAREL -- 0.3%
Benetton Group SPA -- (ITL) ....... 4,160 68,118
Christian Dior SA -- (FRF) ........ 1,200 123,075
Kuraray Co. Ltd. -- (JPY) ......... 21,000 174,433
Yue Yuen Industrial Holdings --
(HKD) ........................... 95,000 201,077
----------
566,703
----------
CONGLOMERATES -- 0.3%
Cycle & Carriage Ltd. -- (SGD) .... 15,000 61,872
GKN PLC -- (GBP) .................. 6,000 123,110
Hutchison Whampoa Ltd. -- (HKD) ... 56,000 351,253
Sime Darby BHD -- (MYR) ........... 50,000 48,043
Tomkins PLC -- (GBP) .............. 12,000 57,458
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
United Engineers Ltd. -- (MYR) .... 15,000 $ 12,486
Valmet Corp. -- (FIM) ............. 4,000 55,238
----------
709,460
----------
CONSTRUCTION -- 0.2%
Compagnie Francaise d'Etudes et de
Construction Technip -- (FRF) ... 2,300 242,775
Matsushita Electric Works
Ltd. -- (JPY) ................... 15,000 130,363
----------
373,138
----------
CONSUMER PRODUCTS & SERVICES -- 0.3%
JUSCO Co. -- (JPY) ................ 11,000 155,667
Kao Corp. -- (JPY) ................ 26,000 375,939
Orkla ASA Cl-A -- (NOK) ........... 1,900 163,656
----------
695,262
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.5%
Johnson Electric
Holdings -- (HKD) ............... 93,600 269,387
Mitsubishi Electric
Corp. -- (JPY) .................. 27,000 69,358
Omron Corp. -- (JPY) .............. 24,000 376,554
Sharp Corp. -- (JPY) .............. 9,000 62,159
Siemans AG -- (DEM) ............... 2,000 120,687
Sony Corp. -- (JPY) ............... 3,000 267,649
----------
1,165,794
----------
FINANCIAL-BANK & TRUST -- 2.1%
Abbey National PLC -- (GBP) ....... 28,000 502,641
ABN Amro Holding NV -- (NLG) ...... 8,000 155,878
Banca Commerciale Italia NA --
(ITL) ........................... 30,000 104,355
Bank of Scotland -- (GBP) ......... 20,208 186,203
Bankgesellschaft Berlin
AG -- (DEM) ..................... 5,450 119,728
Barclays PLC -- (GBP) ............. 15,191 404,427
DCB Holdings BHD -- (MYR) ......... 33,000 15,939
Deutsche Bank AG -- (DEM) ......... 2,800 195,902
Developmental Bank of Singapore
Ltd. Cl-F -- (SGD) .............. 4,000 34,185
Dresdner Bank AG -- (DEM) ......... 3,400 154,680
HSBC Holdings PLC -- (GBP) ........ 18,000 462,032
ING Groep NV -- (NLG) ............. 10,153 427,710
Kredietbank NV -- (BEF) ........... 400 167,882
Overseas-Chinese Banking Corp.
Ltd. -- (SGD) ................... 6,000 34,897
RHB Sakura Merchant Bankers
Berhad -- (MYR) ................. 1,650 555
Societe Generale -- (BEF) ......... 1,000 91,498
Svenska Handelsbanken
Cl-A -- (SEK) ................... 7,300 252,553
Swiss Bank Corp. -- (CHF) ......... 1,840 572,733
Toronto Dominion Bank -- (CAD) .... 4,100 154,142
Union Bank of
Switzerland -- (CHF) ............ 300 434,404
Westpac Banking Corp.
Ltd. -- (AUD) ................... 10,000 63,958
----------
4,536,302
----------
FINANCIAL SERVICES -- 0.2%
Holding Di Partecipazioni
Industriali SPA -- (ITL)* ....... 45,000 26,547
Mediobanca -- (ITL) ............... 7,000 54,994
Societe Generale -- (FRF) ......... 1,972 268,796
----------
350,337
----------
SHARES VALUE
------- ------------
FOOD -- 0.6%
Cadbury Schweppes PLC -- (GBP) .... 1,400 $ 14,132
CSM NV -- (NLG) ................... 2,400 106,549
Danisco AS -- (DKK) ............... 4,000 221,988
Eridania Beghin-Say SA -- (FRF) ... 1,400 218,988
Huhtamaki Group -- (FIM) .......... 1,500 61,978
Nestle SA -- (CHF) ................ 380 570,306
----------
1,193,941
----------
INSURANCE -- 0.3%
AXA SA -- (FRF) ................... 3,400 263,201
CKAG Colonia Konzern AG --
(DEM) ........................... 1,500 143,490
Sumitomo Marine & Fire Insurance
Co. -- (JPY) .................... 30,000 159,205
----------
565,896
----------
MACHINERY & EQUIPMENT -- 0.2%
ABB AG -- (CHF) ................... 160 201,296
SIG Holding AG -- (CHF) ........... 70 191,971
----------
393,267
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.4%
Novartis AG -- (CHF) .............. 180 292,482
Smith and Nephew PLC -- (GBP) ..... 38,000 112,859
Terumo Corp. -- (JPY) ............. 26,000 383,938
----------
789,279
----------
METALS & MINING -- 0.1%
Anglo American Platinum Corp.
Ltd. -- (ZAR) ................... 12,000 160,284
Lonrho PLC -- (GBP) ............... 57,990 88,738
Rio Tinto Ltd. -- (AUD) ........... 6,000 69,990
----------
319,012
----------
OFFICE EQUIPMENT -- 0.2%
Canon, Inc. -- (JPY) .............. 9,000 210,427
Ricoh Co. Ltd. -- (JPY) ........... 13,000 161,974
----------
372,401
----------
OIL & GAS -- 0.1%
Santos Ltd. -- (AUD) .............. 32,000 131,773
Societe Nationale Elf Aquitaine
SA -- (FRF) ..................... 1,100 127,995
----------
259,768
----------
PAPER & FOREST PRODUCTS -- 0.2%
Bobst SA -- (CHF) ................. 160 235,851
Kimberly-Clark de Mexico SA
Cl-A -- (MXP) ................... 10,000 47,880
Svenska Cellulosa AB
Cl-B -- (SEK) ................... 3,500 78,740
----------
362,471
----------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
PHARMACEUTICALS -- 0.5%
Altana AG -- (DEM) ................ 2,100 $ 138,634
Astra AB Cl-B -- (SEK) ............ 14,666 246,764
Gehe AG -- (DEM) .................. 2,150 108,813
Novartis AG -- (CHF) .............. 160 260,534
Takeda Chemical
Industries -- (JPY) ............. 13,000 371,940
----------
1,126,685
----------
PRINTING & PUBLISHING -- 0.3%
Dai Nippon Printing Co.
Ltd. -- (JPY) ................... 12,000 226,117
Elsevier NV -- (NLG) .............. 12,000 194,157
Pearson PLC -- (GBP) .............. 11,600 150,977
----------
571,251
----------
REAL ESTATE -- 0.1%
Cheung Kong Holdings
Ltd. -- (HKD) ................... 38,000 248,894
DBS Land Ltd. -- (SGD) ............ 25,000 38,280
----------
287,174
----------
RETAIL & MERCHANDISING -- 0.3%
Carrefour Supermarche
SA -- (FRF) ..................... 150 78,293
Marui Co. Ltd. -- (JPY) ........... 7,000 109,290
Pinault-Printemps Redoute SA --
(FRF) ........................... 250 133,439
Tesco PLC -- (GBP) ................ 33,943 276,459
----------
597,481
----------
TELECOMMUNICATIONS -- 0.5%
Nippon Telegraph & Telephone
Corp. -- (JPY) .................. 280 241,192
Telecom Corp. of New Zealand
Ltd. -- (NZD) ................... 22,000 106,666
Telecom Italia Mobile
SPA -- (ITL) .................... 75,000 346,367
Telecom Italia SPA -- (ITL) ....... 41,666 266,305
Telekom Malaysia BHD -- (MYR) ..... 24,000 70,908
----------
1,031,438
----------
TRANSPORTATION -- 0.1%
BAA PLC -- (GBP) .................. 17,600 144,217
----------
UTILITIES -- 0.2%
Electrabel SA -- (BEF) ............ 420 97,150
Hong Kong Electric Holdings Ltd. --
(HKD) ........................... 30,000 114,025
Veba AG -- (DEM) .................. 4,000 272,519
----------
483,694
----------
TOTAL FOREIGN STOCK
(COST $17,569,785).......... 19,258,387
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 14.1%
AEROSPACE -- 0.4%
BE Aerospace, Inc. Sr.
Sub. Notes
9.875%.................. 02/01/06 $ 150 158,625
Boeing Co. Notes
6.35%................... 06/15/03 120 121,350
Dyncorp, Inc. Sr. Sub.
Notes
9.50%................... 03/01/07 300 305,250
Raytheon Co. Notes
6.50%................... 07/15/05 350 353,063
-------------
938,288
-------------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
AIRLINES -- 0.0%
Southwest Airlines Co.
Debs.
9.25%................... 02/15/98 $ 25 $ 25,082
-------------
AUTOMOTIVE PARTS -- 0.3%
Chief Auto Parts, Inc. Sr.
Notes
10.50%.................. 05/15/05 75 75,188
Safelite Glass Corp. Sr.
Sub. Notes 144A
9.875%.................. 12/15/06 250 274,375
Venture Holdings Trust Sr.
Notes Cl-B
9.50%................... 07/01/05 250 252,500
-------------
602,063
-------------
BEVERAGES -- 0.1%
Anheuser-Busch Companies,
Inc. Debs.
7.00%................... 12/01/25 150 152,250
-------------
152,250
-------------
BROADCASTING -- 0.2%
TV Azteca SA de CV Sr.
Notes Cl-B
10.50%.................. 02/15/07 250 260,625
Young Broadcasting Corp.
Sr. Sub. Notes
10.125%................. 02/15/05 150 157,500
-------------
418,125
-------------
BUILDING MATERIALS -- 0.2%
American Standard Debs.
9.25%................... 12/01/16 20 20,850
Falcon Building Products
Sr. Sub. Notes
9.50%................... 06/15/07 250 258,125
Koppers Industry, Inc. Sr.
Sub. Notes
9.875%.................. 12/01/07 75 77,250
-------------
356,225
-------------
BUSINESS SERVICES -- 0.2%
Iron Mountain, Inc. Sr.
Sub. Notes
8.75%................... 09/30/09 125 128,438
Muzak L.P. Notes
10.00%.................. 10/01/03 225 235,125
-------------
363,563
-------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
CHEMICALS -- 0.2%
Scotts Co. Sr. Sub. Notes
9.875%.................. 08/01/04 $ 100 $ 107,750
Sovereign Specialty
Chemicals Sr. Sub. Notes
144A
9.50%................... 08/01/07 250 257,500
-------------
365,250
-------------
CLOTHING & APPAREL -- 0.2%
Delta Mills, Inc. Sr.
Notes 144A
9.625%.................. 09/01/07 125 127,500
Dyersburg Corp. Notes Cl-B
9.75%................... 09/01/07 125 131,250
Synthetic Industries, Inc.
Sr. Sub. Notes
9.25%................... 02/15/07 250 265,000
-------------
523,750
-------------
COMPUTER SERVICES & SOFTWARE -- 0.1%
DecisionOne Corp. Sr. Sub.
Notes
9.75%................... 08/01/07 175 182,438
DecisionOne Holdings Corp.
Units [STEP]
10.549%................. 08/01/08 125 81,250
-------------
263,688
-------------
CONSTRUCTION -- 0.1%
Newport News Shipbuilding,
Inc. Sr. Notes
8.625%.................. 12/01/06 150 158,250
-------------
CONSUMER PRODUCTS & SERVICES -- 0.4%
American Safety Razor Co.
Sr. Notes
9.875%.................. 08/01/05 150 160,313
Doane Products Co. Sr.
Notes
10.625%................. 03/01/06 150 160,313
Herff Jones, Inc. Sr. Sub.
Notes
11.00%.................. 08/15/05 175 189,875
PM Holdings Corp. Sub.
Notes [STEP]
10.728%................. 09/01/05 100 77,875
Protection One, Inc. Sr.
Disc. Notes [STEP]
10.811%................. 06/30/05 200 215,500
-------------
803,876
-------------
CONTAINERS & PACKAGING -- 0.4%
Amtrol, Inc. Sr. Sub.
Notes
10.625%................. 12/31/06 150 154,875
Container Corp. of America
Sr. Notes
9.75%................... 04/01/03 150 162,000
11.25%.................. 05/01/04 100 109,250
PAR
MATURITY (000) VALUE
--------- -------- -------------
Plastic Containers Sr.
Notes Cl-B
10.00%.................. 12/15/06 $ 250 $ 263,750
U.S. Can Corp. Sr. Sub.
Notes
10.125%................. 10/15/06 150 158,625
-------------
848,500
-------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.6%
Ametek, Inc. Sr. Notes
9.75%................... 03/15/04 100 106,500
Celestica International,
Inc. Sr. Sub. Notes
10.50%.................. 12/31/06 125 135,625
Details, Inc. Sr. Sub.
Notes 144A
10.00%.................. 11/15/05 150 154,125
DII Group, Inc. Sr. Sub.
Notes 144A
8.50%................... 09/15/07 250 246,250
HCC Industries, Inc. Sr.
Sub. Notes
10.75%.................. 05/15/07 250 260,000
RCN Corp. Sr. Notes 144A
10.00%.................. 10/15/07 75 77,438
Stellex Industries, Inc.
Sr. Sub. Notes 144A
9.50%................... 11/01/07 125 125,625
Viasystems, Inc. Sr. Sub.
Notes
9.75%................... 06/01/07 250 258,438
-------------
1,364,001
-------------
ENTERTAINMENT & LEISURE -- 0.9%
AMC Entertainment, Inc.
Sr. Sub. Notes
9.50%................... 03/15/09 250 259,063
Grand Casinos, Inc. First
Mtge.
10.125%................. 12/01/03 150 162,000
Rio Hotel & Casino, Inc.
Notes
9.50%................... 04/15/07 100 106,250
Rio Hotel & Casino, Inc.
Sr. Sub. Notes
10.625%................. 07/15/05 150 162,375
Six Flags Theme Parks Sr.
Sub. Notes Cl-A [STEP]
9.87%................... 06/15/05 150 156,750
The Majestic Star Casino
LLC Sr. Notes
12.75%.................. 05/15/03 250 269,375
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Time Warner Entertainment
Debs.
7.25%................... 09/01/08 $ 500 $ 524,375
United Artists Theatre
Pass Through Trust
9.30%................... 07/01/15 244 249,315
-------------
1,889,503
-------------
ENVIRONMENTAL SERVICES -- 0.1%
Allied Waste Industries
Sr. Disc. Notes [STEP]
144A
9.57%................... 06/01/07 75 52,969
Allied Waste North America
Notes
10.25%.................. 12/01/06 200 219,000
-------------
271,969
-------------
EQUIPMENT SERVICES -- 0.1%
Coinmach Corp. Sr. Notes
11.75%.................. 11/15/05 250 276,875
-------------
FINANCIAL-BANK & TRUST -- 1.1%
Airplanes Pass Through
Trust
10.875%................. 03/15/19 250 281,256
Aristar, Inc. Sr. Notes
8.875%.................. 08/15/98 200 203,086
7.875%.................. 02/15/99 200 204,000
Banesto Delaware Sub.
Notes
8.25%................... 07/28/02 50 53,625
Bank of Nova Scotia Sub.
Notes
6.25%................... 09/15/08 50 49,438
BankAmerica Corp. Sub.
Notes
6.85%................... 03/01/03 150 153,750
BankUnited Capital Trust
Cl-B
10.25%.................. 12/31/26 250 258,125
CoreStates Home Equity
Trust Cl-A
6.65%................... 05/15/09 60 60,933
First Federal Financial
Notes
11.75%.................. 10/01/04 125 138,438
MBNA Corp.
6.15%................... 10/01/03 450 442,688
NationsBank Texas Sr.
Notes
6.75%................... 08/15/00 150 152,438
Provident Bank Corp. Sub.
Notes
7.125%.................. 03/15/03 175 180,031
U.S. Bancorp Notes
6.72%................... 06/01/98 100 100,307
-------------
2,278,115
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
FINANCIAL SERVICES -- 2.2%
Ahmanson, (H.F.) & Co. Sr.
Notes
9.875%.................. 11/15/99 $ 100 $ 106,125
American Express Master
Trust
7.60%................... 08/15/02 500 523,412
Associates Corp. of North
America Sr. Notes
7.70%................... 03/15/00 50 51,625
Bay View Capital
Corporation Sub. Notes
9.125%.................. 08/15/07 150 154,500
Chrysler Financial Corp.
Notes
8.46%................... 01/19/00 200 209,250
Ciesco L.P. Notes
7.375%.................. 04/19/00 250 255,938
Conseco, Inc. Sr. Notes
8.125%.................. 02/15/03 500 530,000
Enhance Financial Services
Group Debs.
6.75%................... 03/01/03 300 306,375
Household Finance Corp.
Sr. Notes
6.96%................... 04/27/98 300 301,185
Intertek Finance PLC Sr.
Sub. Notes Cl-B
10.25%.................. 11/01/06 250 261,875
ITT Publimedia Sr. Sub.
Notes 144A
9.375%.................. 09/15/07 250 263,750
Loomis Fargo & Co. Notes
10.00%.................. 01/15/04 150 151,125
Ocwen Capital Trust I
10.875%................. 08/01/27 200 216,750
Ocwen Financial Corp.
Notes
11.875%................. 10/01/03 150 169,125
Salomon Smith Barney
Holdings Notes
6.625%.................. 06/01/00 200 202,500
Salomon, Inc Sr. Notes
6.75%................... 02/15/03 500 506,875
Simon Debartolo Group L.P.
Notes
7.00%................... 07/15/09 525 537,469
-------------
4,747,879
-------------
FOOD -- 0.5%
Ameriserv Food
Distributor, Inc. Sr.
Sub. Notes
10.125%................. 07/15/07 250 262,500
Archibald Candy Corp.
Notes
10.25%.................. 07/01/04 250 261,875
Keebler Corp. Sr. Sub.
Notes
10.75%.................. 07/01/06 250 281,875
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Mrs. Fields Original
Cookies Notes 144A
10.125%................. 12/01/04 $ 100 $ 100,750
Windy Hill Pet Food Co.
Sr. Sub. Notes
9.75%................... 05/15/07 250 260,625
-------------
1,167,625
-------------
HEALTHCARE SERVICES -- 0.2%
Quest Diagnostic, Inc. Sr.
Sub. Notes
10.75%.................. 12/15/06 125 137,188
Vencor, Inc. Sr. Sub.
Notes
8.625%.................. 07/15/07 250 250,625
-------------
387,813
-------------
HOTELS & MOTELS -- 0.2%
Courtyard by Marriott Sr.
Notes
10.75%.................. 02/01/08 150 165,000
Host Marriott Travel Plaza
Sr. Notes Cl-B
9.50%................... 05/15/05 150 159,750
-------------
324,750
-------------
INDUSTRIAL PRODUCTS -- 0.1%
International Wire Group,
Inc. Cl-B
11.75%.................. 06/01/05 250 273,750
-------------
INSURANCE -- 0.3%
New York Life Insurance
Co. Notes 144A
7.50%................... 12/15/23 420 437,325
Superior National Capital
Trust I 144A
10.75%.................. 12/01/17 125 128,125
-------------
565,450
-------------
MACHINERY & EQUIPMENT -- 0.1%
Hawk Corp. Sr. Notes Cl-B
10.25%.................. 12/01/03 150 160,500
-------------
METALS & MINING -- 0.3%
AEI Holding Co. Sr. Notes
144A
10.00%.................. 11/15/07 225 231,188
Freeport-McMoran Resource
Partners L.P. Sr. Notes
7.00%................... 02/15/08 150 150,563
Haynes International, Inc.
Sr. Notes
11.625%................. 09/01/04 150 173,063
-------------
554,814
-------------
OFFICE EQUIPMENT -- 0.1%
Axiohm Transaction
Solutions, Inc. Sr. Sub.
Notes 144A
9.75%................... 10/01/07 125 127,188
-------------
PAR
MATURITY (000) VALUE
--------- -------- -------------
OIL & GAS -- 0.4%
Ferrellgas Partners, L.P.
Financial Corp. Sr.
Notes
10.00%.................. 08/01/01 $ 100 $ 105,750
Flores & Rucks, Inc. Sr.
Sub. Notes
9.75%................... 10/01/06 50 55,000
Kelley Oil & Gas Corp. Sr.
Sub. Notes
10.375%................. 10/15/06 150 160,125
Pride Petroleum Services,
Inc. Sr. Notes
9.375%.................. 05/01/07 250 269,375
Tenneco, Inc. Notes
8.20%................... 11/15/99 55 56,994
8.075%.................. 10/01/02 150 159,938
-------------
807,182
-------------
PAPER & FOREST PRODUCTS -- 0.1%
Maxxam Group Holdings,
Inc. Sr. Notes
11.25%.................. 08/01/03 50 53,125
12.00%.................. 08/01/03 150 162,938
-------------
216,063
-------------
PHARMACEUTICALS -- 0.0%
Owens & Minor, Inc. Sr.
Sub. Notes
10.875%................. 06/01/06 75 82,875
-------------
PRINTING & PUBLISHING -- 0.1%
Sun Media Corp. Sr. Sub
Notes
9.50%................... 05/15/07 250 268,750
-------------
REAL ESTATE -- 0.3%
HMC Acquisition Properties
Sr. Notes Cl-B
9.00%................... 12/15/07 150 156,750
HMH Properties, Inc. Sr.
Notes Cl-B
8.875%.................. 07/15/07 250 263,750
Saul, (B.F.) Sr. Notes
[REIT]
11.625%................. 04/01/02 150 160,500
-------------
581,000
-------------
RESTAURANTS -- 0.0%
McDonald's Corp. Notes
6.625%.................. 09/01/05 100 102,250
-------------
102,250
-------------
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
RETAIL & MERCHANDISING -- 0.2%
Specialty Retailers, Inc.
Notes Cl-B
8.50%................... 07/15/05 $ 250 $ 255,000
Wal-Mart Stores, Inc.
Debs.
7.25%................... 06/01/13 85 91,906
-------------
346,906
-------------
SEMICONDUCTORS -- 0.1%
Fairchild Semiconductor
Corp. Sr. Sub. Notes
10.125%................. 03/15/07 250 264,375
-------------
TELECOMMUNICATIONS -- 1.8%
Comcast Cable
Communication Notes
8.125%.................. 05/01/04 400 431,500
Communication & Power
Industries Sr. Sub.
Notes
12.00%.................. 08/01/05 250 278,750
Frontiervision Sr. Sub.
Notes
11.00%.................. 10/15/06 150 167,250
Fundy Cable Ltd. Sr. Notes
11.00%.................. 11/15/05 250 270,000
L-3 Communications Corp.
Sr. Sub. Notes Cl-B
10.375%................. 05/01/07 175 189,875
Lucent Technologies, Inc.
Notes
6.90%................... 07/15/01 500 513,125
Marcus Cable Operating Co.
Sr. Disc. Notes [STEP]
10.86%.................. 08/01/04 250 232,500
Metronet Communications
Corp.
12.00%.................. 08/15/07 100 115,500
Nextlink Communications,
Inc. Sr. Notes
9.625%.................. 10/01/07 125 128,750
Pegasus Communications
Corp. Sr. Notes 144A
9.625%.................. 10/15/05 250 256,875
Rogers Cablesystems Ltd.
Sr. Notes
10.00%.................. 03/15/05 125 138,438
Sprint Spectrum L.P. Sr.
Notes
11.00%.................. 08/15/06 250 281,250
TCI Communications, Inc.
Sr. Notes
8.65%................... 09/15/04 200 219,250
Teleport Communications
Group, Inc. Sr. Notes
9.875%.................. 07/01/06 100 112,750
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Telewest PLC Debs. [STEP]
10.377%................. 10/01/07 $ 250 $ 195,000
United Telecommunications,
Inc. Debs.
9.75%................... 04/01/00 250 269,063
-------------
3,799,876
-------------
TRANSPORTATION -- 1.0%
Allied Holdings, Inc.
Notes Cl-B
8.625%.................. 10/01/07 250 256,875
Coach USA, Inc. Cl-B
9.375%.................. 07/01/07 175 178,938
Federal Express Corp.
Notes
6.25%................... 04/15/98 70 70,015
Global Ocean Carriers Ltd.
Sr. Notes 144A
10.25%.................. 07/15/07 225 214,875
Sea Containers Ltd. Sr.
Sub. Notes
12.50%.................. 12/01/04 70 79,450
Stena AB Sr. Notes
8.75%................... 06/15/07 250 253,750
Union Tank Car Co. Notes
7.125%.................. 02/01/07 150 157,125
-------------
1,211,028
-------------
UTILITIES -- 1.0%
Citizens Utilities Co.
Debs.
8.45%................... 09/01/01 335 360,125
Commonwealth Edison Co.
Notes
9.00%................... 10/15/99 250 260,938
Consumers Energy Co. First
Mtge.
6.625%.................. 10/01/98 50 50,000
Energy Corp. of America
Sr. Sub. Notes Cl-A
9.50%................... 05/15/07 250 250,625
Florida Power & Light
First Mtge.
5.70%................... 03/05/98 200 200,000
Monongahela Power First
Mtge.
8.50%................... 06/01/22 150 158,063
Northland Cable Television
Sr. Sub. Notes 144A
10.25%.................. 11/15/07 250 264,063
Pacific Gas & Electric Co.
First Mtge.
6.75%................... 12/01/00 200 201,000
Public Service Electric &
Gas First Mtge.
7.00%................... 09/01/24 300 295,500
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
Southern California Edison
Co. Notes
6.50%................... 06/01/01 $ 100 $ 101,125
-------------
2,141,439
-------------
TOTAL CORPORATE OBLIGATIONS
(COST $29,052,118).................... 30,030,886
-------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 8.3%
FEDERAL HOME LOAN MORTGAGE CORP. -- 0.0%
7.50%................... 07/15/20 15 14,986
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 0.0%
6.02%................... 01/20/98 60 60,010
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 8.3%
6.00%........... 10/15/23-05/15/26 2,681 2,590,688
6.50%........... 02/15/24-05/15/24 1,484 1,470,796
7.00%........... 09/15/23-02/15/27 8,237 8,317,813
7.50%........... 06/15/24-06/15/26 1,536 1,575,910
8.00%........... 05/15/16-06/15/26 1,190 1,236,159
8.50%........... 06/15/16-10/15/26 2,010 2,112,207
9.00%........... 07/15/16 12 13,302
9.50%........... 10/15/09-06/15/20 50 54,491
10.00%.......... 11/15/09 13 14,554
10.50%.......... 08/15/15 9 9,699
11.50%.......... 06/15/10-11/15/15 145 165,451
12.00%.......... 09/15/13-01/15/14 7 7,400
-------------
17,568,470
-------------
TENNESSEE VALLEY AUTHORITY -- 0.0%
7.75%................... 12/15/22 10 10,400
7.25%................... 07/15/43 20 21,050
6.875%.................. 12/15/43 40 40,600
-------------
72,050
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $17,204,828)............................. 17,715,516
-------------
U.S. TREASURY OBLIGATIONS -- 15.8%
U.S. TREASURY BILLS -- 1.2%
4.60%................... 01/22/98 $ 2,600 2,593,023
-------------
U.S. TREASURY BONDS -- 7.2%
11.625%................. 11/15/02 100 124,678
7.125%.................. 02/15/23 240 274,099
7.625%.................. 02/15/25 300 364,404
6.875%.................. 08/15/25 300 334,734
6.00%................... 02/15/26 100 99,857
6.75%................... 08/15/26 11,525 12,699,166
6.625%.................. 02/15/27 1,250 1,356,813
-------------
15,253,751
-------------
U.S. TREASURY NOTES -- 7.4%
6.125%.................. 05/15/98 100 100,250
6.00%................... 05/31/98 450 450,931
5.125%.................. 12/31/98 50 49,787
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
6.375%.................. 05/15/99 $ 1,950 $ 1,968,720
6.75%................... 05/31/99 460 466,877
6.00%................... 06/30/99 3,500 3,518,795
6.875%.................. 03/31/00 250 256,242
6.25%................... 05/31/00 100 101,262
6.125%.................. 09/30/00 150 151,582
5.625%.................. 11/30/00 275 274,510
5.625%.................. 02/28/01 1,100 1,097,547
5.75%................... 08/15/03 665 665,578
7.50%................... 02/15/05 250 274,935
5.875%.................. 11/15/05 425 427,486
5.625%.................. 02/15/06 500 494,675
6.50%................... 10/15/06 1,350 1,414,179
6.25%................... 02/15/07 2,000 2,064,300
6.125%.................. 08/15/07 2,000 2,056,140
-------------
15,833,796
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $32,402,248)............................. 33,680,570
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
--------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.4%
AUSTRALIA -- 0.0%
Australian Government
9.50%................... 08/15/03 20 15,323
----------
BELGIUM -- 0.0%
Belgium Kingdom Government
7.25%................... 04/29/04 1,550 46,630
----------
CANADA -- 0.2%
Canadian Government
8.50%................... 04/01/02 380 296,083
6.50%................... 06/01/04 110 81,081
9.75%................... 06/01/21 10 10,344
----------
387,508
----------
DENMARK -- 0.0%
Kingdom of Denmark
7.00%................... 12/15/04 275 43,777
----------
FRANCE -- 0.4%
France O.A.T.
8.50%................... 11/25/02 1,406 270,923
8.25%................... 02/27/04 264 51,379
5.50%................... 04/25/07 3,000 506,162
8.50%................... 04/25/23 50 11,179
----------
839,643
----------
GERMANY -- 0.5%
Deutscheland Republic
8.50%................... 08/21/00 375 229,396
8.375%.................. 05/21/01 410 254,477
</TABLE>
<PAGE>
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
6.50%................... 07/15/03 110 $ 65,735
6.00%................... 07/04/07 838 487,203
----------
1,036,811
----------
ITALY -- 0.1%
Italian Government
11.50%.................. 03/01/03 275 198,100
8.50%................... 08/01/04 45 29,646
----------
227,746
----------
JAPAN -- 0.8%
European Investment Bank
4.625%.................. 02/26/03 53,000 473,356
3.00%................... 09/20/06 102,000 856,073
International Bank for
Reconstruction &
Development Global Bond
6.75%................... 03/15/00 14,000 121,856
Japanese Government
4.50%................... 06/20/03 33,500 299,596
----------
1,750,881
----------
NETHERLANDS -- 0.1%
Netherlands Government
5.75%................... 01/15/04 115 58,685
----------
SPAIN -- 0.0%
Spanish Government
8.00%................... 05/30/04 6,400 48,016
----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
UNITED KINGDOM -- 0.3%
United Kingdom Treasury
9.00%................... 03/03/00 85 $ 146,023
8.00%................... 06/10/03 91 159,886
7.50%................... 12/07/06 164 290,592
----------
596,501
----------
TOTAL FOREIGN BONDS
(COST $5,197,512)........... 5,051,521
----------
PAR
(000)
--------
COMMERCIAL PAPER -- 4.1%
Procter & Gamble Co. 5.90%
(COST $8,718,514)......... 01/16/98 $ 8,740 8,718,514
----------
SHARES
--------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Fund
(COST $9,022)...................... 9,022 9,022
----------
TOTAL INVESTMENTS -- 100.5%
(COST $181,276,100).................. 214,199,031
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.5%)..................... (1,123,615)
----------
NET ASSETS -- 100.0%................... $213,075,416
==========
</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 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>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 53.3%
FEDERAL HOME LOAN MORTGAGE CORP. -- 14.1%
5.95%.................. 06/19/98 $1,000 $ 10,013,899
8.25%.................. 08/01/17 544 565,945
6.50% [TBA]............ 01/14/28 43,500 42,997,140
6.50% [TBA]............ 02/12/28 22,000 21,731,820
7.00% [IO]............. 04/25/19 233 21,362
7.00% [TBA]............ 01/14/28 3,000 3,026,250
7.775% [VR]............ 02/01/24 2,025 2,099,823
------------
80,456,239
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 13.2%
5.84%.................. 06/19/98 20,000 20,015,860
6.90%.................. 05/25/23 206 202,846
7.50%.................. 04/01/24 3,639 3,725,104
9.40%.................. 07/25/03 226 235,850
6.154% [VR]............ 10/01/27 971 970,077
6.154% [VR]............ 06/01/28 957 956,508
6.154% [VR]............ 10/01/28 964 963,190
6.25% [IO]............. 05/25/08 236 64,917
6.50% [IO]............. 06/25/14 915 30,174
6.50% [TBA]............ 02/12/28 12,000 11,842,560
6.50% [TBA]............ 03/12/28 36,500 35,986,810
7.799% [VR]............ 01/01/24 306 318,651
------------
75,312,547
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 22.5%
6.00%.......... 11/20/26-12/20/27 23,844 24,374,862
6.50%.......... 09/15/23-12/15/25 23,762 23,544,642
7.00%.................. 12/20/26 22,039 22,558,279
7.50%.................. 12/20/23 397 404,926
6.50% [TBA]............ 01/22/28 3,420 3,384,740
6.875% [VR]............ 10/20/23 584 596,492
6.875% [VR]............ 10/20/24 3,154 3,231,089
6.875% [VR]............ 12/20/25 14,824 15,224,980
7.00% [VR]............. 03/20/17 666 683,607
7.00% [VR]............. 08/20/23 8,801 8,971,908
7.00% [VR]............. 09/20/23 5,815 5,927,336
7.00% [VR]............. 03/20/24 13,828 14,137,154
7.00% [VR]............. 09/20/24 1,201 1,230,309
7.375% [VR]............ 06/20/22 2,074 2,129,310
7.375% [VR]............ 04/20/23 2,559 2,621,684
------------
129,021,318
------------
STUDENT LOAN MARKETING ASSOCIATION -- 3.5%
6.00%.................. 06/30/98 20,000 20,035,398
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $302,054,109)................. 304,825,502
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.1%
California Infrastructure
SDG&E-1 Mtge.
5.97%.................. 12/25/00 10,000 10,004,687
Citicorp Mtge.
Securities, Inc. [VR]
7.584%................. 10/25/22 522 534,037
Collateralized Mtge.
Securities Corp. [VR]
7.985%................. 05/01/17 525 538,214
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
Contimortgage Home Equity
Loan Trust Cl-A2
6.15%.................. 10/15/12 $20,000 $ 19,984,375
Countrywide Adjustable
Rate Mtge. [VR]
7.931%................. 03/25/24 562 575,771
8.359%................. 11/25/24 547 561,500
Guardian Adjustable Rate
Mtge. [VR]
6.889%................. 12/25/19 67 44,377
Mortgage Capital Trust VI
9.50%.................. 02/01/18 519 530,740
Prudential Home Mtge.
Securities
6.50%.................. 01/25/00 6,792 6,778,744
Prudential-Bache CMO
Trust
8.40%.................. 03/20/21 3,372 3,510,182
Resolution Trust Corp.
8.00%.................. 09/25/21 172 172,894
Rothschild (L.F.) Mtge.
Trust
9.95%.................. 08/01/17 2,108 2,300,495
Ryland Mtge. Securities
Corp. [VR]
8.042%................. 09/25/23 676 692,175
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $45,899,885).................. 46,228,191
------------
CORPORATE OBLIGATIONS -- 25.3%
AIRLINES -- 2.2%
American Airlines Notes
10.19%................. 05/26/15 250 328,497
United Air Lines, Inc.
Notes
10.36%................. 11/13/12 6,925 8,897,863
10.36%................. 11/27/12 500 637,200
10.02%................. 03/22/14 2,000 2,488,460
------------
12,352,020
------------
AUTOMOBILE MANUFACTURERS -- 1.7%
Ford Motor Credit Corp.
Notes [VR]
6.042%................. 09/03/01 10,000 9,999,730
------------
ENTERTAINMENT & LEISURE -- 2.5%
Time Warner, Inc. Notes
7.45%.................. 02/01/98 13,000 13,016,250
7.975%................. 08/15/04 262 280,995
8.11%.................. 08/15/06 525 571,594
8.18%.................. 08/15/07 525 576,844
------------
14,445,683
------------
FINANCIAL-BANK & TRUST -- 2.4%
First of America Bank
Notes
6.00%.................. 10/01/99 13,750 13,732,812
------------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
FINANCIAL SERVICES -- 6.5%
Goldman Sachs Notes [VR]
144A
6.085%................. 11/24/00 $20,000 $20,000,000
Salomon, Inc. Notes [VR]
5.83%.................. 08/04/98 15,000 15,011,998
6.08%.................. 02/15/99 2,000 2,009,520
------------
37,021,518
------------
FOOD -- 1.2%
RJR Nabisco, Inc. Notes
8.625%................. 12/01/02 6,500 6,890,000
------------
INDUSTRIAL PRODUCTS -- 1.7%
Imperial Chemical, Inc.
Notes [VR]
6.00%.................. 12/05/98 10,000 10,009,620
------------
REAL ESTATE -- 0.9%
Spieker Properties Notes
6.95%.................. 12/15/02 5,000 5,062,500
------------
TELECOMMUNICATIONS -- 1.8%
TCI Communications, Inc.
Sr. Notes [VR]
6.355%................. 09/11/00 10,000 10,017,900
------------
UTILITIES -- 4.4%
Cleveland Electric
Illumination Corp.
Notes
8.75%.................. 11/15/05 100 100,805
CMS Energy Corp. Sr.
Notes
8.125%................. 05/15/02 5,000 5,137,500
Long Island Lighting
Corp. Notes
7.85%.................. 05/15/99 7,000 7,113,750
8.90%.................. 07/15/19 6,000 6,384,540
Louisiana Power & Light
Corp. Notes
7.74%.................. 07/01/02 6,000 6,210,000
------------
24,946,595
------------
TOTAL CORPORATE OBLIGATIONS
(COST $142,214,548)................. 144,478,378
------------
U.S. TREASURY OBLIGATIONS -- 2.4%
U.S. TREASURY BILLS -- 0.5%
5.02%#................. 02/05/98 60 59,711
5.16%#................. 02/05/98 485 482,660
5.17%#................. 02/05/98 35 34,831
5.14%#................. 03/12/98 115 113,863
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- ------------
<S> <C> <C> <C>
5.19%#................. 03/12/98 $ 685 $ 678,225
5.19%#................. 03/12/98 1,120 1,108,923
5.18%#................. 04/16/98 590 581,120
5.31%#................. 04/16/98 165 162,517
------------
3,221,850
------------
U.S. TREASURY BONDS -- 1.9%
6.50%.................. 11/15/26 10,000 10,681,099
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $13,087,194).................. 13,902,949
------------
SOVEREIGN ISSUES -- 3.2%
ARGENTINA -- 1.7%
Republic of Argentina
[BRB,FRB]
6.688%................. 03/31/05 10,560 9,452,520
------------
MEXICO -- 0.7%
United Mexican States
Ser-W-B [BRB] (with
Value Recover Rights
Attached)
6.25%.................. 12/31/19 5,000 4,193,366
------------
PHILIPPINES -- 0.8%
Bangko Sentral
Philippinas
8.60%.................. 06/15/27 6,000 4,865,700
------------
TOTAL SOVEREIGN ISSUES
(COST $18,185,098).................. 18,511,586
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
(000)
---------
<S> <C> <C> <C>
FOREIGN BONDS -- 8.7%
CANADA -- 0.7%
Canadian Government
4.25%................... 12/01/26 5,158 3,675,036
-------------
NEW ZEALAND -- 1.1%
New Zealand Government
10.00%.................. 03/15/02 10,000 6,359,076
-------------
UNITED KINGDOM -- 6.9%
United Kingdom Treasury
7.25%................... 12/07/07 22,500 39,601,759
-------------
TOTAL FOREIGN BONDS
(COST $50,663,909).................... 49,635,871
-------------
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- --------- -------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT -- 9.6%
Bankers Trust
5.90%................... 07/07/98 $ 20,000 $ 19,997,748
Landesbank Hessen
Thueringer
5.93%................... 06/30/98 25,000 25,005,275
Sanwa Bank New York Ltd.
6.53%................... 06/22/98 10,000 9,994,324
-------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $54,986,321).................... 54,997,347
-------------
COMMERCIAL PAPER -- 20.6%
Abbott Laboratories
6.00%................... 01/13/98 3,200 3,193,600
AT&T Corp.
5.78%................... 01/16/98 14,200 14,165,802
5.76%................... 02/12/98 400 397,312
Canadian Wheat Board
5.73%................... 02/11/98 3,600 3,576,507
Dupont, (E.I.) De Nemours
& Co.
5.83%................... 01/28/98 4,000 3,982,510
Ford Motor Credit Corp.
5.58%................... 01/14/98 19,000 18,962,328
General Electric Capital
Corp.
5.60%................... 01/14/98 3,100 3,093,886
5.72%................... 01/16/98 900 897,950
5.60%................... 01/20/98 13,600 13,559,302
General Motors Acceptance
Corp.
5.53%................... 01/15/98 11,300 11,275,688
5.78%................... 01/28/98 400 398,266
KFW International
Financial Corp.
5.58%................... 01/05/98 1,000 999,380
5.79%................... 01/28/98 10,000 9,956,575
5.73%................... 02/06/98 1,300 1,292,791
National Rural Utility
Corp.
5.58%................... 01/08/98 4,700 4,695,068
New Center Asset Trust
5.56%................... 01/21/98 8,700 8,673,461
5.52%................... 01/28/98 10,300 10,257,435
Procter & Gamble Co.
5.64%................... 02/10/98 1,100 1,093,107
Province of Alberta
5.58%................... 01/09/98 4,000 3,994,800
Western Australian
Treasury
5.66%................... 02/17/98 3,500 3,473,817
-------------
TOTAL COMMERCIAL PAPER
(COST $117,938,976)................... 117,939,585
-------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
----------- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash
Fund.......................... 2,912,640 $ 2,912,640
Temporary Investment Fund....... 2,912,639 2,912,639
------------
(COST $5,825,279)............... 5,825,279
------------
TOTAL INVESTMENTS -- 132.2%
(COST $750,855,319)............... 756,344,688
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (32.2%)................. (184,244,820)
------------
NET ASSETS -- 100.0%................ $ 572,099,868
============
</TABLE>
Foreign currency exchange contacts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Sell CAD 48,000 $ 79,517 $ 78,967 $ 550
03/98 Sell GBP 5,236,000 3,909,797 3,665,974 243,823
---------- ---------- ------
$3,989,314 $3,744,941 $244,373
========== ========== ===============
</TABLE>
# Securities with an aggregate market value of $3,221,850 have been segregated
with the custodian to cover margin requirements for the following open futures
contracts at December 31, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 5 Year Note.............. 03/98 5,000 $ 1,562
U.S. Treasury 10 Year Note............. 03/98 53,500 47,188
U.S. Treasury 30 Year Note............. 03/98 104,800 893,594
Eurodollar............................. 03/98 30,000 25,500
------
$967,844
===============
</TABLE>
<PAGE>
PIMCO TOTAL RETURN BOND PORTFOLIO
- --------------------------------------------------------------------------------
Interest rate swap agreements outstanding at December 31, 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: 36.25......... 04/02 5,000 $ 22,203
37.00...................... 04/02 3,000 12,370
36.50...................... 04/02 7,500 32,512
37.00...................... 05/02 10,000 41,234
36.50...................... 06/02 12,000 52,019
35.75...................... 06/02 6,000 27,912
------------
$188,250
===========
</TABLE>
- --------------------------------------------------------------------------------
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 3.5% of net assets.
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 -- 72.6%
AEROSPACE -- 3.8%
AlliedSignal, Inc. ................ 200,000 $ 7,787,500
General Motors Corp. Cl-H ......... 20,000 738,750
Lockheed Martin Corp. ............. 20,000 1,970,000
Northrop Grumman Corp. ............ 100,000 11,500,000
Raytheon Co. Cl-A ................. 15,074 743,346
----------
22,739,596
----------
AUTOMOBILE MANUFACTURERS -- 1.1%
Chrysler Corp. .................... 30,000 1,055,625
Ford Motor Co. .................... 40,000 1,947,500
General Motors Corp. .............. 60,000 3,637,500
----------
6,640,625
----------
AUTOMOTIVE PARTS -- 0.4%
Borg Warner Automotive, Inc. ...... 50,000 2,600,000
----------
BEVERAGES -- 1.7%
Anheuser-Busch Companies, Inc. .... 140,000 6,160,000
Coors, (Adolph) Co. Cl-B .......... 130,000 4,322,500
----------
10,482,500
----------
CHEMICALS -- 1.5%
Agrium, Inc. ...................... 250,000 3,046,875
General Chemical Group, Inc. ...... 50,000 1,337,500
Lawter International, Inc. ........ 100,000 1,087,500
Olin Corp. ........................ 80,000 3,750,000
----------
9,221,875
----------
COMPUTER HARDWARE -- 2.2%
Hewlett-Packard Co. ............... 50,000 3,125,000
International Business
Machines Corp. .................. 94,000 9,828,875
----------
12,953,875
----------
CONGLOMERATES -- 0.3%
Tenneco, Inc. ..................... 50,000 1,975,000
----------
CONSUMER PRODUCTS & SERVICES -- 0.5%
Colgate-Palmolive Co. ............. 20,000 1,470,000
Procter & Gamble Co. .............. 20,000 1,596,250
----------
3,066,250
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 6.2%
Emerson Electric Co. .............. 100,000 5,643,750
General Electric Co. .............. 150,000 11,006,250
Honeywell, Inc. ................... 40,000 2,740,000
Sundstrand Corp. .................. 100,000 5,037,500
Tandy Corp. ....................... 260,000 10,026,250
Texas Instruments, Inc. ........... 60,000 2,700,000
----------
37,153,750
----------
ENVIRONMENTAL SERVICES -- 0.6%
Allied Waste Industries, Inc.* .... 152,000 3,543,500
----------
FINANCIAL-BANK & TRUST -- 4.3%
Bank of New York Co., Inc. ........ 100,000 5,781,250
Charter One Financial, Inc. ....... 100,000 6,312,500
Fleet Financial Group, Inc. ....... 100,000 7,493,750
Mellon Bank Corp. ................. 100,000 6,062,500
----------
25,650,000
----------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
FINANCIAL SERVICES -- 3.2%
Ahmanson, (H.F.) & Co. ............ 120,000 $ 8,032,500
Associates First Capital Corp. .... 80,000 5,690,000
Morgan Stanley, Dean Witter,
Discover & Co. .................. 95,000 5,616,875
----------
19,339,375
----------
FOOD -- 4.8%
General Mills, Inc. ............... 70,000 5,013,750
Heinz, (H.J.) Co. ................. 93,000 4,725,562
Kellogg Co. ....................... 140,000 6,947,500
Quaker Oats Co. ................... 100,000 5,275,000
Ralston Purina Group .............. 75,000 6,970,312
----------
28,932,124
----------
HEALTHCARE SERVICES -- 0.7%
Tenet Healthcare Corp.* ........... 120,000 3,975,000
----------
HOTELS & MOTELS -- 2.3%
Hilton Hotels Corp. ............... 300,000 8,925,000
Patriot American Hospitality,
Inc. ............................ 160,002 4,610,058
----------
13,535,058
----------
INDUSTRIAL PRODUCTS -- 0.4%
Albany International Corp. Cl-A ... 100,000 2,300,000
----------
INSURANCE -- 5.3%
Allmerica Financial Corp. ......... 131,363 6,559,940
Chubb Corp. ....................... 100,000 7,562,500
Lincoln National Corp. ............ 80,000 6,250,000
Ohio Casualty Corp. ............... 100,000 4,462,500
Travelers Property Casualty
Corp. Cl-A ...................... 167,500 7,370,000
----------
32,204,940
----------
MEDICAL SUPPLIES & EQUIPMENT -- 0.5%
Becton Dickinson & Co. ............ 60,000 3,000,000
----------
METALS & MINING -- 0.5%
Newmont Mining Corp. .............. 100,994 2,966,699
----------
OIL & GAS -- 8.7%
Apache Corp. ...................... 100,000 3,506,250
Atlantic Richfield Co. ............ 60,000 4,807,500
Baker Hughes, Inc. ................ 100,000 4,362,500
Chevron Corp. ..................... 70,000 5,390,000
EEX Corp.* ........................ 380,500 3,448,281
Enron Oil & Gas Co. ............... 100,000 2,118,750
Exxon Corp. ....................... 100,000 6,118,750
Mobil Corp. ....................... 24,000 1,732,500
Phillips Petroleum Co. ............ 100,000 4,862,500
Royal Dutch Petroleum Co. ......... 60,000 3,251,250
Schlumberger Ltd. ................. 42,000 3,381,000
Sonat, Inc. ....................... 85,000 3,888,750
Union Pacific Resources Group,
Inc. ............................ 121,173 2,938,445
USX-Marathon Group ................ 80,000 2,700,000
----------
52,506,476
----------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 0.6%
Fort James Corp. .................. 100,000 $ 3,825,000
----------
PERSONAL SERVICES -- 0.9%
Galileo International, Inc. ....... 99,000 2,734,875
Service Corp. International ....... 72,000 2,659,500
----------
5,394,375
----------
PHARMACEUTICALS -- 5.1%
Abbott Laboratories ............... 100,000 6,556,250
American Home Products Corp. ...... 60,000 4,590,000
Merck & Co., Inc. ................. 80,000 8,500,000
Novo Nordisk AS [ADR] ............. 20,000 1,447,500
Pfizer, Inc. ...................... 30,000 2,236,875
Smithkline Beecham PLC [ADR] ...... 70,000 3,600,625
Warner-Lambert Co. ................ 30,000 3,720,000
----------
30,651,250
----------
RAILROADS -- 2.6%
Kansas City Southern Industries,
Inc. ............................ 350,000 11,112,500
Norfolk Southern Corp. ............ 150,000 4,621,875
----------
15,734,375
----------
REAL ESTATE -- 0.2%
Kilroy Realty Corp. [REIT] ........ 50,000 1,437,500
----------
RETAIL & MERCHANDISING -- 3.1%
Dayton-Hudson Corp. ............... 80,000 5,400,000
Dollar General Corp. .............. 31,250 1,132,812
Federated Department Stores,
Inc.* ........................... 100,000 4,306,250
May Department Stores Co. ......... 70,000 3,688,125
Penney, (J.C.) Co., Inc. .......... 70,000 4,221,875
----------
18,749,062
----------
SEMI-CONDUCTORS -- 2.1%
Analog Devices, Inc.* ............. 300,000 8,306,250
Motorola, Inc. .................... 75,000 4,279,688
----------
12,585,938
----------
TELECOMMUNICATIONS -- 7.7%
Ameritech Corp. ................... 50,000 4,025,000
AT&T Corp. ........................ 60,000 3,675,000
Bell Atlantic Corp. ............... 108,400 9,864,400
BellSouth Corp. ................... 80,000 4,505,000
GTE Corp. ......................... 100,000 5,225,000
SBC Communications, Inc. .......... 90,000 6,592,500
Sprint Corp. ...................... 12,700 744,538
Teleport Communications Group, Inc.
Cl-A* ........................... 99,600 5,465,550
U.S. West Communications Group .... 140,000 6,317,500
----------
46,414,488
----------
UTILITIES -- 1.3%
Endesa SA [ADR] ................... 300,000 5,456,250
IES Industries, Inc. .............. 60,000 2,208,750
----------
7,665,000
----------
TOTAL COMMON STOCK
(COST $345,121,687).................. 437,243,631
----------
PREFERRED STOCK -- 0.1%
METALS & MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575) ................... 20,000 720,000
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
------- -----
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 18.9%
BROADCASTING -- 0.8%
Allbritton Communica-
tions Co. Sr. Sub.
Debs.
9.75%................ 11/30/07 $ 1,500 1,537,500
Chancellor Media Corp.
Sr. Sub. Notes 144A
8.125%............... 12/15/07 2,000 1,965,000
SFX Broadcasting, Inc.
Sr. Sub. Notes
10.75%............... 05/15/06 1,000 1,097,500
------------
4,600,000
------------
BUILDING MATERIALS -- 0.3%
USG Corp. Sr. Notes
8.50%................ 08/01/05 1,500 1,616,250
------------
COMPUTER HARDWARE -- 0.5%
International Business
Machine Corp. Debs.
6.22%................ 08/01/27 2,950 2,994,250
------------
COMPUTER SERVICES & SOFTWARE -- 0.2%
Unisys Corp. Sr. Notes
12.00%............... 04/15/03 1,000 1,132,500
------------
CONTAINERS & PACKAGING -- 0.3%
Gaylord Container Corp.
Sr. Sub. Debs.
12.75%............... 05/15/05 2,000 2,145,000
------------
ELECTRONIC COMPONENTS & EQUIPMENT -- 0.3%
Wyman-Gordon Co. Sr.
Notes
8.00%................ 12/15/07 2,000 2,027,500
------------
ENTERTAINMENT & LEISURE -- 0.9%
Fox Kids Worldwide,
Inc. Sr. Notes 144A
9.25%................ 11/01/07 1,000 970,000
GCI, Inc. Sr. Notes
9.75%................ 08/01/07 1,000 1,040,000
Horseshoe Gaming L.L.C.
Sr. Notes
12.75%............... 09/30/00 1,350 1,491,750
Time Warner
Entertainment Co.
L.P. Debs.
8.375%............... 03/15/23 1,000 1,136,250
Time Warner, Inc. Notes
6.85%................ 01/15/03 1,000 1,033,750
------------
5,671,750
------------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
------- ----- ----
<S> <C> <C> <C>
FINANCIAL-BANK & TRUST -- 0.3%
Dime Bancorp, Inc. Sr.
Notes
10.50%............... 11/15/05 $ 2,000 $ 2,157,500
------------
FINANCIAL SERVICES -- 1.8%
CEI Citicorp Holdings
S.A. 144A
9.75%................ 02/14/07 2,000 1,915,000
Donaldson Lufkin &
Jenrette, Inc. Notes
5.625%............... 02/15/16 1,000 986,250
DQU II Funding Corp.
Debs.
8.70%................ 06/01/16 2,000 2,270,000
General Motors
Acceptance Corp. Notes
6.70%................ 04/25/01 1,000 1,015,000
Lehman Brothers
Holdings, Inc. Sr. Notes
8.80%................ 03/01/15 1,850 2,183,000
Spieker Properties,
Inc. Notes
7.35%................ 12/01/17 2,500 2,521,875
------------
10,891,125
------------
HEALTHCARE SERVICES -- 0.2%
FHP International Corp.
Sr. Notes
7.00%................ 09/15/03 1,000 1,010,000
------------
INSURANCE -- 0.8%
Equitable Companies,
Inc. Sr. Notes
9.00%................ 12/15/04 4,035 4,599,900
------------
MACHINERY & EQUIPMENT -- 0.2%
Agco Corp. Sr. Sub.
Notes
8.50%................ 03/15/06 1,000 1,027,500
------------
METALS & MINING -- 0.7%
Centaur Mining &
Exploration Ltd. 144A
11.00%............... 12/01/07 2,000 2,035,000
Glencore Nickel Ltd.
144A
9.00%................ 12/01/14 2,000 1,995,000
------------
4,030,000
------------
<CAPTION>
PAR
MATURITY (000) VALUE
------- ----- ----
<S> <C> <C> <C>
OIL & GAS -- 1.7%
Belco Oil & Gas Corp.
Sr. Sub. Notes
8.875%............... 09/15/07 $ 1,500 $ 1,515,000
Cliffs Drilling Co.
Cl-B
10.25%............... 05/15/03 1,000 1,093,750
Navigator Gas Transport
Notes 144A
10.50%............... 06/30/07 1,000 1,065,000
Noram Energy Corp.
Sub. Deb. [CVT]
6.00%................ 03/15/12 339 319,508
Pacific Gas & Electric
First Mtge.
7.25%................ 08/01/26 1,500 1,515,000
Sun Co., Inc. Debs.
9.375%............... 06/01/16 2,000 2,347,500
VERITAS Holdings Sr.
Notes
9.625%............... 12/15/03 2,000 2,145,000
------------
10,000,758
------------
PAPER & FOREST PRODUCTS -- 0.4%
Quno Corp. Sr. Notes
9.125%............... 05/15/05 2,150 2,375,750
------------
PHARMACEUTICALS -- 0.4%
McKesson Corp. Sub.
Debs.
4.50%................ 03/01/04 2,875 2,601,875
------------
PRINTING &
PUBLISHING -- 0.3%
Affiliated Newspaper
Investments, Inc.
Sr. Disc. Notes [STEP]
10.882%.............. 07/01/06 2,000 1,900,000
------------
REAL ESTATE -- 0.2%
Saul, (B.F.)
Sr. Notes [REIT]
11.625%.............. 04/01/02 1,000 1,070,000
------------
TELECOMMUNICATIONS -- 2.9%
CF Cable TV, Inc. Sr.
Notes
11.625%.............. 02/15/05 2,000 2,302,500
Commnet Cellular, Inc.
Sub. Notes
11.25%............... 07/01/05 1,000 1,152,500
Frontier Corp.
Notes
7.25%................ 05/15/04 2,000 2,090,000
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
------- ----- ----
<S> <C> <C> <C>
Intermedia Communication
Sr. Notes 144A
8.50%................ 01/15/08 $ 2,000 $ 2,005,000
Nextel Communications,
Inc. Sr. Disc. Notes
144A
10.153%.............. 10/31/07 4,000 2,440,000
Nextlink Communications, Inc.
Sr. Notes
9.625%............... 10/01/07 2,000 2,060,000
NTL, Inc. Sr. Notes
10.00%............... 02/15/07 1,000 1,062,500
PriCellular Wireless
Corp.
Sr. Disc. Notes
14.00%............... 11/15/01 1,345 1,501,356
9.559%............... 10/01/03 2,000 2,060,000
U.S. West Capital
Funding Notes
7.30%................ 01/15/07 1,000 1,032,500
------------
17,706,356
------------
UTILITIES -- 5.7%
Boston Edison Co. Debs.
7.80%................ 05/15/10 1,000 1,084,806
7.80%................ 03/15/23 1,640 1,701,500
Carolina Power & Light
First Mtge.
8.625%............... 09/15/21 1,000 1,230,160
6.875%............... 08/15/23 1,000 988,750
Cleveland Electric
Illumination Co.
First Mtge. Cl-B
9.50%................ 05/15/05 3,000 3,348,750
Detroit Edison
Medium-Term Notes
8.30%................ 08/01/22 1,000 1,098,750
Jersey Central Power &
Light Co. First Mtge.
7.50%................ 05/01/23 1,500 1,539,375
6.75%................ 11/01/25 1,000 961,250
Long Island Lighting
Co. Debs.
8.20%................ 03/15/23 3,500 3,788,750
9.00%................ 11/01/22 1,000 1,113,750
Metropolitan Edison Co.
Notes
8.15%................ 01/30/23 2,975 3,252,127
<CAPTION>
PAR
MATURITY (000) VALUE
------- ----- ----
<S> <C> <C> <C>
New York State Electric
& Gas Notes
8.30%................ 12/15/22 $ 1,400 $ 1,505,000
Pacific Gas & Electric
First Mtge.
8.25%................ 11/01/22 2,740 3,024,275
PECO Energy First Mtge.
7.25%................ 11/01/24 2,000 2,007,500
Penn Power and Light
First Mtge.
7.875%............... 02/01/23 1,000 1,073,750
Potomac Electric Power
First Mtge.
6.25%................ 10/15/04 1,900 1,919,000
PSI Energy, Inc. Debs.
6.35%................ 11/15/00 1,500 1,503,750
South Carolina Electric
& Gas Co. Mtge.
8.875%............... 08/15/21 2,000 2,215,000
Utilicorp United, Inc.
Sr. Notes
9.00%................ 11/15/21 1,000 1,097,500
------------
34,453,743
------------
TOTAL CORPORATE OBLIGATIONS
(COST $111,540,457)...... 114,011,757
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 3.1%
Federal Home Loan Mtge.
Corp.
6.50%................ 09/01/11 13,800 13,834,769
6.50%................ 01/01/12 4,691 4,703,535
------------
(COST $18,094,307).............. 18,538,304
------------
COMMERCIAL PAPER -- 5.0%
American Express Credit
Corp.
5.76%................ 01/08/98 10,000 10,000,000
CIGNA Corp.
6.06%................ 01/06/98 10,000 10,000,000
Ford Motor Credit Corp.
6.11%................ 01/02/98 10,000 10,000,000
------------
TOTAL COMMERCIAL PAPER
(COST $30,000,000)....... 30,000,000
------------
</TABLE>
<PAGE>
INVESCO EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------------ ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 2.0%
Temporary Investment Cash
Fund.......................... 6,086,602 $ 6,086,602
Temporary Investment Fund....... 6,086,601 6,086,601
-----------
(COST $12,173,203)..... 12,173,203
-----------
TOTAL INVESTMENTS -- 101.7%
(COST $517,926,229)...... 612,686,895
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (1.7%).................. (10,582,061)
------------
NET ASSETS -- 100.0%................ $602,104,834
============
</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 2.4% 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 -- 87.1%
AEROSPACE -- 0.9%
REMEC, Inc.* ...................... 114,825 $ 2,583,562
----------
AUTOMOTIVE PARTS -- 0.8%
OEA, Inc. ......................... 46,400 1,342,700
United Rentals, Inc.* ............. 51,900 1,002,319
----------
2,345,019
----------
BUILDING MATERIALS -- 0.5%
NS Group, Inc.* ................... 76,600 1,311,775
----------
BUSINESS SERVICES -- 2.0%
Concord EFS, Inc.* ................ 94,550 2,351,931
Paraxel International Corp.* ...... 90,250 3,339,250
----------
5,691,181
----------
CHEMICALS -- 1.2%
Crompton & Knowles Corp. .......... 60,925 1,614,512
O.M. Group, Inc. .................. 48,575 1,779,059
----------
3,393,571
----------
CLOTHING & APPAREL -- 1.5%
The Men's Wearhouse, Inc.* ........ 65,775 2,285,681
Warnaco Group, Inc. Cl-A .......... 61,200 1,920,150
----------
4,205,831
----------
COMPUTER HARDWARE -- 1.4%
Insight Enterprises, Inc.* ........ 105,337 3,871,135
----------
COMPUTER SERVICES & SOFTWARE -- 15.6%
Aspen Technologies, Inc. .......... 79,925 2,737,431
Avant! Corp.* ..................... 38,400 643,200
CDW Computers Centers, Inc.* ...... 78,275 4,080,084
Checkfree Corp.* .................. 84,325 2,276,775
Documentum, Inc.* ................. 108,075 4,552,659
Electronic Arts, Inc.* ............ 33,875 1,280,898
Geoworks Corp.* ................... 238,900 2,299,412
Harbinger Corp.* .................. 89,850 2,527,031
HNC Software, Inc.* ............... 109,300 4,699,900
Keane, Inc.* ...................... 59,000 2,396,875
Mastech Corp.* .................... 103,100 3,273,425
MMC Networks, Inc.* ............... 36,775 625,175
Radisys Corp.* .................... 60,250 2,244,312
SanDisk Corp.* .................... 82,225 1,670,195
Security Dynamics Technologies,
Inc.* ........................... 37,550 1,342,412
SIPEX Corp.* ...................... 52,975 1,602,494
Sterling Commerce, Inc.* .......... 34,525 1,327,055
Summit Design, Inc.* .............. 126,150 1,308,806
Transaction Systems Architects,
Inc.* ........................... 64,925 2,467,150
----------
43,355,289
----------
CONSUMER PRODUCTS & SERVICES -- 8.4%
800-JR CIGAR, Inc.* ............... 51,625 1,290,625
Action Performance Companies,
Inc.* ........................... 33,425 1,265,972
Helen of Troy Ltd.* ............... 284,225 4,583,128
Pre-Paid Legal Services, Inc.* .... 109,250 3,734,984
Rexall Sundown, Inc.* ............. 102,900 3,106,294
Samsonite Corp.* .................. 69,300 2,191,612
Vestcom International, Inc.* ...... 76,450 1,710,569
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Windmere -- Durable Holdings,
Inc. ............................ 25,000 $ 564,062
Wolverine World Wide, Inc. ........ 220,630 4,991,754
----------
23,439,000
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 5.1%
Berg Electronics Corp.* ........... 143,800 3,271,450
Brooks Automation, Inc.* .......... 72,825 1,338,159
Powerwave Technologies, Inc.* ..... 35,425 595,601
PRI Automation, Inc.* ............. 74,250 2,143,969
Sanmina Corp.* .................... 47,800 3,238,450
Sawtek, Inc.* ..................... 54,500 1,437,437
Zebra Technologies Corp. Cl-A* .... 72,500 2,156,875
----------
14,181,941
----------
ENERGY SERVICES -- 0.2%
Metzler Group, Inc.* .............. 15,325 614,916
----------
ENTERTAINMENT & LEISURE -- 3.2%
Midway Games, Inc.* ............... 68,900 1,253,119
Signature Resorts, Inc.* .......... 124,075 2,714,141
Silverleaf Resorts, Inc.* ......... 132,025 3,234,612
Vistana, Inc.* .................... 70,400 1,619,200
----------
8,821,072
----------
ENVIRONMENTAL SERVICES -- 0.8%
USA Waste Services, Inc.* ......... 58,739 2,305,506
----------
EQUIPMENT SERVICES -- 0.8%
Rental Service Corp.* ............. 93,950 2,307,647
----------
FINANCIAL-BANK & TRUST -- 0.5%
Banco Latinoamericano de
Exportaciones SA Cl-E ........... 34,000 1,406,750
----------
FINANCIAL SERVICES -- 0.5%
Affiliated Managers Group,
Inc.* ........................... 46,975 1,362,275
----------
FOOD -- 2.0%
JP Foodservice, Inc.* ............. 149,425 5,519,386
----------
HEALTHCARE SERVICES -- 7.9%
Access Health, Inc.* .............. 45,400 1,333,625
Advance Paradigm, Inc.* ........... 49,525 1,572,419
Capital Senior Living Corp.* ...... 202,550 2,114,116
Coram Healthcare Corp.* ........... 2,152 7,263
Envoy Corp.* ...................... 9,150 266,494
FPA Medical Management, Inc.* ..... 125,475 2,336,972
Heartport, Inc.* .................. 63,850 3,264,331
Medical Manager Corp.* ............ 130,975 2,357,550
National Data Corp. ............... 30,000 1,083,750
NCS Healthcare, Inc. Cl-A* ........ 53,000 1,397,875
Orthodontic Centers of America,
Inc.* ........................... 145,150 2,413,119
Simione Central Holdings, Inc. .... 123,075 1,107,675
Sunrise Assisted Living, Inc.* .... 65,125 2,808,516
----------
22,063,705
----------
HOTELS & MOTELS -- 1.5%
Capstar Hotel Co.* ................ 81,900 2,810,194
Promus Hotel Corp.* ............... 35,500 1,491,000
----------
4,301,194
----------
INDUSTRIAL PRODUCTS -- 0.8%
Harsco Corp. ...................... 52,500 2,264,062
----------
</TABLE>
<PAGE>
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
INSURANCE -- 2.4%
Executive Risk, Inc. .............. 42,150 $ 2,942,597
Reliastar Financial Corp. ......... 90,000 3,706,875
----------
6,649,472
----------
MEDICAL SUPPLIES & EQUIPMENT -- 5.5%
Covance, Inc.* .................... 85,075 1,690,866
ESC Medical Systems Ltd.* ......... 81,600 3,162,000
HBO & Co. ......................... 102,645 4,926,960
Ocular Sciences, Inc.* ............ 59,775 1,569,094
Schein, (Henry), Inc.* ............ 70,525 2,468,375
Transition Systems, Inc.* ......... 68,750 1,521,094
----------
15,338,389
----------
METALS & MINING -- 0.3%
IMCO Recycling, Inc. .............. 55,350 889,059
----------
OFFICE EQUIPMENT -- 1.6%
U.S. Office Products Co.* ......... 229,500 4,503,937
----------
OIL & GAS -- 2.4%
Offshore Logistics, Inc.* ......... 209,000 4,467,375
Patterson Energy, Inc.* ........... 6,375 246,633
UTI Energy Corp.* ................. 79,250 2,050,594
----------
6,764,602
----------
PERSONAL SERVICES -- 0.9%
Sylvan Learning Systems, Inc.* .... 67,500 2,632,500
----------
PHARMACEUTICALS -- 2.5%
Scherer, (R.P.) Corp.* ............ 21,050 1,284,050
Watson Pharmaceuticals, Inc.* ..... 174,425 5,657,911
----------
6,941,961
----------
PRINTING & PUBLISHING -- 0.9%
Mail-Well, Inc.* .................. 62,950 2,549,475
----------
REAL ESTATE -- 2.2%
Fairfield Communities, Inc.* ...... 138,887 6,128,389
----------
RESTAURANTS -- 1.5%
CKE Restaurants, Inc. ............. 98,500 4,149,312
----------
RETAIL & MERCHANDISING -- 3.0%
Meyer, (Fred), Inc.* .............. 60,000 2,182,500
Proffitt's, Inc.* ................. 117,100 3,330,031
Stage Stores, Inc.* ............... 73,125 2,733,047
----------
8,245,578
----------
SEMICONDUCTORS -- 0.7%
Speedfam International, Inc.* ..... 36,925 978,513
Vitesse Semiconductor, Inc.* ...... 23,562 889,466
----------
1,867,979
----------
TELECOMMUNICATIONS -- 7.3%
Cellular Communications
International, Inc.* ............ 45,900 2,145,825
Digital Microwave Corp.* .......... 98,500 1,428,250
Echostar Communications Corp.* .... 53,450 895,288
Genesys Telecommuncations
Laboratories, Inc.* ............. 40,025 1,275,797
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Intelect Communications, Inc.* .... 119,450 $ 612,181
Nextlink Communications, Inc.
C1-A* ........................... 52,675 1,122,636
P-Com, Inc.* ...................... 89,600 1,545,600
Pacific Gateway Exchange, Inc.* ... 32,500 1,748,906
Periphonics Corp.* ................ 100,575 880,031
Premiere Technologies, Inc.* ...... 147,475 4,073,997
Smartalk Teleservices, Inc.* ...... 98,250 2,235,188
Westell Technologies, Inc.
Cl-A* ........................... 181,300 2,311,575
----------
20,275,274
----------
TOTAL COMMON STOCK
(COST $202,679,911).................. 242,280,744
----------
FOREIGN STOCK -- 2.7%
BROADCASTING -- 0.5%
Flextech PLC -- (GBP)* ............ 167,000 1,448,112
----------
BUILDING MATERIALS -- 0.6%
Hunter Douglas NV -- (NLG) ........ 42,037 1,472,269
----------
RESTAURANTS -- 0.9%
Wetherspoon, (J.D.)
PLC -- (GBP) .................... 447,665 2,467,590
----------
TRANSPORTATION -- 0.8%
IHC Caland NV -- (NLG) ............ 40,000 2,075,739
----------
TOTAL FOREIGN STOCK
(COST $4,779,865).................... 7,463,710
----------
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund .... 58 58
Temporary Investment Fund ......... 57 57
----------
(COST $115)........................ 115
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 10.5%
American Express Credit
Corp.
6.00%................ 01/06/98 $10,973 10,963,856
Associates Corp. of
North America
6.00%................ 01/02/98 10,509 10,507,249
Ciesco L.P.
5.90%................ 01/05/98 7,693 7,687,957
-----------
TOTAL COMMERCIAL PAPER
(COST $29,159,062).................. 29,159,062
-----------
TOTAL INVESTMENTS -- 100.2%
(COST $236,618,952)................. 278,903,631
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.2%).................... (645,477)
------------
NET ASSETS -- 100.0%.................. $278,258,154
============
</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 -- 94.5%
ARGENTINA -- 1.1%
Banco de Galicia y Buenos Aires
SA de C.V. [ADR] .............. 14,268 $ 367,401
Banco Frances del Rio de la Plata
SA [ADR] ...................... 16,411 449,251
Perez Companc SA ................ 138,525 989,247
Telefonica de Argentina SA Cl-B
[ADR] ......................... 29,080 1,083,230
YPF SA [ADR] .................... 58,307 1,993,371
----------
4,882,500
----------
AUSTRALIA -- 2.2%
Australia & New Zealand Banking
Group Ltd. .................... 54,000 356,772
Australian Gas Light Co. Ltd. ... 125,945 878,060
Brambles Industries Ltd. ........ 13,000 257,923
Broken Hill Proprietary Co.
Ltd. .......................... 93,549 868,587
Commonwealth Bank of
Australia ..................... 94,461 1,083,240
Fosters Brewing Group Ltd. ...... 242,000 460,424
FXF Trust* ...................... 116,300 19,702
John Fairfax Holdings Ltd. ...... 201,000 419,088
Lend Lease Corp. Ltd. ........... 32,854 642,198
National Australia Bank Ltd. .... 36,185 505,255
News Corp. Ltd. ................. 158,593 875,240
News Corp. Ltd. Pfd. ............ 56,839 281,240
Publishing & Broadcasting
Ltd. .......................... 116,300 515,286
Sydney Harbour Casino Holdings
Ltd.* ......................... 339,000 321,382
Tabcorp Holdings Ltd. ........... 99,000 464,437
Telstra Corp. Ltd.* ............. 298,000 629,102
Westpac Banking Corp. Ltd. ...... 97,000 620,391
WMC Ltd. ........................ 80,377 280,185
Woodside Petroleum Ltd. ......... 86,000 606,297
----------
10,084,809
----------
BELGIUM -- 1.3%
Credit Communal Holding Dexia
SA ............................ 3,940 529,057
Generale de Banque SA ........... 3,274 1,424,923
Generale de Banque SA -
Strip* ........................ 214 58
Kredietbank NV .................. 8,790 3,689,200
UCB SA .......................... 101 333,396
----------
5,976,634
----------
BRAZIL -- 3.2%
Banco Bradesco SA ............... 73,235,000 721,837
Banco Bradesco SA Rights* ....... 3,131,162 11,223
Banco Itau SA ................... 710,000 381,714
Brasmotor SA Pfd. ............... 906,000 89,299
Centrais Electrobras SA [ADR] ... 3,628 90,210
Centrais Eletricas Brasileiras
SA- Electrobras ............... 16,860,000 838,453
Cesp-Cia Energetica de Sao Paolo
[ADR]* ........................ 5,020 90,410
Companhia Cervejaria Brahma ..... 834,000 560,474
Companhia Cimento Portland
Itau .......................... 865,000 166,641
Companhia de Tecidos Norte de
Minas ......................... 619,000 221,860
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Companhia Energetica de Minas
Gerais ........................ 11,846,000 $ 514,697
Companhia Energetica de Minas
Geras [ADR] ................... 19,868 863,245
Lojas Americanas SA* ............ 7,826,000 36,465
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [GDR] .................. 5,160 99,975
Companhia Brasileira de
Distribuicoa Grupo Pao de
Acucar [ADR] .................. 16,260 315,038
Petroleo Brasileiro
SA-Petrobras .................. 4,889,508 1,143,493
White Martins SA ................ 84,000 122,686
Telebras SA [ADR] ............... 52,707 6,137,071
Telecomunicacoes de Minas Gerais-
Telemig Cl-B .................. 1,935,000 244,471
Telecomunicacoes de Sao Paulo
SA ............................ 4,292,000 1,142,167
Telecomunicacoes do Rio de
Janeiro SA .................... 2,013,000 209,233
Usinas Siderurgicas de Minas
Gerais SA ..................... 58,000 343,005
Usinas Siderurgicas de Minas
Gerais SA [ADR] ............... 61,345 362,794
----------
14,706,461
----------
CANADA -- 0.3%
Alcan Aluminium Ltd. ............ 30,470 843,183
Royal Bank of Canada ............ 10,980 580,067
----------
1,423,250
----------
CHILE -- 0.4%
Chilectra Metropolitana SA [ADR]
144A .......................... 14,905 380,704
Chilgener SA [ADR] .............. 8,472 207,564
Compania Cervecerias Unidas SA
[ADR] ......................... 7,712 226,540
Empresa Nacional de Electridad SA
[ADR] ......................... 18,526 327,679
Enersis SA [ADR] ................ 12,553 364,037
Genesis Chile Fund ** ........... 9,350 359,975
Santa Isabel SA [ADR] ........... 8,017 140,298
----------
2,006,797
----------
CHINA -- 0.3%
Huaneng Power International, Inc.
[ADR]* ........................ 51,000 1,182,563
----------
CZECH REPUBLIC -- 0.0%
SPT Telecom AS* ................. 1,360 145,130
----------
DENMARK -- 0.3%
Den Danske Bank ................. 6,380 850,703
Tele Danmark AS Cl-B ............ 2,030 126,000
Unidanmark AS Cl-A .............. 6,110 448,844
----------
1,425,547
----------
FINLAND -- 0.3%
Nokia AB Cl-A ................... 17,254 1,226,209
----------
FRANCE -- 8.3%
Accor SA ........................ 2,920 543,144
Alcatel Alsthom ................. 12,992 1,652,113
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Assurances Generales de
France ........................ 7,533 $ 399,323
AXA SA .......................... 16,162 1,251,133
Canal Plus ...................... 3,880 721,712
Carrefour Supermarche SA ........ 1,669 871,141
Compagnie de Saint-Gobain ....... 11,740 1,668,540
Compagnie Generale des Eaux ..... 47,970 6,698,095
Credit Commercial de France ..... 10,560 724,086
Credit Local de France .......... 3,095 358,588
Dexia France .................... 7,128 825,853
Groupe Danone ................... 5,700 1,018,558
GTM Entrepose SA ................ 4,510 303,622
Guilbert SA ..................... 5,003 713,543
Havas SA ........................ 2,940 211,611
L'Oreal ......................... 1,607 629,085
Lapeyre SA ...................... 10,315 568,401
Legrand SA ...................... 3,823 761,949
Louis Vuitton Moet Hennessy ..... 1,873 311,032
Pathe SA ........................ 2,331 452,572
Pinault-Printemps Redoute SA .... 7,441 3,971,677
Sanofi SA ....................... 19,997 2,227,111
Schneider SA .................... 35,098 1,906,631
Societe Generale ................ 7,336 999,943
Societe Nationale Elf Aquitaine
SA ............................ 14,280 1,661,608
Societe Television Francaise .... 11,080 1,132,706
Sodexho Alliance SA (New)* ...... 282 147,425
Sodexho SA ...................... 2,543 1,362,414
Total SA Cl-B ................... 39,864 4,340,347
----------
38,433,963
----------
GERMANY -- 5.5%
Allianz AG ...................... 9,480 2,446,397
Bayer AG ........................ 43,195 1,603,561
Bayerische Hypotheken-und
Wechsel-Bank AG ............... 29,712 1,441,777
Bayerische Vereinsbank AG ....... 25,045 1,615,771
Bilfinger & Berger Bau AG ....... 10,700 338,013
Buderus AG ...................... 807 362,199
Commerzbank AG .................. 15,850 617,061
Deutsche Bank AG ................ 37,964 2,656,154
Deutsche Telekom AG ............. 46,401 859,354
Dresdner Bank AG ................ 12,380 563,216
Dresdner Bank AG Warrants* ...... 27,736 493,622
Fielmann AG Pfd. ................ 5,723 132,887
Fresenius AG Pfd. ............... 2,660 483,760
Gehe AG ......................... 44,961 2,275,506
Hoechst AG ...................... 12,980 449,742
Hornbach Baumarkt AG ............ 1,300 37,235
Hornbach Holdings AG Pfd. ....... 5,870 406,451
Krones AG Hermann Kronseder
Maschinenfabrik Pfd. .......... 456 142,021
Mannesmann AG ................... 1,880 944,161
Rhoen-Klinikum AG ............... 8,250 807,546
SAP AG .......................... 5,980 1,814,248
SAP AG Pfd. ..................... 1,738 564,692
Siemens AG ...................... 15,410 929,893
Veba AG ......................... 41,654 2,837,876
Volkswagen AG ................... 1,019 569,562
----------
25,392,705
----------
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
HONG KONG -- 2.4%
Cheung Kong Holdings Ltd. ....... 65,000 $ 425,740
China Light & Power Co. Ltd. .... 100,000 554,963
Dao Heng Bank Group Ltd. ........ 243,000 606,852
First Pacific Co. Ltd. .......... 926,954 448,626
Hong Kong Land Holdings Ltd. .... 620,582 1,191,517
HSBC Holdings PLC ............... 18,800 463,432
Hutchison Whampoa Ltd. .......... 405,000 2,540,309
New World Development Co.
Ltd. .......................... 592,205 2,048,340
Sun Hung Kai Properties Ltd. .... 64,000 446,035
Swire Pacific Ltd. Cl-A ......... 241,000 1,321,908
Wharf Holdings Ltd. ............. 516,000 1,132,124
----------
11,179,846
----------
INDIA -- 0.1%
Mahanagar Telephone Nigam Ltd.
[GDR]* ........................ 44,000 682,440
----------
ITALY -- 3.6%
Assicurazioni Generali .......... 60,000 1,474,551
Banca Commerciale Italia NA ..... 104,000 361,765
Credito Italiano SPA ............ 636,996 1,965,396
Ente Nazionale Idrocarburi
SPA ........................... 479,100 2,717,977
Industrie Natuzzi SPA [ADR] ..... 15,260 314,738
Istituto Mobiliare Italiano
SPA ........................... 68,710 816,127
Italgas SPA ..................... 112,936 466,309
La Rinascente SPA ............... 22,800 170,227
Mediolanum SPA .................. 58,344 1,098,902
Telecom Italia Mobile RNC SPA ... 113,043 321,611
Telecom Italia Mobile SPA ....... 821,805 3,795,278
Telecom Italia SPA .............. 533,518 3,409,935
----------
16,912,816
----------
JAPAN -- 18.2%
Advantest Corp. ................. 7,000 398,397
Alps Electric Co. Ltd. .......... 72,000 681,120
Amada Co. Ltd. .................. 109,000 406,588
Canon, Inc. ..................... 217,000 5,073,638
Citizen Watch Co. Ltd. .......... 68,000 457,618
Dai Nippon Screen Manufacturing
Co. Ltd. ...................... 122,000 562,986
Daifuku Co. Ltd. ................ 18,000 87,909
Daiichi Pharmaceutical Co.
Ltd. .......................... 129,000 1,458,456
Daiwa House Industry Co. Ltd. ... 163,000 865,014
DDI Corp. ....................... 267 708,462
Denso Corp. ..................... 188,000 3,397,910
East Japan Railway Co. Ltd. ..... 358 1,621,752
Fanuc Co. ....................... 34,000 1,291,790
Hitachi Ltd. .................... 228,000 1,630,812
Hitachi Zosen Corp. ............. 181,000 290,945
Honda Motor Co. ................. 15,000 552,603
Inax ............................ 46,000 134,086
Ishihara Sangyo Kaisha Ltd.* .... 56,000 62,451
Ito-Yokado Co. Ltd. ............. 53,000 2,710,714
Kao Corp. ....................... 90,000 1,301,327
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Kokuyo .......................... 58,000 $ 1,003,683
Komatsu Ltd. .................... 173,000 871,512
Komori Corp. .................... 49,000 731,112
Kumagai Gumi Co. Ltd. ........... 88,000 48,054
Kuraray Co. Ltd. ................ 126,000 1,046,599
Kyocera Corp. ................... 68,000 3,096,113
Makita Corp. .................... 84,000 807,561
Matsushita Electric Industrial
Co. ........................... 207,000 3,040,814
Mauri Co. Ltd. .................. 137,000 2,138,961
Mitsubishi Corp. ................ 132,000 1,045,677
Mitsubishi Heavy Industries
Ltd. .......................... 641,000 2,681,903
Mitsubishi Paper Mills Ltd. ..... 64,000 90,078
Mitsui Fudosan Co. Ltd. ......... 306,000 2,965,365
Mitsui Petrochemical
Industries .................... 43,000 79,372
Murata Manufacturing Co. Ltd. ... 65,000 1,639,734
National House Industrial ....... 26,000 178,971
NEC Corp. ....................... 386,000 4,126,561
Nippon Hodo ..................... 22,000 71,065
Nippon Steel Co. ................ 819,000 1,215,703
Nippon Telegraph & Telephone
Corp. ......................... 183 1,576,360
Nomura Securities Co. Ltd. ...... 194,000 2,596,194
Pioneer Electronic Corp. ........ 68,000 1,051,214
Sangetsu Co. Ltd. ............... 11,000 113,366
Sankyo Co. Ltd. ................. 140,000 3,176,408
Sega Enterprises Ltd. ........... 19,400 352,127
Sekisui Chemical Co. Ltd. ....... 207,000 1,055,529
Sekisui House Ltd. .............. 107,000 690,450
Seven-Eleven Japan Co. Ltd. ..... 16,000 1,137,046
Sharp Corp. ..................... 193,000 1,332,968
Shin-Etsu Chemical Co. .......... 112,000 2,144,883
Shiseido Co. Ltd. ............... 51,000 698,194
Sony Corp. ...................... 49,100 4,380,520
Sumitomo Corp. .................. 218,000 1,223,955
Sumitomo Electric Industries .... 290,000 3,970,125
Sumitomo Forestry Co. ........... 73,000 356,519
TDK Corp. ....................... 48,000 3,632,641
Teijin Ltd. ..................... 303,000 636,197
Tokio Marine & Fire Insurance
Co. ........................... 60,000 682,966
Tokyo Electron Ltd. ............. 18,000 578,675
Tokyo Steel Manufacturing Co.
Ltd. .......................... 56,500 191,634
Toppan Printing Co. Ltd. ........ 111,000 1,451,303
UNY Co. Ltd. .................... 66,000 908,622
Yurtec Corp. .................... 22,000 135,532
----------
84,646,844
----------
KOREA -- 0.1%
Samsung Electronics Co. ......... 12,038 272,728
----------
MALAYSIA -- 0.3%
Berjaya Sports Toto BHD ......... 222,000 567,495
Tanjong PLC ..................... 371,000 614,780
Time Engineering BHD ............ 190,000 48,813
----------
1,231,088
----------
MEXICO -- 2.2%
Cementos de Mexico SA de CV
[ADS]* ........................ 65,090 559,774
Cemex SA [ADS] 144A* ............ 50,068 430,585
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Cemex SA Cl-B* .................. 67,925 $ 360,613
Cifra SA [ADR]* ................. 6,445 158,708
Fomento Economico Mexicano SA
Cl-B .......................... 96,409 770,142
Gruma SA [ADS] 144A* ............ 24,309 364,635
Gruma SA Cl-B* .................. 112,850 447,939
Grupo Financiero Banamex SA Cl-
B* ............................ 146,200 437,051
Grupo Financiero Banamex SA Cl-
L* ............................ 4,184 10,795
Grupo Financiero Bancomer SA Cl-B
[GDR]* ........................ 2,330 29,125
Grupo Financiero Bancomer SA
Cl-L* ......................... 1,725 706
Grupo Industrial Maseca SA de CV
Cl-B .......................... 306,095 306,786
Grupo Modelo SA Cl-C ............ 67,506 568,564
Grupo Televisia SA [GDR]* ....... 14,034 542,378
Kimberly-Clark de Mexico SA
Cl-A .......................... 166,630 789,558
Panamerican Beverages, Inc.
Cl-A .......................... 34,540 1,126,868
Telefonos de Mexico SA Cl-L
[ADR] ......................... 46,014 2,579,660
TV Azteca, SA de CV [ADR]* ...... 31,200 703,950
----------
10,187,837
----------
NETHERLANDS -- 10.4%
ABN Amro Holding NV ............. 126,196 2,458,893
AKZO Nobel NV ................... 3,582 617,723
Baan Co. NV* .................... 16,454 538,935
Baan Co. NV [ADR]* .............. 18,040 595,320
CSM NV .......................... 36,451 1,618,262
Elsevier NV ..................... 330,172 5,342,088
Fortis Amev NV .................. 38,702 1,687,651
Gucci Group NV .................. 15,717 658,149
ING Groep NV .................... 128,092 5,396,061
ING Groep NV Warrants* .......... 39,906 418,109
Koninklijke Ahold NV ............ 27,463 716,639
Koninklijke Nutricia Verenigde
Bedrijven NV .................. 30,650 929,828
Otra NV ......................... 6,490 92,841
Polygram NV ..................... 60,217 2,881,296
Royal Dutch Petroleum Co. ....... 202,374 11,110,839
Royal PTT Nederland NV .......... 11,749 490,307
Unilever NV ..................... 70,080 4,321,167
Wolters Kluwer NV ............... 65,110 8,411,630
----------
48,285,738
----------
NEW ZEALAND -- 0.3%
Air New Zealand Ltd. ............ 140,445 281,347
Fletcher Challenge Building
Ltd. .......................... 129,552 264,791
Fletcher Challenge Energy
Ltd. .......................... 100,267 351,068
Telecom Corp. of New Zealand
Ltd. .......................... 136,000 659,389
----------
1,556,595
----------
NORWAY -- 1.8%
Bergesen D.Y. AS Cl-A ........... 9,560 225,637
Norsk Hydro AS .................. 79,880 3,895,296
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Orkla AS Cl-A ................... 48,710 $ 4,195,612
Saga Petroleum ASA Cl-B ......... 15,160 230,314
----------
8,546,859
----------
PANAMA -- 0.0%
Banco Latinoamericano de
Exportaciones SA Cl-E ......... 4,035 166,948
----------
PERU -- 0.1%
Credicorp Ltd. [ADR] ............ 10,620 191,160
Telefonica del Peru SA Cl-B ..... 26,690 59,627
Telefonica del Peru SA Cl-B
[ADR] ......................... 11,383 265,366
----------
516,153
----------
PORTUGAL -- 0.6%
Jeronimo Martins, SGPS, SA ...... 33,099 1,051,423
Jeronimo Martins, SGPS, SA
(New)* ........................ 33,099 1,539,146
----------
2,590,569
----------
RUSSIA -- 0.1%
Gazprom [ADR] ................... 5,750 138,719
Lukoil Holding [ADR] ............ 3,620 332,407
----------
471,126
----------
SINGAPORE -- 0.6%
City Developments Ltd. .......... 53,000 245,350
Overseas-Chinese Banking Corp.
Ltd. .......................... 37,200 216,364
Overseas Union Bank Ltd. ........ 110,400 422,614
Singapore Land Ltd. ............. 104,000 228,376
Singapore Press Holdings Ltd. ... 90,000 1,127,043
United Overseas Bank Ltd. ....... 101,400 562,685
----------
2,802,432
----------
SPAIN -- 2.3%
Banco Bilbao Vizcaya SA ......... 21,420 692,847
Banco Popular Espanol SA ........ 22,680 1,584,761
Banco Santander SA .............. 57,788 1,929,864
Centros Comerciales Pryca SA .... 14,319 213,260
Corporacion Bancaria de Espana
SA ............................ 12,814 779,356
Empresa Nacional de
Electricidad SA ............... 64,292 1,141,026
Gas Natural SDG SA .............. 14,051 728,292
Iberdrola SA .................... 86,553 1,138,591
Repsol SA ....................... 20,855 889,395
Telefonica de Espana SA ......... 57,547 1,642,416
----------
10,739,808
----------
SWEDEN -- 3.2%
ABB AB Cl-A ..................... 82,210 973,959
Astra AB Cl-B ................... 231,146 3,889,158
Atlas Copco AB Cl-B ............. 40,130 1,196,158
Electrolux AB Cl-B .............. 28,770 1,997,927
Esselte AB ...................... 14,410 292,400
Granges AB* ..................... 14,385 225,719
Hennes & Mauritz AB Cl-B ........ 59,900 2,642,305
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Nordbanken Holding AB* .......... 366,188 $ 2,072,233
Sandvik AB Cl-A ................. 6,140 174,890
Sandvik AB Cl-B ................. 43,420 1,242,235
Scribona AB Cl-B ................ 5,500 61,347
----------
14,768,331
----------
SWITZERLAND -- 6.4%
ABB AG .......................... 1,569 1,973,957
Adecco SA ....................... 7,460 2,166,062
Credit Suisse Group ............. 7,130 1,104,782
Nestle SA ....................... 3,898 5,850,140
Novartis AG ..................... 5,939 9,650,290
Roche Holding AG ................ 565 5,618,817
Swiss Bank Corp. ................ 6,700 2,085,496
Union Bank of Switzerland ....... 1,000 1,448,013
----------
29,897,557
----------
UNITED KINGDOM -- 18.5%
Abbey National PLC .............. 176,000 3,159,457
Argos PLC ....................... 182,749 1,656,844
ASDA Group PLC .................. 501,450 1,464,539
BG PLC-B ........................ 169,597 764,617
British Petroleum Co. PLC ....... 153,840 2,025,043
Cable & Wireless PLC ............ 352,000 3,098,643
Cadbury Schweppes PLC ........... 241,456 2,437,404
Caradon PLC ..................... 334,530 988,040
Centrica PLC .................... 126,210 185,863
Compass Group PLC ............... 159,000 1,946,458
Diageo PLC ...................... 760,940 7,005,281
Electrocomponents PLC ........... 126,000 937,096
GKN PLC ......................... 17,000 348,811
Glaxo Wellcome PLC .............. 254,000 6,018,264
Heywood Williams Group PLC ...... 32,010 109,290
Hillsdown Holdings PLC .......... 95,160 232,518
Kingfisher PLC .................. 378,950 5,287,529
Ladbroke Group PLC .............. 218,000 946,968
Laing, (John) PLC Cl-A .......... 70,000 372,028
National Westminster Bank PLC ... 648,670 10,801,383
Rank Group PLC .................. 207,120 1,155,305
Reed International PLC .......... 659,740 6,621,825
Rolls-Royce PLC ................. 78,140 302,146
Rio Tinto PLC ................... 165,600 2,040,879
Safeway PLC ..................... 289,660 1,634,774
Shell Transport & Trading Co.
PLC ........................... 893,000 6,465,158
Smith, (David S.) Holdings
PLC ........................... 197,900 647,998
Smithkline Beecham PLC .......... 821,240 8,418,470
T&N PLC ......................... 181,680 759,304
Tesco PLC ....................... 238,000 1,938,462
Tomkins PLC ..................... 631,220 3,022,378
United News & Media PLC ......... 280,470 3,198,119
----------
85,990,894
----------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
VENEZUELA -- 0.1%
Cia Anonima Nacional Tele
Venezuela [ADS] ............... 13,427 $ 558,899
----------
TOTAL INVESTMENTS -- 94.5%
(COST $395,941,263)................ 438,892,076
OTHER ASSETS LESS
LIABILITIES -- 5.5%................ 25,563,844
----------
NET ASSETS -- 100.0%................. $464,455,920
==========
</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 0.3% 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 -- 89.7%
AUSTRALIA -- 4.0%
Australian Government
12.00%................ 11/15/01 1,200 $ 953,684
10.00%................ 10/15/07 1,600 1,343,626
7.50%................. 09/15/09 2,350 1,719,336
Federal National Mtge.
Assoc. Global Bond
6.50%................. 07/10/02 1,850 1,234,782
-------------
5,251,428
-------------
CANADA -- 2.8%
Canadian Government
8.00%................. 06/01/23 3,185 2,823,282
Province of Alberta
8.00%................. 03/01/00 710 521,671
Province of Ontario
8.25%................. 12/01/05 200 161,043
Province of Quebec
7.75%................. 03/30/06 200 155,903
-------------
3,661,899
-------------
CZECH REPUBLIC -- 0.2%
European Investment Bank
11.00%................ 10/10/01 8,000 208,287
-------------
DENMARK -- 1.5%
Nykredit
7.00%................. 10/01/16 202 29,923
6.00%................. 10/01/26 13,820 1,966,873
7.00%................. 10/01/29 10 1,444
-------------
1,998,240
-------------
EUROPEAN CURRENCY UNIT -- 3.7%
European Bank
Reconstruction &
Development Global
Bond
6.00%................. 05/06/99 970 1,086,132
French O.A.T.
9.50%................. 04/25/00 1,550 1,884,246
United Kingdom Treasury
4.00%................. 01/28/00 1,760 1,915,528
-------------
4,885,906
-------------
FRANCE -- 9.5%
French O.A.T.
5.50%................. 04/25/04 7,000 1,195,939
6.50%................. 10/25/06 6,500 1,173,722
5.50%................. 10/25/07 20,000 3,365,770
6.00%................. 10/25/25 4,000 674,351
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- ----------- -------------
<S> <C> <C> <C>
French O.A.T. Principal
Strip [ZCB]
5.471%................ 10/25/08 13,700 $ 1,270,058
French Treasury Bill
7.75%................. 04/12/00 16,000 2,853,657
4.50%................. 07/12/02 11,000 1,809,849
-------------
12,343,346
-------------
GERMANY -- 20.1%
Bank Nederlandse
Gemeenten
6.25%................. 08/10/00 1,000 576,739
5.25%................. 10/01/01 4,300 2,439,323
Federal National Mtge.
Assoc. Global Bond
5.00%................. 02/16/01 3,500 1,963,402
Federal Republic of
Germany
7.25%................. 10/21/02 1,960 1,202,245
7.50%................. 11/11/04 5,750 3,619,321
6.875%................ 05/12/05 9,400 5,766,913
6.50%................. 07/04/27 2,800 1,686,814
Federal Republic of
Germany Principal
Strip [ZCB]
11.13%................ 07/04/07 6,500 2,197,949
18.72%................ 07/04/27 8,400 794,198
Inter-America
Development Bank
7.00%................. 06/08/05 4,500 2,740,484
KFW International
Finance, Inc.
6.75%................. 06/20/05 4,500 2,721,714
Minnesota Mining &
Manufacturing Co.
5.00%................. 10/15/01 900 504,322
-------------
26,213,424
-------------
HUNGARY -- 0.4%
Hungarian Government
24.00%................ 03/21/98 45,000 221,855
23.50%................ 05/17/98 50,000 247,738
-------------
469,593
-------------
ITALY -- 8.6%
Italian Government
9.50%................. 02/01/01 6,150,000 3,915,067
8.25%................. 07/01/01 3,715,000 2,315,576
9.00%................. 10/01/03 1,880,000 1,254,222
9.50%................. 01/01/05 2,510,000 1,741,955
8.75%................. 07/01/06 1,895,000 1,297,242
7.25%................. 11/01/26 1,100,000 724,210
-------------
11,248,272
-------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- ----------- -------------
<S> <C> <C> <C>
JAPAN -- 8.1%
Asian Development Bank
3.125%................ 06/29/05 200,000 $ 1,678,574
Export-Import Bank of
Japan
4.375%................ 10/01/03 360,000 3,207,359
International Bank
Reconstruction &
Development Global
Bond
4.75%................. 12/20/04 260,000 2,412,229
Republic of Austria
5.00%................. 01/22/01 110,000 949,834
4.50%................. 09/28/05 180,000 1,658,673
Republic of Italy
3.75%................. 06/08/05 70,000 608,363
-------------
10,515,032
-------------
NETHERLANDS -- 1.8%
Netherlands Government
7.50%................. 11/15/99 1,950 1,016,732
9.00%................. 01/15/01 2,500 1,381,812
-------------
2,398,544
-------------
NEW ZEALAND -- 2.7%
International Bank
Reconstruction &
Development
7.00%................. 09/18/00 1,300 739,751
New Zealand Government
10.00%................ 03/15/02 4,310 2,740,762
-------------
3,480,513
-------------
PHILIPPINES -- 0.1%
Philippines Government
12.50%................ 04/25/01 8,000 168,856
-------------
PORTUGAL -- 2.5%
Republic of Portugal
5.375%................ 03/23/00 200,000 1,101,720
5.75%................. 03/23/02 380,000 2,117,347
-------------
3,219,067
-------------
RUSSIA -- 1.3%
GKO Pass-Through Notes
10.80%................ 01/15/98 3,128,000 519,219
25.817%............... 04/15/98 3,815,500 588,295
25.991%............... 07/01/98 4,060,538 588,094
-------------
1,695,608
-------------
SOUTH AFRICA -- 1.9%
Republic of South Africa
12.00%................ 02/28/05 13,000 2,466,807
-------------
SPAIN -- 4.4%
Spanish Government
10.90%................ 08/30/03 341,000 $ 2,845,854
8.00%................. 05/30/04 160,000 1,200,509
10.00%................ 02/28/05 208,000 1,729,473
-------------
5,775,836
-------------
SWEDEN -- 1.1%
Swedish Government
5.50%................. 04/12/02 11,000 1,383,200
-------------
UNITED KINGDOM -- 15.0%
Alliance & Leicester BLD
8.75%................. 12/07/06 1,500 2,705,677
Annington Finance
7.75%................. 10/02/11 500 900,350
Bank of Scotland
8.375%................ 10/29/49 450 781,623
Federal National Mtge.
Assoc. Global Bond
6.875%................ 06/07/02 990 1,630,461
Guaranteed Export
Finance Corp.
6.102%................ 09/29/00 900 1,229,124
10.625%............... 09/15/01 1,550 2,837,310
Halifax Building Society
8.75%................. 07/10/06 600 1,089,675
9.375%................ 05/15/21 710 1,447,892
National Power Co. PLC
8.375%................ 08/02/06 600 1,056,355
Republic of Austria
9.00%................. 07/22/04 360 660,469
Swiss Bank Corp. Jersey
8.75%................. 12/18/25 520 1,016,578
United Kingdom Treasury
9.00%................. 08/06/12 360 740,991
8.75%................. 08/25/17 1,640 3,438,030
-------------
19,534,535
-------------
TOTAL FOREIGN BONDS
(COST $119,967,824)................. 116,918,393
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 7.5%
ARGENTINA -- 0.6%
Republic of Argentina
Debs. [FRB, BRB]
6.6875%.............. 03/31/05 $ 504 451,458
Republic of Argentina
Unsub. Debs. [FRB,
BRB]
11.375%.............. 01/30/17 250 274,219
-------------
725,677
-------------
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- -------------
<S> <C> <C> <C>
BRAZIL -- 1.1%
Federal Republic of
Brazil Debs., EI Bond
[FRB, BRB]
6.6875%.............. 04/15/06 $ 49 $ 41,956
Federal Republic of
Brazil Debs., IDU
Bond [FRB, BRB]
6.8125%.............. 01/01/01 608 579,582
Republic of Brazil
Capitalization Bond
[FRB, BRB]
4.50%................ 04/15/14 456 357,757
Republic of Brazil Debt
Conversion Bond
Series L [FRN, BRB]
6.9375%.............. 04/15/12 200 151,000
Republic of Brazil
Global Bond
10.125%.............. 05/15/27 250 235,312
Republic of Brazil New
Money Bond [FRB, BRB]
6.75%................ 04/15/09 155 125,124
-------------
1,490,731
-------------
BULGARIA -- 1.1%
National Republic of
Bulgaria Debs. [FRN,
BRB]
6.6875%.............. 07/28/11 575 421,906
2.25%................ 07/28/12 1,620 988,200
-------------
1,410,106
-------------
DOMINICAN REPUBLIC -- 0.2%
Dominican Republic
Disc. [FRN, BRB]
6.875%............... 08/30/24 250 201,250
-------------
MEXICO -- 1.0%
Banco Nacional de
Comercio Exterier
Debs.
7.25%................ 02/02/04 120 111,375
United Mexican States
Global Bond
9.875%............... 01/15/07 100 104,312
11.375%.............. 09/15/16 625 717,578
United Mexican States
[BRB]
6.25%................ 12/31/19 500 418,694
-------------
1,351,959
-------------
POLAND -- 0.6%
Government of Poland
PDI [STEP, BRB]
4.00%................ 10/27/14 $ 375 $ 324,609
Government of Poland
REG -- PAR [BRB,
STEP]
3.00%................ 10/27/24 250 154,219
Poland Communications,
Inc. Sr. Notes 144A
9.875%............... 11/01/03 300 295,200
-------------
774,028
-------------
RUSSIA -- 1.7%
City of Moscow Unsub.
Deb.
9.50%................ 05/31/00 100 95,187
Republic of Kazakhstan
9.25%................ 12/20/99 100 98,250
Russia Interest Note --
US [FRN]
6.71875%............. 12/15/15 1,177 824,866
Russia Ministry of
Finance Unsub.
10.00%............... 06/26/07 650 602,062
Russia Principal Loans
[FRN]
2.6875%.............. 12/15/20 1,050 650,344
-------------
2,270,709
-------------
SOUTH AFRICA -- 0.2%
Ivory Coast [FLIRB, WI]
1.246%............... 12/29/49 750 256,875
-------------
VENEZUELA -- 1.0%
Republic of Venezuela
Debs. [FRN, BRB]
6.75%................ 12/18/07 1,190 1,066,964
Republic of Venezuela
[BRB]
6.75%................ 03/31/20 300 259,875
-------------
1,326,839
-------------
TOTAL SOVEREIGN ISSUES
(COST $9,300,891)........ 9,808,174
-------------
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
(000)
--------
<S> <C> <C> <C>
OPTIONS -- 0.0%
Call Option on United Kingdom
Pound Put Option on German
Deutsche Marks Strike Price
GBP 2.8759, Expires 1/5/98
(COST $61,070)............... 1,500 0
-------------
TOTAL INVESTMENTS -- 97.2%
(COST $129,329,785).............. 126,726,567
OTHER ASSETS LESS
LIABILITIES -- 2.8%.............. 3,680,964
-------------
NET ASSETS -- 100.0%............... $ 130,407,531
===========
</TABLE>
<PAGE>
T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy CAD 1,987,907 $1,405,874 $1,390,261 $(15,613)
01/98 Buy JPY 176,407,200 1,350,000 1,362,143 12,143
---------- ---------- --------
$2,755,874 $2,752,404 $ (3,470)
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Sell CAD 1,988,372 $ 1,396,027 $ 1,390,587 $ 5,440
========== ========== ===============
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
SETTLEMENT CONTRACTS TO IN EXCHANGE APPRECIATION
MONTH TYPE RECEIVE FOR (DEPRECIATION)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy CAD 1,972,308 AUD 2,060,928 $ 35,680
01/98 Buy DEM 2,526,175 GBP 853,438 4,808
01/98 Buy DEM 1,025,183 ITL 1,006,473,185 (787)
01/98 Buy DEM 3,206,448 ZAR 8,939,104 (48,711)
01/98 Buy FRF 4,153,360 DEM 1,241,439 330
01/98 Buy JPY 233,467,453 GBP 1,130,277 (52,601)
01/98 Buy JPY 627,713,692 NZD 8,073,488 151,904
01/98 Buy NZD 1,760,000 JPY 135,247,200 (20,897)
01/98 Buy ZAR 2,989,104 DEM 1,104,017 571
-------
$ 70,297
=======
</TABLE>
- --------------------------------------------------------------------------------
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>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 96.4%
AUTOMOTIVE PARTS -- 1.0%
Lear Corp.* ...................... 40,000 $ 1,900,000
----------
BEVERAGES -- 1.7%
PepsiCo, Inc. .................... 87,800 3,199,212
----------
BUILDING MATERIALS -- 0.9%
Lowe's Companies, Inc. ........... 36,000 1,716,750
----------
CLOTHING & APPAREL -- 5.3%
Claiborne, (Liz), Inc. ........... 79,600 3,328,275
Hilfiger, (Tommy) Corp.* ......... 100,800 3,540,600
Jones Apparel Group, Inc.* ....... 67,000 2,881,000
----------
9,749,875
----------
COMPUTER HARDWARE -- 2.5%
Bay Networks, Inc.* .............. 104,200 2,663,612
Compaq Computer Corp. ............ 34,100 1,924,519
----------
4,588,131
----------
COMPUTER SERVICES & SOFTWARE -- 12.9%
BMC Software, Inc.* .............. 27,800 1,824,375
Cadence Design Systems, Inc.* .... 223,200 5,468,400
CHS Electronics, Inc. ............ 113,950 1,951,394
Cisco Systems, Inc.* ............. 39,225 2,186,794
Computer Sciences Corp.* ......... 48,300 4,033,050
Parametric Technology Corp.* ..... 141,500 6,703,562
Sun Microsystems, Inc.* .......... 40,000 1,595,000
----------
23,762,575
----------
CONGLOMERATES -- 1.1%
Philip Morris Companies, Inc. .... 44,000 1,993,750
----------
CONSUMER PRODUCTS & SERVICES -- 3.4%
Cendant Corp. .................... 62,481 2,147,771
Republic Industries, Inc.* ....... 173,500 4,044,719
----------
6,192,490
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 11.3%
Altera Corp.* .................... 25,000 828,125
Applied Materials, Inc.* ......... 106,200 3,199,275
Honeywell, Inc. .................. 80,500 5,514,250
KLA-Tencor Corp.* ................ 19,400 749,325
LAM Research Corp.*............... 112,300 3,284,775
Linear Technology Corp. .......... 32,000 1,844,000
Maxim Integrated Products,
Inc.* .......................... 70,000 2,415,000
Philips Electronics NV [ADR] ..... 25,000 1,512,500
Tandy Corp. ...................... 42,000 1,619,625
----------
20,966,875
----------
ENTERTAINMENT & LEISURE -- 2.0%
Mirage Resorts, Inc.* ............ 57,800 1,314,950
Royal Caribbean Cruises Ltd. ..... 45,000 2,399,062
----------
3,714,012
----------
ENVIRONMENTAL SERVICES -- 5.7%
Allied Waste Industries, Inc.* ... 71,000 1,655,187
U.S. Filter Corp.* ............... 117,900 3,529,631
USA Waste Services, Inc.*......... 138,400 5,432,200
----------
10,617,018
----------
FINANCIAL-BANK & TRUST -- 1.5%
Chase Manhattan Corp. ............ 26,000 $ 2,847,000
----------
FINANCIAL SERVICES -- 6.6%
CIT Group, Inc. Cl-A* ............ 100,000 3,225,000
Green Tree Financial Corp. ....... 138,000 3,613,875
Household International, Inc. .... 17,000 2,168,562
The Money Store, Inc. ............ 154,700 3,248,700
----------
12,256,137
----------
FOOD -- 2.5%
International Home Foods,
Inc.* .......................... 100,000 2,800,000
Safeway, Inc.* ................... 27,500 1,739,375
----------
4,539,375
----------
HEALTHCARE SERVICES -- 4.5%
Medpartners, Inc.* ............... 94,000 2,103,250
Omnicare, Inc. ................... 88,400 2,740,400
Phycor, Inc.* .................... 65,800 1,776,600
Tenet Healthcare Corp.* .......... 50,000 1,656,250
----------
8,276,500
----------
HOTELS & MOTELS -- 2.3%
Hilton Hotels Corp. .............. 75,600 2,249,100
Promus Hotel Corp. * ............. 46,177 1,939,434
----------
4,188,534
----------
INSURANCE -- 2.4%
Conseco, Inc. .................... 50,000 2,271,875
Hartford Financial Services
Group, Inc. .................... 23,000 2,151,938
----------
4,423,813
----------
MACHINERY & EQUIPMENT -- 0.9%
Caterpillar, Inc. ................ 34,400 1,670,550
----------
MEDICAL SUPPLIES & EQUIPMENT -- 1.2%
Johnson & Johnson Co. ............ 33,000 2,173,875
----------
OFFICE EQUIPMENT -- 3.6%
Office Depot, Inc.* .............. 100,000 2,393,750
Officemax, Inc.* ................. 145,000 2,066,250
Xerox Corp. ...................... 30,000 2,214,375
----------
6,674,375
----------
OIL & GAS -- 4.9%
Baker Hughes, Inc. ............... 75,000 3,271,875
Halliburton Co. .................. 50,000 2,596,875
Noble Drilling Corp.* ............ 50,000 1,531,250
Texaco, Inc. ..................... 30,000 1,631,250
----------
9,031,250
----------
PAPER & FOREST PRODUCTS -- 0.9%
Kimberly-Clark Corp. ............. 34,600 1,706,213
----------
PHARMACEUTICALS -- 0.9%
Cardinal Health, Inc. ............ 22,500 1,690,313
----------
RESTAURANTS -- 1.0%
McDonald's Corp. ................. 40,000 1,910,000
----------
</TABLE>
<PAGE>
BERGER CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
RETAIL & MERCHANDISING -- 4.3%
Federated Department Stores,
Inc.* .......................... 65,000 $ 2,799,063
Nordstrom, Inc. .................. 49,400 2,982,525
TJX Companies, Inc. .............. 65,000 2,234,375
----------
8,015,963
----------
SEMICONDUCTORS -- 5.0%
Motorola, Inc. ................... 35,000 1,997,188
National Semiconductor Corp.* .... 132,000 3,423,750
Xilinx, Inc.* .................... 110,500 3,874,406
----------
9,295,344
----------
TELECOMMUNICATIONS -- 6.1%
China Telecom Hong Kong Ltd.* .... 25,000 839,063
Nokia Corp. Cl-A [ADR]............ 52,000 3,640,000
Teleport Communications Group,
Inc. Cl-A* ..................... 20,000 1,097,500
Tellabs, Inc.* ................... 43,600 2,305,350
Telstra Corp. Ltd. [ADR]* ........ 81,000 3,381,750
----------
11,263,663
----------
TOTAL COMMON STOCK
(COST $174,483,265)................. 178,363,593
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 2.7%
Federal Home Loan
Mortgage Corp.
4.90%
(COST $4,999,319)....... 01/02/98 $5,000 $ 4,999,319
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.5%
Temporary Investment Cash Fund ... 1,406,059 1,406,059
Temporary Investment Fund ........ 1,406,060 1,406,060
----------
(COST $2,812,119)................. 2,812,119
----------
TOTAL INVESTMENTS -- 100.6%
(COST $182,294,703)................. 186,175,031
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.6%).................... (1,125,219)
------------
NET ASSETS -- 100.0%.................. $185,049,812
===========
</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 -- 76.4%
AUSTRALIA -- 0.9%
Village Roadshow Ltd. ........... 396,000 $ 1,003,701
------------
CANADA -- 1.7%
Cinar Films, Inc. Cl-B*.......... 52,500 2,040,937
------------
CHILE -- 1.6%
Banco de A. Edwards [ADR]........ 44,800 761,600
Compania Cervecerias Unidas SA
[ADR].......................... 38,575 1,133,141
------------
1,894,741
------------
DENMARK -- 2.2%
Kobenhavns Lufthavne AS.......... 21,575 2,599,508
------------
FINLAND -- 3.9%
KCI Konecranes International*.... 41,250 1,363,516
Raision Tehtaat Oy............... 27,450 3,261,448
------------
4,624,964
------------
FRANCE -- 6.1%
Altran Technologies SA........... 6,975 2,133,361
Coflexip SA [ADR]................ 33,475 1,857,862
Dassault Systemes SA............. 57,850 1,764,581
Guilbert SA...................... 10,050 1,433,361
------------
7,189,165
------------
GERMANY -- 10.0%
Douglas Holding AG............... 16,350 495,581
Marschollek, Lautenschlaeger Ung
Partner AG..................... 10,450 2,673,467
Plettac AG....................... 2,150 296,545
Porsche AG Pfd. ................. 1,700 2,855,331
Schmalbach Lubeca AG............. 12,810 2,137,327
Schwarz Pharma AG................ 29,825 2,015,382
Sixt AG.......................... 3,800 300,105
Turbon International AG.......... 48,775 1,055,231
------------
11,828,969
------------
HONG KONG -- 2.5%
Asia Satellite Telecommunications
Holdings Ltd. [ADR]*........... 25,000 420,312
VTech Holdings Ltd. ............. 876,000 2,583,364
------------
3,003,676
------------
INDONESIA -- 0.9%
Gulf Indonesia Resources Ltd.*... 33,325 733,150
London Sumatra*.................. 637,600 362,613
------------
1,095,763
------------
IRELAND -- 0.7%
Ryanair Holdings PLC [ADR]*...... 33,000 829,125
------------
ITALY -- 2.6%
Bulgari SPA...................... 270,000 1,374,437
Editoriale L'Expresso SPA........ 75,000 360,578
Industrie Natuzzi SPA [ADR]...... 65,775 1,356,609
------------
3,091,624
------------
JAPAN -- 3.1%
Doutor Coffee Co. Ltd. .......... 39,000 1,004,837
Fuji Soft ABC, Inc. ............. 24,500 842,286
Nippon System Development........ 36,000 742,033
Noritsu Koki Co. Ltd. ........... 41,000 1,015,374
------------
3,604,530
------------
MALAYSIA -- 0.0%
Kentucky Fried Chicken Holdings
Warrants*...................... 21,333 $ 2,192
------------
MEXICO -- 2.8%
Grupo Iusacell SA [ADR]*......... 98,600 2,138,388
Grupo Posadas SA................. 1,675,000 1,142,733
------------
3,281,121
------------
NETHERLANDS -- 3.3%
Beter Bed Holding NV............. 14,875 286,900
Brunel International NV*......... 19,050 364,606
Hunter Douglas NV................ 46,950 1,644,337
IHC Caland NV.................... 26,025 1,350,528
Toolex Alpha NV.................. 29,000 293,257
------------
3,939,628
------------
NEW ZEALAND -- 0.3%
Sky Network Television Ltd. ..... 226,000 339,879
------------
NORWAY -- 2.8%
Kverneland ASA................... 37,325 607,554
Narvesen ASA..................... 15,050 332,757
Petroleum Geo-Services [ADR]*.... 19,125 1,238,344
Tomra Systems ASA................ 49,175 1,100,606
------------
3,279,261
------------
PANAMA -- 1.1%
Banco Latinoamericano de
Exportaciones SA Cl-E.......... 33,000 1,365,375
------------
PHILIPPINES -- 0.1%
International Container Terminal
Services, Inc.*................ 481,775 60,375
------------
SPAIN -- 2.6%
Tele Pizza SA*................... 37,600 3,034,339
------------
SWEDEN -- 1.3%
NetCom Systems AB Cl-B........... 62,000 1,332,307
Pricer AB Cl-B*.................. 8,000 148,216
------------
1,480,523
------------
UNITED KINGDOM -- 25.9%
British-Borneo Petroleum
Syndicate PLC.................. 382,473 2,662,050
BTG PLC.......................... 72,350 809,510
Cairn Energy PLC................. 188,525 1,538,600
Capital Radio PLC................ 184,950 1,512,466
DFS Furniture Co. PLC............ 151,350 1,285,012
Eidos PLC [ADR].................. 23,000 281,750
Flextech PLC*.................... 226,475 1,963,839
JBA Holdings PLC................. 200,300 3,389,692
Misys PLC........................ 99,892 3,007,855
Parity PLC....................... 213,800 2,237,381
PizzaExpress PLC................. 270,750 3,341,218
Psion PLC........................ 341,400 2,541,892
Regent Inns PLC.................. 186,125 1,009,102
Select Appointments Holdings
PLC............................ 90,400 831,487
</TABLE>
<PAGE>
FOUNDERS PASSPORT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
Virgin Express Holdings PLC
[ADR].......................... 32,150 $ 667,113
Wetherspoon, (J.D.) PLC.......... 630,000 3,472,645
------------
30,551,612
------------
TOTAL FOREIGN STOCK
(COST $79,935,175)................. 90,141,008
------------
COMMON STOCK -- 3.4%
EQUIPMENT SERVICES -- 1.2%
Rofin-Sinar Technologies,
Inc.*.......................... 119,900 1,453,788
------------
TELECOMMUNICATIONS -- 2.1%
Cellular Communications
International, Inc.*........... 53,850 2,517,488
------------
TOTAL COMMON STOCK
(COST $3,533,348).................. 3,971,276
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 20.2%
Associates Corp. of North
America
6.12%.................... 01/02/98 $ 1,255 1,254,787
5.55%.................... 01/05/98 4,411 4,408,280
Bell Atlantic Financial
Services, Inc.
6.15%.................... 01/06/98 5,196 5,191,562
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
General Electric Capital
Corp.
5.75%.................... 01/07/98 $ 5,716 $ 5,710,522
Household Finance Corp.
6.08%.................... 01/02/98 1,916 1,915,676
Merrill Lynch & Co., Inc.
6.05%.................... 01/07/98 1,679 1,677,307
Progress Capital Holdings
6.02%.................... 01/02/98 3,700 3,699,381
TOTAL COMMERCIAL PAPER
(COST $23,857,515)..................... 23,857,515
TOTAL INVESTMENTS -- 100.0%
(COST $106,746,038).................... 117,969,799
LIABILITIES IN EXCESS OF OTHER
ASSETS -- 0.0%......................... (32,070)
NET ASSETS -- 100.0%..................... $117,937,729
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE RECEIVE FOR AT VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/98 Buy DEM 408,405 $230,100 $227,173 $ (2,927)
01/98 Buy NLG 12,664 6,299 6,248 (51)
----- --------- -----------
$236,399 $233,421 $ (2,978)
===== ========= ===========
</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 -- 80.3%
CHEMICALS -- 6.6%
Applied Extrusion Technologies,
Inc.* .......................... 5,600 $ 37,800
Dupont, (E.I.) de Nemours &
Co. ............................ 6,400 384,400
FMC Corp.* ....................... 18,000 1,211,625
Great Lakes Chemical Corp. ....... 28,300 1,269,962
IMC Global, Inc. ................. 11,500 376,625
Lyondell Petrochemical Co. ....... 58,300 1,544,950
Millennium Chemicals, Inc. ....... 75,000 1,767,187
Olin Corp. ....................... 11,000 515,625
Witco Corp. ...................... 8,000 326,500
----------
7,434,674
----------
DIVERSIFIED METALS -- 5.1%
Freeport-McMoran Copper & Gold,
Inc. Cl-A ...................... 31,900 488,469
Freeport-McMoran Copper & Gold,
Inc. Cl-B ...................... 13,000 204,750
Inco, Ltd. ....................... 86,800 1,475,600
Nucor Corp. ...................... 28,500 1,376,906
Reynolds Metals Co.* ............. 35,300 2,118,000
----------
5,663,725
----------
DIVERSIFIED RESOURCES -- 1.0%
Penn Virginia Corp. .............. 25,700 758,150
Western Water Co.* ............... 28,000 304,500
----------
1,062,650
----------
ENERGY SERVICES -- 14.0%
Ashland, Inc. .................... 23,500 1,261,656
Camco International, Inc. ........ 10,800 687,825
Carbo Ceramics, Inc. ............. 43,750 1,400,000
Coflexip SA [ADR] ................ 42,600 2,364,300
Cooper Cameron Corp.* ............ 38,300 2,336,300
Energy Group PLC [ADR] ........... 7,875 351,422
Halliburton Co. .................. 19,600 1,017,975
McDermott International, Inc. .... 59,300 2,171,862
Niagara Mohawk Power Corp. ....... 95,000 997,500
Western Atlas, Inc.* ............. 20,000 1,480,000
Wheelabrator Technologies,
Inc. ........................... 103,000 1,654,437
----------
15,723,277
----------
HOTELS & MOTELS -- 0.5%
Patriot American Hospitality,
Inc. ........................... 17,400 501,337
----------
INTEGRATED PETROLEUM -- 15.0%
Amerada Hess Corp. ............... 25,500 1,399,312
Atlantic Richfield Co. ........... 13,000 1,041,625
British Petroleum Co. PLC
[ADR] .......................... 25,600 2,040,000
Ente Nazionale Idrocarbure SPA
[ADR] .......................... 13,000 741,812
Mobil Corp. ...................... 49,200 3,551,625
Phillips Petroleum Co. ........... 33,000 1,604,625
Repsol SA [ADR] .................. 18,600 791,662
Texaco, Inc. ..................... 52,000 2,827,500
Total SA [ADR] ................... 45,000 2,497,500
Ultramar Diamond Shamrock
Corp. .......................... 10,800 344,250
----------
16,839,911
----------
OIL & GAS -- 6.8%
Exxon Corp. ...................... 9,000 $ 550,688
Hanover Compressor Co.* .......... 41,400 846,113
Ocean Energy, Inc.* .............. 3,500 172,594
Petroleo Brasileiro SA [ADR]
144A* .......................... 58,600 1,370,478
Royal Dutch Petroleum Co. ........ 28,000 1,517,250
Santa Fe International Corp. ..... 12,000 488,250
USX-Marathon Group ............... 80,500 2,716,875
----------
7,662,248
----------
PAPER & FOREST PRODUCTS -- 7.0%
Fort James Corp. ................. 22,800 872,100
Georgia Pacific Corp. ............ 13,300 807,975
Georgia Pacific Timber Group* .... 13,300 301,744
International Paper Co. .......... 31,000 1,336,875
Jefferson Smurfit Corp.* ......... 104,600 1,477,475
Kimberly-Clark Corp. ............. 15,200 749,550
Louisiana-Pacific Corp. .......... 78,000 1,482,000
Willamette Industries, Inc. ...... 24,800 798,250
----------
7,825,969
----------
PETROLEUM EXPLORATION &
PRODUCTION -- 7.9%
Barrett Resources Corp.* ......... 15,100 456,775
Bouygues Offshore SA [ADR]........ 40,000 870,000
Enserch Corp.* ................... 202,000 1,830,625
Houston Exploration Co.* ......... 50,500 927,938
Noble Affiliates, Inc. ........... 9,900 348,975
Rutherford-Moran Oil Corp.* ...... 35,300 630,988
Societe Nationale Elf Aquitaine SA
[ADR] .......................... 7,000 410,375
Union Texas Petroleum Holdings,
Inc. ........................... 91,700 1,908,506
United Meridian Corp.* ........... 51,300 1,442,813
----------
8,826,995
----------
PRECIOUS METALS -- 10.6%
Ashanti Goldfields Co. Ltd.
[GDR] .......................... 32,900 246,750
Battle Mountain Gold Co. ......... 272,000 1,598,000
Cambior, Inc. .................... 140,400 824,850
Canyon Resources Corp.* .......... 368,400 437,475
Dayton Mining Corp.* ............. 60,000 116,250
Driefontein Consolidated Ltd.
[ADR] .......................... 100,000 662,500
Gold Fields of South Africa Ltd.
[ADR] .......................... 40,000 620,000
Homestake Mining Co. ............. 173,700 1,541,588
Kloof Gold Mining Co. Ltd.
[ADR] .......................... 130,000 430,625
Newmont Mining Corp. ............. 89,224 2,620,955
Placer Dome, Inc. ................ 147,300 1,868,869
TVX Gold, Inc.* .................. 260,900 880,538
----------
11,848,400
----------
RAILROADS -- 1.1%
Burlington Northern Santa Fe
Corp. .......................... 13,700 1,273,244
----------
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
REAL ESTATE -- 4.7%
AMB Property Corp. [REIT] ........ 14,893 $ 374,187
Apartment Investment & Management
Co. Cl-A [REIT] ................ 23,700 870,975
Boston Properties, Inc. [REIT] ... 8,600 284,338
Camden Property Trust [REIT] ..... 13,100 406,100
Catellus Development Corp.* ...... 26,500 530,000
Equity Office Properties Trust
[REIT] ......................... 25,735 812,261
Security Capital Group, Inc.
Warrants* ...................... 1,804 9,471
Security Capital Pacific Trust
[REIT] ......................... 34,285 831,411
The Rouse Co. [REIT] ............. 13,200 432,300
United Dominion Realty Trust
[REIT] ......................... 50,000 696,875
----------
5,247,918
----------
TOTAL COMMON STOCK
(COST $83,111,614).................. 89,910,348
----------
PREFERRED STOCK -- 0.3%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT]
(COST $225,345)................. 9,890 369,639
----------
FOREIGN STOCK -- 13.6%
DIVERSIFIED METALS -- 2.7%
English China Clays
PLC -- (GBP) ................... 181,000 801,135
Lonrho PLC -- (GBP) .............. 1,464,035 2,240,317
----------
3,041,452
----------
HOTELS & MOTELS -- 0.4%
Sun International
Ltd. -- (ZAR) .................. 1,150,000 472,633
----------
METALS & MINING -- 2.4%
Anglo American Platinum Corp.
Ltd. -- (ZAR) .................. 50,139 669,708
AVMIN Ltd. -- (ZAR) .............. 240,000 288,512
Oryx Gold Holdings
Ltd. -- (ZAR)* ................. 1,450,000 953,487
Rio Tinto PLC -- (GBP) ........... 63,000 776,421
----------
2,688,128
----------
NON-FERROUS METALS -- 0.2%
Bougainville Copper
Ltd. -- (AUD)* ................. 882,542 270,267
----------
PAPER & FOREST PRODUCTS -- 0.7%
Macmillan Bloedel
Ltd. -- (CAD) .................. 72,000 747,159
----------
PETROLEUM EXPLORATION &
PRODUCTION -- 0.7%
Berkley Petroleum
Corp. -- (CAD)* ................ 20,100 210,689
Northstar Energy
Corp. -- (CAD)* ................ 78,000 547,791
----------
758,480
----------
PRECIOUS METALS -- 5.7%
Banro Resources
Corp. -- (CAD)* ................ 70,000 $ 256,810
Banro Resources Corp. Special --
(CAD)* ......................... 91,630 384,846
Banro Resources Corp. Special
Warrants -- (CAD)* ............. 45,815 0
Delta Gold NL -- (AUD) ........... 850,000 894,993
Gold Fields of South Africa
Ltd. -- (ZAR) .................. 3,800 58,175
Goldfields Ltd. -- (AUD) ......... 665,000 511,285
Impala Platinum Holdings Ltd. --
(ZAR) .......................... 94,900 906,809
Normandy Mining Ltd. -- (AUD) .... 458,658 445,282
Prime Resources Group, Inc. --
(CAD) .......................... 358,000 2,376,626
Samax 144A -- (CAD)* ............. 193,500 574,678
War Eagle Mining Co., Inc.
Warrants -- (CAD)* ............. 59,000 0
----------
6,409,504
----------
REAL ESTATE -- 0.8%
Security Capital U.S. Realty
[REIT] -- (NLG)* ............... 60,000 852,000
----------
TOTAL FOREIGN STOCK
(COST $19,480,116).................. 15,239,623
----------
<CAPTION>
PAR
MATURITY (000)
--------- ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.4%
Federal Home Loan
Mortgage Corp.
4.75%
(COST $1,499,802)...... 01/02/98 $1,500 1,499,802
------------
COMMERCIAL PAPER -- 3.1%
Procter & Gamble Co.
5.90%
(COST $3,491,396)........ 01/16/98 3,500 3,491,396
------------
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 1.0%
Temporary Investment Cash Fund
(COST $1,082,331)................. 1,082,331 1,082,331
----------
TOTAL INVESTMENTS -- 99.7% (COST
$108,890,604)................................. 111,593,139
OTHER ASSETS LESS LIABILITIES -- 0.3%........... 360,920
----------
NET ASSETS -- 100.0%............................ $111,954,059
==========
</TABLE>
<PAGE>
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
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 LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 18.8%
FINANCIAL SERVICES -- 1.6%
Salomon, Inc Sr. Notes
7.00%.................. 01/20/98 $ 2,650 $ 2,650,954
9.375%................. 04/15/98 2,000 2,018,400
4,669,354
FOOD -- 4.7%
RJR Nabisco Inc. Notes
7.625%................. 09/15/03 5,000 5,110,600
8.625%................. 12/01/02 8,000 8,516,720
13,627,320
INDUSTRIAL PRODUCTS -- 4.7%
Chesapeake Energy Corp.
Sr. Notes
12.00%................. 03/01/01 8,000 8,460,000
Imperial Chemical, Inc.
Notes
6.00% [VR]............. 03/05/98 5,000 5,004,810
13,464,810
TELECOMMUNICATIONS -- 1.7%
TCI Communications, Inc.
Sr. Notes
6.355% [FRN]........... 09/11/00 5,000 5,008,950
UTILITIES -- 6.1%
Connecticut Light & Power
7.25%.................. 07/01/99 6,000 6,001,260
Long Island Lighting Co.
8.50%.................. 05/15/06 5,000 5,371,800
9.75%.................. 05/01/21 1,000 1,015,850
9.625%................. 07/01/24 5,000 5,156,250
17,545,160
TOTAL CORPORATE OBLIGATIONS
(COST $53,802,909)......... 54,315,594
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 78.2%
FEDERAL HOME LOAN MORTGAGE
CORP. -- 12.0%
5.95%.................. 06/19/98 10,000 10,013,899
8.50%.................. 01/01/25 19,690 20,551,363
8.75%.................. 10/01/01 2,158 2,215,475
6.50% [TBA]............ 01/14/28 1,500 1,482,660
6.50% [TBA]............ 02/12/28 500 493,905
34,757,302
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 32.3%
5.84%................. 06/19/98 5,000 5,003,965
6.334% [VR]........... 03/01/17 2,379 2,383,901
6.907%................ 05/01/25 1,460 1,491,467
7.50%...........01/25/22-05/01/24 67,749 69,679,011
7.694% [VR]........... 01/01/25 475 487,045
8.00%................. 11/25/23 4,189 4,353,870
6.50% [TBA]........... 01/14/28 10,000 9,875,000
-----------
93,274,259
-----------
PAR
MATURITY (000) VALUE
-------- ------- -----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 30.4%
6.00%................. 11/20/26 $25,225 $25,824,347
6.50%................. 01/20/26 8,590 8,772,820
7.00%.......... 01/15/24-08/15/25 2,634 2,657,162
7.00% [VR]............ 07/20/17 286 292,830
7.00% [VR]............ 08/20/17 373 381,999
7.00% [VR]............ 09/20/17 313 321,775
7.00% [VR]............ 03/20/24 5,991 6,124,922
7.00% [VR]............ 07/20/24 368 376,947
7.375% [VR]........... 05/20/24 2,957 3,038,597
8.00%.......... 01/15/25-11/15/25 8,799 9,128,899
7.50% [TBA]........... 01/22/28 20,000 20,487,600
8.00% [TBA]........... 01/22/28 10,000 10,365,600
-----------
87,773,498
-----------
STUDENT LOAN MARKETING
ASSOCIATION -- 3.5%
6.00%.................. 06/30/98 10,000 10,017,699
-------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $224,126,411)........ 225,822,758
-------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 3.9%
Merrill Lynch Mtge.
Investors, Inc. Cl-B
7.332% [VR]............ 06/15/21 1,096 1,125,023
Resolution Trust Corp.
7.50% [VR]............. 07/25/28 10,000 10,194,176
-------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $11,261,427)......... 11,319,199
-------------
U.S. TREASURY OBLIGATIONS --
3.5%
U.S. TREASURY
BILLS -- 0.0%
5.02% #................ 02/05/98 10 9,952
5.14% #................ 03/12/98 15 14,852
-------------
24,804
-------------
U.S. TREASURY
NOTES -- 3.5%
5.625%................. 12/31/02 10,000 9,963,399
-------------
TOTAL U.S. TREASURY
OBLIGATIONS
(COST $9,999,014).......... 9,988,203
-------------
SOVEREIGN ISSUES -- 2.1%
Republic of Argentina
[FRB, BRB]
6.688%................. 03/31/05 4,800 4,296,600
Republic of Argentina
Bote 10 [FRN, PIK]
5.719%................. 04/01/00 1,994 1,888,014
-------------
TOTAL SOVEREIGN ISSUES
(COST $5,808,881).......... 6,184,614
-------------
</TABLE>
<PAGE>
PIMCO LIMITED MATURITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- -------- -------------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.0%
New Zealand Government
10.00%
(COST $6,187,247)...... 03/15/02 8,900 $ 5,659,577
-------------
PAR
(000)
--------
CERTIFICATES OF
DEPOSIT -- 3.5%
Landesbank Hessen
Thueringer
5.93%
(COST $9,995,127)...... 06/30/98 $10,000 10,002,110
-------------
COMMERCIAL PAPER -- 6.4%
International Business
Machines Corp.
5.82%.................. 01/16/98 1,100 1,097,332
Ford Motor Credit Corp.
5.68%.................. 01/06/98 1,500 1,498,817
General Electric Capital
Corp.
5.60%.................. 01/14/98 1,600 1,596,844
KFW International
Financial Corp.
5.89%.................. 01/09/98 3,500 3,495,419
National Rural Utility
Corp.
5.54%.................. 01/05/98 1,000 999,380
5.54%.................. 01/12/98 1,000 998,267
New Center Asset Trust
5.56%.................. 01/14/98 1,400 1,397,224
5.56%.................. 01/21/98 5,200 5,184,138
Procter & Gamble Co.
5.83%.................. 01/16/98 1,300 1,296,842
6.04%.................. 01/26/98 900 896,225
-------------
TOTAL COMMERCIAL PAPER
(COST $18,460,217)......... 18,460,488
-------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.2%
Temporary Investment Cash Fund... 245,384 $ 245,384
Temporary Investment Fund........ 245,383 245,383
----------
(COST $490,767).................. 490,767
----------
TOTAL INVESTMENTS -- 118.6%
(COST $340,132,000)................ 342,243,310
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (18.6%).................. (53,600,863)
----------
NET ASSETS -- 100.0%................. $288,642,447
==========
</TABLE>
# Securities with an aggregate market value of $24,804 have been segregated with
the custodian to cover margin requirements for the following open futures
contracts at December 31, 1997:
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION AMOUNT UNREALIZED
DESCRIPTION MONTH (000) APPRECIATION
- ----------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury 10 Year
Note 03/98 2,000 $ 5,000
======== =============
</TABLE>
Interest rate swap agreement outstanding at December 31, 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 06/02 7,000 $ 30,344
======== =============
</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 -- 96.3%
BUSINESS SERVICES -- 0.5%
Robert Half International,
Inc.* .......................... 30,200 $ 1,208,000
----------
COMPUTER HARDWARE -- 11.3%
Adaptec, Inc.* ................... 121,100 4,495,838
Bay Networks, Inc.* .............. 160,700 4,107,894
Compaq Computer Corp.* ........... 137,320 7,749,997
Dell Computer Corp.* ............. 89,600 7,526,400
EMC Corp.* ....................... 101,700 2,790,394
----------
26,670,523
----------
COMPUTER SERVICES & SOFTWARE -- 7.6%
BMC Software, Inc.* .............. 75,200 4,935,000
Cadence Design Systems, Inc.* .... 193,900 4,750,550
CompUSA, Inc.* ................... 266,752 8,269,312
----------
17,954,862
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 14.5%
Applied Materials, Inc.* ......... 203,700 6,136,462
Inacom Corp.* .................... 146,100 4,099,931
KLA-Tencor Corp.* ................ 121,100 4,677,487
Novellus System, Inc.* ........... 121,100 3,913,044
Sony Corp. [ADR] ................. 40,300 3,657,225
Tech Data Corp.* ................. 105,400 4,097,425
Teradyne, Inc.* .................. 169,700 5,430,400
VLSI Technology, Inc.* ........... 91,300 2,156,962
----------
34,168,936
----------
FINANCIAL-BANK & TRUST -- 6.0%
Chase Manhattan Corp. ............ 44,300 4,850,850
Citicorp ......................... 44,300 5,601,181
Northern Trust Corp. ............. 52,300 3,647,925
----------
14,099,956
----------
FINANCIAL SERVICES -- 12.5%
Ahmanson, (H.F.) & Co. ........... 95,200 6,372,450
Franklin Resources, Inc. ......... 40,800 3,547,050
Household International, Inc. .... 39,500 5,038,719
Merrill Lynch & Co., Inc. ........ 97,076 7,080,481
Schwab, (Charles) Corp. .......... 88,700 3,719,856
SunAmerica, Inc. ................. 88,750 3,794,062
----------
29,552,618
----------
FOOD -- 1.6%
Safeway, Inc.* ................... 59,500 3,763,375
----------
HEALTHCARE SERVICES -- 4.9%
Concentra Managed Care, Inc.* .... 81,800 2,760,750
Healthcare Compare Corp.* ........ 88,100 4,504,112
United Healthcare Corp. .......... 86,600 4,302,937
----------
11,567,799
----------
INSURANCE -- 2.9%
The Equitable Companies, Inc. .... 45,500 2,263,625
Travelers Group, Inc. ............ 86,050 4,635,944
----------
6,899,569
----------
MEDICAL SUPPLIES & EQUIPMENT -- 3.1%
HBO & Co. ........................ 150,400 7,219,200
----------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
OFFICE EQUIPMENT -- 1.1%
Staples, Inc.* ................... 89,500 $ 2,483,625
----------
PHARMACEUTICALS -- 9.2%
Bristol-Meyers Squibb Co. ........ 29,100 2,753,587
Cardinal Health, Inc. ............ 59,100 4,439,887
Lilly, (Eli) & Co. ............... 46,500 3,237,563
McKesson Corp. ................... 63,600 6,880,725
Pfizer, Inc. ..................... 59,100 4,406,644
----------
21,718,406
----------
RETAIL & MERCHANDISING -- 13.4%
Costco Companies, Inc.* .......... 91,000 4,060,875
CVS Corp. ........................ 77,200 4,945,625
Dayton-Hudson Corp. .............. 69,700 4,704,750
Gap, Inc. ........................ 113,650 4,027,472
General Nutrition Companies,
Inc.* .......................... 60,400 2,053,600
Nordstrom, Inc. .................. 86,000 5,192,250
Starbucks Corp. .................. 88,800 3,407,700
Walgreen Co. ..................... 103,900 3,259,863
----------
31,652,135
----------
SEMICONDUCTORS -- 0.8%
National Semiconductor Corp.* .... 74,500 1,932,344
----------
TELECOMMUNICATIONS -- 2.7%
Lucent Technologies, Inc. ........ 45,500 3,634,313
Northern Telecom Ltd. ............ 30,600 2,723,400
----------
6,357,713
----------
TRANSPORTATION -- 4.2%
CNF Transportation, Inc. ......... 98,000 3,760,750
Federal Express Corp.* ........... 38,400 2,344,800
Swift Transportation Co., Inc. ... 23,100 747,863
USFreightways Corp. .............. 50,000 1,625,000
Werner Enterprises, Inc. ......... 30,100 617,050
Yellow Corp. ..................... 30,100 756,263
----------
9,851,726
----------
TOTAL COMMON STOCK
(COST $218,581,896)................. 227,100,787
----------
</TABLE>
<PAGE>
ROBERTSON STEPHENS VALUE + GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.9%
Temporary Investment Cash Fund ... 3,376,869 $ 3,376,869
Temporary Investment Fund ........ 3,376,869 3,376,869
----------
(COST $6,753,738)................. 6,753,738
----------
TOTAL INVESTMENTS -- 99.2%
(COST $225,335,634)................. 233,854,525
OTHER ASSETS LESS
LIABILITIES -- 0.8%................. 1,793,174
----------
NET ASSETS -- 100.0%.................. $235,647,699
==========
</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 -- 87.9%
ARGENTINA -- 1.0%
Banco Rio de La Plata SA* ....... 9,650 $ 135,100
Nortel Inversora [ADR]* ......... 38,625 984,938
Telecom Argentina Stet SA
Cl-B [ADR] .................... 11,550 412,912
Telefonica de Argentina SA
Cl-B [ADR] .................... 6,400 238,400
YPF SA [ADR] .................... 23,000 786,313
----------
2,557,663
----------
AUSTRIA -- 0.6%
Erste Bank Der Oesterreichischen
Sparkassen AG 144A* ........... 30,133 1,499,404
----------
BRAZIL -- 0.9%
Companhia Energetica de Minas
Geras [ADR] ................... 3,125 135,778
Companhia Paranaense de Energia-
Copel ......................... 69,900 956,756
Ericsson Telecomunicacoes SA .... 20,540,000 658,888
Petroleo Brasileiro SA .......... 580,000 135,643
Unibanco Holdings SA Sponsored
[GDR]* ........................ 9,275 298,539
----------
2,185,604
----------
CHILE -- 0.1%
Quinenco SA [ADR]* .............. 23,800 273,700
----------
DENMARK -- 1.3%
BG Bank AS ...................... 5,686 382,820
BG Bank AS 144A* ................ 12,772 859,897
SAS Danmark AS .................. 24,525 358,175
Sophus Berendsen AS ............. 7,601 1,254,399
Unidanmark AS Cl-A .............. 5,663 416,007
----------
3,271,298
----------
FINLAND -- 4.1%
Amer Group Ltd.* ................ 14,866 285,282
Merita Ltd. Cl-A................. 251,062 1,373,919
Metra Oy Cl-B ................... 4,193 98,560
Nokia AB Cl-A ................... 32,112 2,282,139
Nokia Corp. Cl-A [ADR] .......... 11,950 836,500
Pohjola Insurance Co. ........... 61,232 2,271,400
Raision Tehtaat Oy .............. 11,179 1,328,223
Sampo Insurance Co. Ltd. ........ 63,296 2,057,375
----------
10,533,398
----------
FRANCE -- 10.8%
Alcatel Alsthom ................. 2,414 306,974
Assurances Generales de
France ........................ 6,299 333,909
Axime* .......................... 4,952 638,770
Banque Nationale de Paris ....... 13,700 728,513
Cap Gemini SA ................... 15,331 1,257,650
Compagnie Francaise d'Etudes et
de Construction Technip ....... 5,405 570,521
Credit Commercial de France ..... 10,904 747,674
Credit Local de France .......... 10,155 1,176,562
Dassault Systemes SA [ADR] ...... 1,750 54,031
GrandVision 144A* ............... 23,024 947,619
GrandVision* .................... 12,492 514,144
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Groupe Danone ................... 4,480 $ 800,551
Groupe Danone [ADR].............. 125,775 4,496,456
Lagardere S.C.A. ................ 8,365 276,708
Michelin C.G.D.E. Cl-B .......... 28,403 1,430,570
Renault SA* ..................... 67,657 1,904,022
Rhone-Poulenc ................... 26,034 1,166,710
Societe Generale ................ 2,013 274,385
Societe Nationale Elf Aquitaine
SA ............................ 37,009 4,306,334
Suez Lyonnaise des Eaux ......... 16,102 1,782,610
Total SA Cl-B ................... 35,552 3,870,861
Union des Assurances
Federales ..................... 340 44,649
----------
27,630,223
----------
GERMANY -- 5.9%
Adidas AG ....................... 4,214 557,792
Allianz AG ...................... 2,478 639,470
AMB Aachener & Muenchener
Beteiligungs AG ............... 11,785 1,297,763
Bankgesellschaft Berlin AG ...... 25,780 566,344
Bayerische Vereinsbank AG ....... 44,412 2,865,227
Deutsche Bank AG ................ 39,815 2,785,659
Deutsche Lufthansa AG ........... 33,533 630,362
Deutsche Lufthansa AG 144A ...... 48,330 908,519
Deutsche Pfandbrief &
Hypothekenbank AG ............. 26,600 1,575,549
Fresenius Medical Care AG
[ADR]* ........................ 4,175 90,806
Muenchener Rueckversicherung
AG ............................ 1,354 515,081
Pfeiffer Vacuum Technology AG
[ADR]* ........................ 80,525 2,259,733
Siemens AG ...................... 4,533 273,537
----------
14,965,842
----------
HONG KONG -- 0.6%
China Telecom Ltd. 144A ......... 164,000 281,508
Citic Pacific Ltd. .............. 67,000 266,330
First Pacific Co. Ltd. .......... 1,184,860 573,447
Hutchison Whampoa Ltd. .......... 26,000 163,082
Swire Pacific Ltd. Cl-A ......... 57,000 312,650
----------
1,597,017
----------
IRELAND -- 0.6%
Ryanair Holdings PLC [ADR]* ..... 59,675 1,499,334
----------
ITALY -- 3.4%
Aeroporti di Roma SPA 144A* ..... 197,886 2,053,855
Assicurazioni Generali .......... 104,638 2,571,567
Banca Commerciale Italia NA ..... 830,689 2,889,563
Credito Italiano SPA ............ 163,293 503,826
Telecom Italia SPA .............. 103,609 662,208
----------
8,681,019
----------
JAPAN -- 8.2%
Bridgestone Corp. ............... 33,130 721,098
Fujitsu Ltd. .................... 32,000 344,559
Hitachi Ltd. .................... 65,000 464,925
Kita Kyushu Coca-Cola
Bottling ...................... 33,550 639,927
Matsushita Electric Works
Ltd. .......................... 26,000 225,963
Mitsubishi Estate Co. Ltd. ...... 93,000 1,015,681
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Mitsui Fudosan Co. Ltd. ......... 13,000 $ 125,980
Nippon Denso Corp. .............. 16,000 289,184
Nippon Telegraph & Telephone
Corp. ......................... 674 5,805,827
NTT Data Corp. .................. 38 2,054,590
Rohm Co. ........................ 12,000 1,227,493
Ryohin Keikaku Co. Ltd. ......... 2,000 132,286
Sony Corp. ...................... 64,000 5,709,843
Takeda Chemical Industries ...... 61,000 1,745,255
Tokyo Electron Ltd. ............. 17,000 546,527
----------
21,049,138
----------
MEXICO -- 0.9%
Cifra V* ........................ 68,818 169,019
Fomento Economico Mexicano SA
Cl-B .......................... 65,000 519,238
Grupo Carso SA de CV ............ 21,100 140,548
Grupo Casa Autrey SA de CV
[ADR] ......................... 14,075 287,658
Grupo Televisa SA [GDR]* ........ 17,250 667,359
Kimberly-Clark de Mexico SA
Cl-A .......................... 82,800 392,339
----------
2,176,161
----------
NETHERLANDS -- 10.9%
AKZO Nobel NV ................... 27,105 4,674,313
ASM Lithography Holding NV* ..... 4,900 330,750
Elsevier NV ..................... 165,899 2,684,198
Getronics NV .................... 79,541 2,534,665
KLM Royal Dutch Airlines NV ..... 41,745 1,544,410
Koninklijke Ahrend Groep NV ..... 40,990 1,287,995
Koninklijke Nutricia Verenigde
Bedrijven NV .................. 8,595 260,746
Philips Electronics NV .......... 62,915 3,773,851
Philips Electronics NV [ADR] .... 70,179 4,245,830
Simac Techniek NV ............... 3,252 378,582
Vedior NV 144A .................. 6,516 117,320
Wolters Kluwer NV ............... 45,872 5,926,252
----------
27,758,912
----------
NORWAY -- 1.0%
Ekornes ASA ..................... 19,206 157,614
Merkantildata ASA ............... 13,549 466,815
Petroleum Geo-Services [ADR]* ... 19,975 1,293,381
SAS Norge ASA Cl-B .............. 26,266 366,973
Tomra Systems ASA ............... 17,824 398,926
----------
2,683,709
----------
PERU -- 0.2%
Millicom International Cellular
SA* ........................... 3,225 121,341
Telefonica del Peru SA
Cl-B [ADR] .................... 17,000 396,313
----------
517,654
----------
PORTUGAL -- 1.1%
Brisa-Auto Estradas de Portugal
SA* ........................... 79,700 2,858,189
----------
RUSSIA -- 0.2%
Lukoil Holding [ADR] ............ 4,450 408,621
Mosenergo [ADR] 144A* ........... 1,650 62,700
Unified Energy Systems [GDR]* ... 4,680 140,400
----------
611,721
----------
SHARES VALUE
---------- ------------
SOUTH AFRICA -- 0.3%
Dimension Data Holdings Ltd.
144A* ......................... 203,297 $ 877,298
----------
SPAIN -- 0.3%
Tele Pizza SA* .................. 9,277 748,659
----------
SWEDEN -- 8.0%
Assa Abloy AB Cl-B .............. 69,858 1,848,943
Electrolux AB Cl-B .............. 89,117 6,188,712
Ericsson, (L.M.) Telephone Co.
[ADR] ......................... 17,088 637,596
Ericsson, (L.M.) Telephone Co.
Cl-B .......................... 45,022 1,693,781
Investor AB ..................... 18,763 915,169
Medical Invest Svenska AB* ...... 10,572 353,095
Munters AB 144A* ................ 61,603 531,839
Prosolvia AB Cl-B 144A* ......... 9,200 367,566
SAS Sverige AB .................. 29,019 420,599
Securitas AB .................... 213,323 6,452,634
Skandinaviska Enskilda Banken ... 78,461 993,821
----------
20,403,755
----------
SWITZERLAND -- 7.5%
Ares-Serono Group ............... 743 1,227,678
Baloise Holding Ltd. ............ 144 266,862
Clariant AG ..................... 129 107,902
Credit Suisse Group ............. 7,618 1,180,397
Kuoni Reisen AG ................. 508 1,906,894
Novartis AG ..................... 1,036 1,683,398
Roche Holding AG ................ 249 2,476,257
Sair Group* ..................... 24 32,909
Schweizerische
Lebensversicherungs-Und
Rentenanstalt ................. 8,256 6,492,497
Union Bank of Switzerland........ 1,533 2,219,805
Zurich
Versicherungs-Gesellschaft .... 3,427 1,635,317
----------
19,229,916
----------
UNITED KINGDOM -- 20.0%
Amvescap PLC .................... 29,237 251,599
Barclays PLC .................... 23,891 636,045
British Petroleum Co. PLC ....... 67,365 886,746
Capita Group PLC ................ 254,217 1,543,498
Compass Group PLC ............... 67,929 831,578
Compass Group PLC 144A .......... 9,626 118,632
Electrocomponents PLC ........... 318,758 2,370,689
Energis PLC ..................... 169,380 707,898
Freepages Group PLC* ............ 202,634 109,194
Hays PLC ........................ 79,014 1,055,687
Imperial Chemical Industries
PLC ........................... 69,994 1,095,258
JBA Holdings PLC ................ 77,893 1,318,189
Lloyds TSB Group PLC ............ 380,572 4,928,180
Logica PLC ...................... 114,457 2,179,909
Misys PLC ....................... 16,581 499,272
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
National Westminster Bank PLC ... 27,398 $ 456,220
Newsquest PLC 144A* ............. 566,132 2,482,504
Pilkington PLC .................. 295,677 622,734
Powerscreen International PLC ... 637,517 6,372,548
Premier Farnell PLC ............. 110,312 799,546
Rentokil Initial PLC ............ 1,395,324 6,084,095
Royal & Sun Alliance Insurance
Group PLC ..................... 139,446 1,406,506
Select Appointments Holdings
PLC ........................... 142,950 2,608,838
SEMA Group PLC .................. 56,654 1,381,975
Siebe PLC ....................... 330,589 6,500,269
Smithkline Beecham PLC [ADR] .... 1,000 51,438
Stagecoach Holdings PLC ......... 35,434 489,167
TI Group PLC .................... 7,571 58,052
Tomkins PLC ..................... 144,103 689,987
Victrex PLC ..................... 27,849 105,851
Virgin Express Holdings PLC
[ADR]* ........................ 31,100 629,775
Wetherspoon, (J.D.) PLC ......... 2,490 13,725
Williams PLC .................... 323,330 1,798,199
----------
51,083,803
----------
TOTAL FOREIGN STOCK
(COST $210,319,143)................ 224,693,417
----------
COMMON STOCK -- 3.6%
CHEMICALS -- 0.1%
Monsanto Co. .................... 3,250 136,500
Solutia, Inc. ................... 650 17,347
----------
153,847
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 0.9%
Texas Instruments, Inc. ......... 53,700 2,416,500
----------
FINANCIAL SERVICES -- 0.1%
Romanian Investment Fund** ...... 163 150,775
----------
OIL & GAS -- 1.7%
Schlumberger Ltd. ............... 52,125 4,196,063
Transocean Offshore, Inc. ....... 7,200 346,950
----------
4,543,013
----------
SHARES VALUE
---------- ------------
PHARMACEUTICALS -- 0.1%
Bristol-Meyers Squibb Co. ....... 2,600 $ 246,025
----------
TELECOMMUNICATIONS -- 0.7%
Northern Telecom Ltd. ........... 19,250 1,713,250
----------
TOTAL COMMON STOCK
(COST $9,602,095).................. 9,223,410
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000)
-------- ---------
<S> <C> <C> <C>
FOREIGN BONDS -- 0.2%
JAPAN
STB Cayman Capital Ltd.
144A
0.50%
(COST $650,421)........ 10/01/07 75,000 428,430
-------------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
---------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 3.9%
Federal Mortgage Corp.
Disc. Notes
5.70%
(COST $9,998,417)...... 9,998,417
01/02/98 $ 10,000 -------------
COMMERCIAL PAPER -- 4.3%
General Electric Capital
Services, Inc.
6.70%
(COST $11,097,936)..... 11,097,936
01/02/98 11,100 -------------
TOTAL INVESTMENTS -- 99.9%
(COST $241,668,012).................. 255,441,610
OTHER ASSETS LESS
LIABILITIES -- 0.1%.................. 263,514
-------------
NET ASSETS -- 100.0%................... $ 255,705,124
===========
</TABLE>
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2/98 Buy CHF 4,000,000 $ 2,889,088 $ 2,759,725 $ (129,363)
2/98 Buy DEM 6,575,000 3,824,600 3,665,234 (159,366)
1/98 Buy FRF 14,257,261 2,484,753 2,372,025 (112,728)
2/98 Buy FRF 10,000,000 1,746,533 1,667,303 (79,230)
4/98 Buy FRF 6,000,000 1,051,814 1,004,386 (47,428)
2/98 Buy GBP 4,500,000 7,486,830 7,381,163 (105,667)
1/98 Buy JPY 125,861,393 967,554 968,717 1,163
3/98 Buy JPY 320,000,000 2,683,524 2,488,942 (194,582)
1/98 Buy NLG 625,000 322,639 308,436 (14,203)
2/98 Buy NLG 7,950,000 4,056,605 3,930,596 (126,009)
4/98 Buy NLG 3,250,000 1,666,667 1,611,935 (54,732)
1/98 Buy SEK 2,022,304 259,117 254,897 (4,220)
----------- ----------- ------------
$29,439,724 $28,413,359 $ (1,026,365)
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE DELIVER FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1/98 Sell CHF 1,009,714 $ 695,498 $ 692,918 $ 2,580
2/98 Sell CHF 6,990,000 4,884,062 4,822,949 61,113
1/98 Sell DEM 1,333,698 751,167 741,903 9,264
2/98 Sell DEM 7,392,500 4,098,846 4,121,185 (22,339)
3/98 Sell DEM 1,675,000 976,107 934,559 41,548
1/98 Sell FRF 16,100,059 2,678,522 2,679,209 (687)
2/98 Sell FRF 18,750,000 3,151,715 3,127,374 24,341
3/98 Sell FRF 1,500,000 257,909 250,698 7,211
4/98 Sell FRF 11,000,000 1,880,760 1,841,374 39,386
1/98 Sell GBP 9,284 15,474 15,274 200
2/98 Sell GBP 10,935,000 17,657,003 17,933,164 (276,161)
1/98 Sell JPY 20,000,000 176,991 154,024 22,967
2/98 Sell JPY 255,000,000 2,149,643 1,975,673 173,970
3/98 Sell JPY 726,200,000 6,269,486 5,648,343 621,143
4/98 Sell JPY 653,000,000 5,130,981 5,106,563 24,418
1/98 Sell NLG 625,000 313,362 308,436 4,926
2/98 Sell NLG 9,975,000 4,939,231 4,932,040 7,191
4/98 Sell NLG 6,500,000 3,311,427 3,223,871 87,556
1/98 Sell SEK 2,213,557 283,689 279,004 4,685
2/98 Sell SEK 13,000,000 1,723,224 1,639,865 83,359
10/98 Sell ZAR 1,750,000 346,741 359,612 (12,871)
----------- ----------- ----------
$61,691,838 $60,788,038 $ 903,800
=========== =========== ==========
</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 4.5% 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 -- 93.2%
AEROSPACE -- 2.8%
Boeing Co. ........................ 26,825 $ 1,312,748
General Motors Corp. Cl-H ......... 15,420 569,577
Northrop Grumman Corp. ............ 8,170 939,550
Raytheon Co. Cl-A ................. 9,050 446,294
----------
3,268,169
----------
AIRLINES -- 0.9%
Delta Air Lines, Inc. ............. 8,673 1,032,087
----------
AUTOMOBILE MANUFACTURERS -- 0.5%
Chrysler Corp. .................... 16,070 565,463
----------
AUTOMOTIVE PARTS -- 4.0%
Dana Corp. ........................ 27,836 1,322,210
Eaton Corp. ....................... 9,343 833,863
Goodyear Tire & Rubber Co. ........ 23,845 1,517,138
TRW, Inc. ......................... 18,483 986,530
----------
4,659,741
----------
BEVERAGES -- 0.9%
PepsiCo, Inc. ..................... 30,245 1,102,052
----------
BUILDING MATERIALS -- 1.5%
Lowe's Companies, Inc. ............ 23,594 1,125,139
Masco Corp. ....................... 13,524 688,033
----------
1,813,172
----------
CHEMICALS -- 2.5%
Dupont, (E.I.) de Nemours & Co. ... 17,143 1,029,651
Eastman Chemical Co. .............. 16,638 991,001
Witco Corp. ....................... 21,810 890,121
----------
2,910,773
----------
COMPUTER HARDWARE -- 3.7%
Hewlett-Packard Co. ............... 30,856 1,928,500
International Business Machines
Corp. ........................... 18,665 1,951,659
Seagate Technology, Inc.* ......... 25,445 489,816
----------
4,369,975
----------
COMPUTER SERVICES & SOFTWARE -- 2.0%
Computer Associates International,
Inc. ............................ 31,710 1,676,666
NCR Corp.* ........................ 24,130 671,116
----------
2,347,782
----------
CONGLOMERATES -- 3.3%
Minnesota Mining & Manufacturing
Co. ............................. 12,503 1,026,027
Philip Morris Companies, Inc. ..... 33,954 1,538,541
Tenneco, Inc. ..................... 33,680 1,330,360
----------
3,894,928
----------
CONSUMER PRODUCTS & SERVICES -- 3.4%
Clorox Co. ........................ 9,090 718,678
Colgate-Palmolive Co. ............. 1,500 110,250
Eastman Kodak Co. ................. 22,635 1,376,491
RJR Nabisco Holdings Corp. ........ 23,480 880,500
Whitman Corp. ..................... 33,450 871,791
----------
3,957,710
----------
CONTAINERS & PACKAGING -- 1.7%
Owens-Illinois, Inc.* ............. 44,105 1,673,233
Temple-Inland, Inc. ............... 6,678 349,343
----------
2,022,576
----------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
ELECTRONIC COMPONENTS &
EQUIPMENT -- 3.2%
Emerson Electric Co. .............. 19,810 $ 1,118,027
Polaroid Corp. .................... 24,924 1,213,487
Texas Instruments, Inc. ........... 31,620 1,422,900
----------
3,754,414
----------
ENVIRONMENTAL SERVICES -- 0.9%
Browning-Ferris Industries,
Inc. ............................ 29,195 1,080,215
----------
FINANCIAL-BANK & TRUST -- 10.5%
Banc One Corp. .................... 19,021 1,033,078
BankBoston Corp. .................. 6,550 615,291
Bankers Trust New York Corp. ...... 10,280 1,155,858
Crestar Financial Corp. ........... 700 39,900
First Chicago NBD Corp. ........... 11,685 975,698
First Tennessee National Corp. .... 5,451 363,854
Mercantile Bancorporation, Inc. ... 9,777 601,286
Morgan, (J.P.) & Co., Inc. ........ 10,238 1,155,614
National City Corp. ............... 8,670 570,053
PNC Bank Corp. .................... 44,725 2,552,120
Regions Financial Corp. ........... 11,836 499,331
Summit Bancorp .................... 11,100 591,075
Suntrust Banks, Inc. .............. 6,740 481,068
Union Planters Corp. .............. 10,521 714,770
Wells Fargo & Co. ................. 2,860 970,791
----------
12,319,787
----------
FINANCIAL SERVICES -- 1.3%
Ahmanson, (H.F.) & Co. ............ 4,383 293,387
Beneficial Corp. .................. 7,979 663,254
Washington Mutual, Inc. ........... 8,260 527,091
----------
1,483,732
----------
FOOD -- 4.9%
General Mills, Inc. ............... 21,731 1,556,483
Heinz, (H.J.) Co. ................. 22,705 1,153,698
Quaker Oats Co. ................... 23,905 1,260,989
Ralston Purina Group .............. 7,850 729,559
Sara Lee Corp. .................... 18,768 1,056,873
----------
5,757,602
----------
HOTELS & MOTELS -- 0.7%
ITT Corp.* ........................ 10,700 886,763
----------
INSURANCE -- 3.2%
American General Corp. ............ 23,360 1,262,900
AON Corp. ......................... 20,519 1,202,926
CIGNA Corp. ....................... 5,962 1,031,799
USF&G Corp. ....................... 11,859 261,639
----------
3,759,264
----------
MACHINERY & EQUIPMENT -- 2.3%
Caterpillar, Inc. ................. 18,875 916,617
Cooper Industries, Inc. ........... 20,190 989,310
Deere & Co. ....................... 13,380 780,221
----------
2,686,148
----------
</TABLE>
<PAGE>
AST PUTNAM VALUE GROWTH & INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 2.5%
Baxter International, Inc. ........ 30,957 $ 1,561,394
Johnson & Johnson Co. ............. 20,725 1,365,259
----------
2,926,653
----------
OFFICE EQUIPMENT -- 3.1%
Pitney Bowes, Inc. ................ 12,975 1,166,939
Xerox Corp. ....................... 34,082 2,515,678
----------
3,682,617
----------
OIL & GAS -- 10.1%
Amoco Corp. ....................... 14,863 1,265,213
Atlantic Richfield Co. ............ 14,721 1,179,520
British Petroleum Co. PLC [ADR] ... 12,971 1,033,627
Coastal Corp. ..................... 14,816 917,666
Enron Corp. ....................... 8,900 369,906
Exxon Corp. ....................... 17,691 1,082,468
Kerr-McGee Corp. .................. 9,595 607,483
Mobil Corp. ....................... 15,424 1,113,420
Occidental Petroleum Corp. ........ 32,273 946,002
Societe Nationale Elf Aquitaine SA
[ADR] ........................... 28,175 1,651,759
Tosco Corp. ....................... 31,125 1,176,914
YPF Sociedad Anonima [ADR] ........ 15,600 533,325
----------
11,877,303
----------
PAPER & FOREST PRODUCTS -- 2.8%
Boise Cascade Corp. ............... 28,885 873,771
Kimberly-Clark Corp. .............. 35,282 1,739,844
Willamette Industries, Inc. ....... 22,385 720,517
----------
3,334,132
----------
PHARMACEUTICALS -- 7.0%
American Home Products Corp. ...... 20,839 1,594,184
Bristol-Meyers Squibb Co. ......... 18,320 1,733,530
Glaxo Wellcome PLC [ADR] .......... 12,360 591,735
Merck & Co., Inc. ................. 19,045 2,023,531
Pharmacia & Upjohn, Inc. .......... 63,157 2,313,125
----------
8,256,105
----------
PRINTING & PUBLISHING -- 1.1%
McGraw-Hill Co., Inc. ............. 12,415 918,710
Times Mirror Co. Cl-A ............. 6,200 381,300
----------
1,300,010
----------
RAILROADS -- 1.7%
Canadian National Railway Co. ..... 12,408 586,278
Norfolk Southern Corp. ............ 332 10,230
Union Pacific Corp. ............... 22,015 1,374,562
----------
1,971,070
----------
RETAIL & MERCHANDISING -- 2.0%
Kmart Corp.* ...................... 86,000 994,375
Penney, (J.C.) Co., Inc. .......... 600 36,188
Toys 'R' Us, Inc.* ................ 41,375 1,300,727
----------
2,331,290
----------
SEMICONDUCTORS -- 1.5%
Intel Corp. ....................... 24,398 $ 1,713,197
----------
TELECOMMUNICATIONS -- 7.0%
AT&T Corp. ........................ 17,989 1,101,826
Bell Atlantic Corp. ............... 14,185 1,290,835
BellSouth Corp. ................... 24,534 1,381,571
SBC Communications, Inc. .......... 18,937 1,387,135
Sprint Corp. ...................... 31,246 1,831,797
U.S. West Communications Group .... 26,186 1,181,643
----------
8,174,807
----------
TRANSPORTATION -- 0.2%
Ryder Systems, Inc. ............... 5,606 183,597
----------
TOTAL COMMON STOCK
(COST $103,780,576).................. 109,423,134
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 2.5%
Federal Home Loan Mtge. Corp.
5.72%..................... 01/14/98 $2,000 1,995,869
5.71%..................... 01/20/98 1,000 996,986
------------
(COST $2,992,855)......... 2,992,855
------------
REPURCHASE AGREEMENTS -- 3.5%
UBS Securities Funding,
Inc. 6.45%, dated
12/31/97,
repurchase price
$4,081,462
(Collateralized by U.S.
Treasury Notes, par
value $3,052,000,
market value
$4,168,364 due
02/15/19)
(COST $4,080,000)......... 01/02/98 4,080 4,080,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund ..... 173 173
Temporary Investment Fund .......... 172 172
------------
(COST $345)......................... 345
------------
TOTAL INVESTMENTS -- 99.2%
(COST $110,853,776)................... 116,496,334
OTHER ASSETS LESS LIABILITIES -- 0.8%... 941,982
------------
NET ASSETS -- 100.0%.................... $117,438,316
===========
</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 -- 56.2%
ADVERTISING -- 2.5%
Outdoor Systems, Inc.* .............. 18,800 $ 721,450
----------
AIRLINES -- 1.2%
Alaska Air Group, Inc.* ............. 3,900 151,125
AMR Corp.* .......................... 1,500 192,750
----------
343,875
----------
BEVERAGES -- 1.8%
Coca-Cola Co. ....................... 7,800 519,675
----------
BROADCASTING -- 2.4%
Clear Channel Communications,
Inc.* ............................. 8,700 691,106
----------
COMPUTER HARDWARE -- 1.6%
Hewlett-Packard Co. ................. 900 56,250
International Business Machines
Corp. ............................. 3,800 397,337
----------
453,587
----------
COMPUTER SERVICES & SOFTWARE -- 4.5%
America Online, Inc.* ............... 2,700 240,806
BMC Software, Inc.* ................. 3,600 236,250
Cisco Systems, Inc.* ................ 6,700 373,525
Compuware Corp.* .................... 10,200 326,400
Sun Microsystems, Inc.* ............. 3,200 127,600
----------
1,304,581
----------
CONGLOMERATES -- 3.3%
Tyco International Ltd. ............. 21,200 955,325
----------
CONSUMER PRODUCTS & SERVICES -- 5.7%
Gillette Co. ........................ 4,800 482,100
Procter & Gamble Co. ................ 9,600 766,200
Sunbeam Oster Corp. ................. 6,600 278,025
U.S. Industries, Inc. ............... 3,850 115,981
----------
1,642,306
----------
ELECTRONIC COMPONENTS & EQUIPMENT -- 3.6%
General Electric Co. ................ 13,600 997,900
SCI Systems, Inc.* .................. 1,400 60,987
----------
1,058,887
----------
ENTERTAINMENT & LEISURE -- 0.6%
Viacom, Inc. Cl-B* .................. 4,300 178,181
----------
ENVIRONMENTAL SERVICES -- 0.5%
USA Waste Services, Inc.* ........... 3,400 133,450
----------
FINANCIAL-BANK & TRUST -- 2.3%
BankAmerica Corp. ................... 4,300 313,900
Charter One Financial, Inc. ......... 3,120 196,950
Citicorp ............................ 1,200 151,725
----------
662,575
----------
FINANCIAL SERVICES -- 4.5%
American Express Co. ................ 2,300 205,275
CIT Group, Inc. Cl-A* ............... 7,300 235,425
Fannie Mae .......................... 2,600 148,362
Morgan Stanley, Dean Witter, Discover
& Co. ............................. 2,400 141,900
SunAmerica, Inc. .................... 13,300 568,575
----------
1,299,537
----------
INSURANCE -- 2.6%
American International Group,
Inc. .............................. 1,600 174,000
Conseco, Inc. ....................... 4,800 218,100
Travelers Group, Inc. ............... 6,900 371,737
----------
763,837
----------
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
MEDICAL SUPPLIES & EQUIPMENT -- 1.3%
Guidant Corp. ....................... 3,200 $ 199,200
Medtronic, Inc. ..................... 3,300 172,631
----------
371,831
----------
OIL & GAS -- 2.6%
Diamond Offshore Drilling, Inc. ..... 1,500 72,188
Falcon Drilling Co., Inc.* .......... 4,200 147,263
Input-Output, Inc.* ................. 17,600 522,500
----------
741,951
----------
PHARMACEUTICALS -- 9.2%
Bristol-Meyers Squibb Co. ........... 6,300 596,138
Cardinal Health, Inc. ............... 2,600 195,325
Lilly, (Eli) & Co. .................. 10,900 758,913
Merck & Co., Inc. ................... 1,000 106,250
Pfizer, Inc. ........................ 7,200 536,850
Warner-Lambert Co. .................. 3,800 471,200
----------
2,664,676
----------
PRINTING & PUBLISHING -- 1.8%
McGraw-Hill Co., Inc. ............... 7,200 532,800
----------
RETAIL & MERCHANDISING -- 0.5%
Pier 1 Imports, Inc. ................ 6,400 144,800
----------
TELECOMMUNICATIONS -- 3.7%
Ameritech Corp. ..................... 600 48,300
Bell Atlantic Corp. ................. 2,300 209,300
Jacor Communications, Inc.* ......... 3,200 170,000
Tele-Communications, Inc., Cl-A* .... 7,757 216,711
WorldCom, Inc.* ..................... 14,500 438,625
----------
1,082,936
----------
TOTAL COMMON STOCK
(COST $14,634,581)..................... 16,267,366
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 4.1%
AEROSPACE -- 0.7%
Lockheed Martin Corp.
Notes
7.25%.................. 05/15/06 $ 200 211,750
-----------
FINANCIAL-BANK & TRUST -- 1.0%
BankAmerica Mfg. Housing
Contract Cl-A5
6.39%.................. 12/10/12 100 100,626
CIT RV Trust Cl-A
6.35%.................. 04/15/11 100 100,588
First Bank System Sub.
Notes
7.625%................. 05/01/05 100 106,750
-----------
307,964
-----------
</TABLE>
<PAGE>
TWENTIETH CENTURY STRATEGIC BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
FINANCIAL SERVICES -- 0.4%
General Motors Acceptance
Corp. Notes
7.125%................. 05/01/03 $ 100 $ 103,875
-----------
METALS & MINING -- 0.4%
Barrick Gold Corp. Notes
7.50%.................. 05/01/07 100 105,875
-----------
OIL & GAS -- 0.5%
Enron Corp. Notes
6.625%................. 11/15/05 150 151,688
-----------
RETAIL & MERCHANDISING -- 0.7%
Sears Roebuck Co. Notes
6.25%.................. 01/15/04 200 199,750
-----------
TELECOMMUNICATIONS -- 0.4%
Worldcom, Inc. Notes
7.55%.................. 04/01/04 100 104,875
-----------
TOTAL CORPORATE OBLIGATIONS
(COST $1,155,057).................... 1,185,777
-----------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 15.0%
FEDERAL HOME LOAN BANK DISC. NOTES -- 9.4%
4.75%................... 01/02/98 2,708 2,707,643
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 2.9%
7.00%................... 02/20/07 150 153,732
7.50%.......... 03/01/27- 07/01/27 675 690,897
----------
844,629
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 2.7%
7.00%................... 12/15/27 300 302,250
8.00%................... 03/15/27 185 191,569
8.75%.......... 01/15/27- 04/15/27 281 298,206
----------
792,025
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $4,316,450).............................. 4,344,297
----------
U.S. TREASURY OBLIGATIONS -- 22.6%
U.S. Treasury Notes
5.75%.................. 11/30/02 500 500,547
6.25%.................. 02/15/03 1,100 1,125,465
6.25%.................. 01/31/02 650 661,869
6.25%.................. 08/31/02 1,000 1,020,920
5.875%................. 09/30/02 1,000 1,005,840
6.625%................. 05/15/07 2,100 2,223,690
-----------
(COST $6,402,015)................ 6,538,331
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY
MATURITY (000) VALUE
--------- -------- ----------
<S> <C> <C> <C>
FOREIGN BONDS -- 6.6%
AUSTRALIA -- 0.5%
Queensland Treasury
Corp.
8.00%................. 08/14/01 200 $ 139,693
----------
CANADA -- 0.3%
Canadian Government
6.50%................. 06/01/04 100 73,555
----------
FRANCE -- 0.9%
French O.A.T.
6.75%................. 10/25/03 1,500 272,255
----------
GERMANY -- 1.6%
Deutscheland Republic
6.00%................. 09/15/03 800 468,866
----------
ITALY -- 0.7%
Italian Government
6.75%................. 02/01/07 350,000 214,308
----------
JAPAN -- 1.5%
Japanese Government
4.10%................. 12/22/03 50,000 441,890
----------
SPAIN -- 0.3%
Spanish Government
10.50%................ 10/30/03 10,000 82,370
----------
UNITED KINGDOM -- 0.8%
United Kingdom Treasury
8.00%................. 06/10/03 125 219,818
----------
TOTAL FOREIGN BONDS
(COST $1,909,249)......... 1,912,755
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund ..... 719 719
Temporary Investment Fund .......... 718 718
----------
(COST $1,437)....................... 1,437
----------
TOTAL INVESTMENTS -- 104.5%
(COST $28,418,789).................... 30,249,963
LIABILITIES IN EXCESS OF OTHER ASSETS --
(4.5%)................................ (1,302,849)
----------
NET ASSETS -- 100.0%.................... $28,947,114
==========
</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 -- 91.9%
ARGENTINA -- 0.2%
YPF Sociedad Anonima [ADR] ........ 2,300 $ 78,631
----------
AUSTRALIA -- 0.8%
Woodside Petroleum Ltd. ........... 36,400 256,619
----------
AUSTRIA -- 0.6%
VA Technologie AG ................. 1,360 206,190
----------
BRAZIL -- 1.6%
Centrais Eletricas Brasileiras SA-
Electrobras ..................... 2,372,000 117,960
Petroleo Brasileiro
SA-Petrobras .................... 478,900 111,999
Telebras SA [ADR] ................. 2,500 291,094
----------
521,053
----------
CANADA -- 4.2%
Geac Computer Corp. Ltd. .......... 11,400 375,215
Investors Group, Inc. ............. 9,100 287,431
Newbridge Networks Corp. .......... 3,800 132,525
Newcourt Credit Group, Inc.
144A ............................ 9,320 311,639
Newcourt Credit Group, Inc.
Rights* ......................... 2,150 71,065
Northern Telecom Ltd. ............. 1,100 97,738
QLT Phototherapeutics, Inc. ....... 3,900 43,605
Talisman Energy, Inc. ............. 2,200 67,260
----------
1,386,478
----------
DENMARK -- 2.1%
Novo Nordisk A/S Cl-B ............. 4,811 688,569
----------
FINLAND -- 2.0%
Merita Ltd. C1-A................... 40,900 223,822
Raision Tehtaat Oy ................ 1,000 118,814
Sampo Insurance Co. Ltd. .......... 10,200 331,541
----------
674,177
----------
FRANCE -- 10.3%
Accor SA .......................... 2,473 459,999
Alcatel Alsthom ................... 1,169 148,655
AXA SA ............................ 8,407 650,803
Cap Gemini SA ..................... 4,330 355,204
Compagnie Francaise d'Etudes et de
Construction Technip ............ 2,200 232,219
Dassault Systemes SA [ADR]* ....... 5,200 160,550
France Telecom SA [ADR] ........... 3,800 136,800
Groupe Danone ..................... 2,000 357,389
Pinault-Printemps Redoute SA ...... 600 320,253
Rhone-Poulenc ..................... 4,900 219,593
Societe Generale .................. 1,900 258,982
Societe Nationale Elf Aquitaine
SA .............................. 1,000 116,359
----------
3,416,806
----------
GERMANY -- 8.8%
Bayerische Hypotheken-und Wechsel-
Bank AG ......................... 5,300 257,183
Bayerische Vereinsbank AG ......... 3,800 245,156
Berliner Kraft-Und Licht (Bewag)-
Aktiengesellschaft .............. 2,000 59,287
Deutsche Bank AG .................. 4,100 286,857
Deutsche Pfandbrief &
Hypothekenbank AG ............... 6,200 367,233
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
Henkel KGAA ....................... 3,400 $ 189,095
Henkel KGAA Pfd. .................. 2,000 123,245
Mannesmann AG ..................... 950 477,103
SAP AG Pfd. ....................... 500 162,455
Veba AG ........................... 8,000 545,038
Wella Aktiengesellschaft AG
Pfd. ............................ 260 190,874
----------
2,903,526
----------
HONG KONG -- 0.3%
HSBC Holdings PLC ................. 3,000 73,952
Shanghai Industrial Holdings Ltd.
144A ............................ 12,000 44,603
----------
118,555
----------
HUNGARY -- 0.5%
Magyar Tavkozlesi Rt. [ADR]........ 6,000 156,000
----------
IRELAND -- 1.1%
Bank of Ireland ................... 10,000 153,517
CBT Group PLC [ADR] ............... 2,700 221,737
----------
375,254
----------
ISRAEL -- 0.4%
Check Point Software Technologies
Ltd. ............................ 3,400 138,550
----------
ITALY -- 4.3%
Banca Popolare di Bergamo Credito
Varesino SPA .................... 6,900 120,594
Banco Ambrosiano Veneto SPA ....... 32,800 125,598
Banco Ambrosiano Veneto SPA
Rights* ......................... 20,000 85,125
Banco Ambrosiano Veneto SPA
Rights* ......................... 20,000 12,670
Credito Italiano SPA .............. 180,200 555,992
Mondadori, (Arnoldo) Editore
SPA ............................. 22,800 179,254
Telecom Italia SPA ................ 55,000 351,528
----------
1,430,761
----------
JAPAN -- 7.4%
Canon, Inc. ....................... 9,000 210,427
Circle K Japan Co. Ltd. ........... 2,000 96,138
Keyence Corp. ..................... 2,200 326,562
Minebea Co. Ltd. .................. 28,000 301,490
Nintendo Co. Ltd. ................. 800 78,756
NTT Data Corp. .................... 3 162,204
Promise Co. Ltd. .................. 1,600 89,093
Rohm Co. .......................... 1,000 102,291
Shiseido Co. Ltd. ................. 22,000 301,182
Sony Corp. ........................ 5,300 472,846
Takeda Chemical Industries ........ 11,000 314,718
----------
2,455,707
----------
MEXICO -- 1.4%
Desc SA de C.V. [ADR] ............. 1,900 71,250
Grupo Financiero Banamex SA
Cl-B ............................ 35,100 104,928
Grupo Televisia SA [GDR]* ......... 3,000 116,063
Panamerican Beverages, Inc.
Cl-A ............................ 5,000 163,125
----------
455,366
----------
</TABLE>
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
NETHERLANDS -- 9.5%
Assurantieconcern Stad Rotterdam
NV .............................. 5,100 $ 277,487
Getronics NV ...................... 6,300 200,757
ING Groep NV ...................... 16,500 695,086
KLM Royal Dutch Airlines NV ....... 5,200 192,381
Koninklijke Ahold NV .............. 17,948 468,348
Randstad Holdings NV .............. 5,750 216,416
Stork NV .......................... 1,700 58,701
Unilever NV PLC [ADR] ............. 7,000 437,063
Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit ........................... 20,800 586,889
----------
3,133,128
----------
NORWAY -- 0.8%
Petroleum Geo-Services ASA ........ 1,500 94,612
Storebrand ASA .................... 23,000 162,231
----------
256,843
----------
PORTUGAL -- 1.2%
Banco Espirito Santo e Comercial de
Lisboa SA ....................... 6,400 190,666
Portugal Telecom SA ............... 4,400 204,390
----------
395,056
----------
RUSSIA -- 0.3%
Unified Energy Systems [GDR] ...... 3,000 83,250
----------
SOUTH AFRICA -- 0.6%
ABSA Group Ltd. ................... 11,800 67,895
Liberty Life Association of Africa
Ltd. ............................ 4,605 118,287
----------
186,182
----------
SPAIN -- 1.5%
Banco Popular Espanol SA .......... 3,500 244,562
Telefonica de Espana SA ........... 9,000 256,864
----------
501,426
----------
SWEDEN -- 1.3%
Hennes & Mauritz AB Cl-B .......... 4,200 185,270
Skandinaviska Enskilda Banken ..... 18,900 239,395
----------
424,665
----------
SWITZERLAND -- 12.5%
ABB AG ............................ 100 125,810
Credit Suisse Group ............... 2,750 426,108
Julius Baer Holdings AG Cl-B ...... 300 557,403
Nestle SA ......................... 340 510,274
Novartis AG ....................... 700 1,137,431
Roche Holding AG .................. 80 795,585
Union Bank of Switzerland ......... 400 579,205
----------
4,131,816
----------
UNITED KINGDOM -- 18.2%
Amvescap PLC ...................... 33,500 288,285
British Aerospace PLC ............. 16,500 471,041
British-Borneo Petroleum Syndicate
PLC ............................. 23,263 161,913
Cable & Wireless PLC .............. 38,600 339,794
COLT Telecom Group PLC ............ 833 8,450
Compass Group PLC ................. 16,600 203,215
Flextech PLC 144A* ................ 3,600 31,217
SHARES VALUE
--------- -----------
General Electric Co. PLC .......... 58,600 $ 380,382
Glaxo Wellcome PLC [ADR] .......... 8,000 383,000
Hays PLC .......................... 22,300 297,945
Ladbroke Group PLC ................ 49,100 213,285
Lloyds TSB Group PLC .............. 39,700 514,091
Misys PLC ......................... 21,600 650,399
Next PLC .......................... 26,100 297,181
Pearson PLC ....................... 37,800 491,975
Railtrack Group PLC ............... 13,200 210,027
Siebe PLC ......................... 11,600 228,087
Standard Chartered Bank PLC ....... 22,200 237,433
Tesco PLC ......................... 19,000 154,751
Vodafone Group PLC ................ 14,000 101,128
Zeneca Group PLC .................. 10,000 351,625
----------
6,015,224
----------
TOTAL FOREIGN STOCK
(COST $29,016,171)................... 30,389,832
----------
COMMON STOCK -- 0.8%
OIL & GAS
Transocean Offshore, Inc.
(COST $273,021).................... 5,600 269,850
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 10.3%
Federal Home Loan Bank
Disc. Notes 4.75%
(COST $3,412,550)........ 01/02/98 $3,413 3,412,550
-----------
TOTAL INVESTMENTS -- 103.0%
(COST $32,701,742)...................... 34,072,232
LIABILITIES IN EXCESS OF OTHER ASSETS --
(3.0%).................................. (947,710)
-----------
NET ASSETS -- 100.0%...................... $33,124,522
==========
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1997:
<TABLE>
<CAPTION>
IN UNREALIZED
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS APPRECIATION
MONTH TYPE RECEIVE FOR AT VALUE (DEPRECIATION)
- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1/98 Buy CHF 383,552 $ 263,433 $ 263,189 $ (244)
1/98 Buy CAD 138,000 96,369 96,450 81
1/98 Buy DEM 589,689 329,351 328,145 (1,206)
1/98 Buy DKK 296,978 43,418 43,384 (34)
1/98 Buy ESP 26,927,573 177,388 176,758 (630)
1/98 Buy GBP 58,332 96,638 95,931 (707)
1/98 Buy ITL 692,628,525 393,550 391,835 (1,715)
1/98 Buy JPY 25,506,829 200,211 196,982 (3,229)
1/98 Buy NLG 468,675 232,133 231,257 (876)
1/98 Buy PTE 34,949,393 190,346 190,143 (203)
1/98 Buy SEK 543,090 69,850 68,483 (1,367)
---------- ---------- --------
$2,092,687 $2,082,557 $(10,130)
========== ========== ========
</TABLE>
<PAGE>
TWENTIETH CENTURY INTERNATIONAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IN
SETTLEMENT CONTRACTS TO EXCHANGE CONTRACTS UNREALIZED
MONTH TYPE DELIVER FOR AT VALUE APPRECIATION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1/98 Sell CHF 1,085,057 $ 768,142 $ 746,868 $ 21,274
1/98 Sell DEM 390,697 219,160 217,577 1,583
1/98 Sell FRF 4,011,880 683,853 668,633 15,220
1/98 Sell GBP 741,689 1,237,357 1,217,517 19,840
1/98 Sell JPY 115,860,726 913,024 894,760 18,264
1/98 Sell NLG 1,174,773 596,086 580,278 15,808
1/98 Sell SEK 1,263,622 165,446 159,341 6,105
---------- ---------- --------
$4,583,068 $4,484,974 $ 98,094
========== ========== ========
</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 1.2% 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 -- 93.4%
AIRLINES -- 1.4%
Midwest Express Holdings, Inc.* ... 70,000 $ 2,716,875
----------
AUTOMOTIVE PARTS -- 1.6%
Myers Industries, Inc. ............ 80,000 1,365,000
TBC Corp.* ........................ 200,000 1,912,500
----------
3,277,500
----------
BUILDING MATERIALS -- 8.3%
Giant Cement Holding, Inc.* ....... 60,000 1,387,500
Gibraltar Steel Corp.* ............ 90,000 1,777,500
Holophane Corp.* .................. 90,000 2,227,500
Juno Lighting, Inc. ............... 100,000 1,750,000
Modine Manufacturing Co. .......... 90,000 3,071,250
Republic Group, Inc. .............. 90,000 1,473,750
Skyline Corp. ..................... 51,800 1,424,500
Synthetic Industries, Inc.* ....... 60,000 1,485,000
Thomas Industries, Inc. ........... 105,000 2,073,750
----------
16,670,750
----------
BUSINESS SERVICES -- 1.0%
Grey Advertising, Inc. ............ 6,000 1,968,000
----------
CHEMICALS -- 2.7%
Furon Co. ......................... 140,000 2,922,500
Schulman, (A.), Inc. .............. 100,000 2,512,500
----------
5,435,000
----------
CLOTHING & APPAREL -- 1.0%
Unitog Co. ........................ 90,000 2,002,500
----------
COMPUTER HARDWARE -- 1.4%
Analogic Corp. .................... 75,000 2,850,000
----------
COMPUTER SERVICES & SOFTWARE -- 1.2%
Analysts International Corp. ...... 67,500 2,328,750
----------
CONSUMER PRODUCTS & SERVICES -- 1.3%
American Safety Razor Co.* ........ 60,000 1,200,000
Culp, Inc. ........................ 70,000 1,400,000
----------
2,600,000
----------
CONTAINERS & PACKAGING -- 3.2%
Aptargroup, Inc. .................. 33,600 1,864,800
First Brands Corp. ................ 80,000 2,155,000
Shorewood Packaging* .............. 90,000 2,407,500
----------
6,427,300
----------
ELECTRONIC COMPONENTS &
EQUIPMENT -- 7.9%
Electro Rental Corp.* ............. 120,000 4,290,000
Franklin Electric Co., Inc. ....... 30,000 1,927,500
Landauer, Inc. .................... 51,000 1,428,000
Littelfuse, Inc.* ................. 100,000 2,487,500
Nichols Research Corp.* ........... 120,000 3,000,000
Pioneer-Standard Electronics,
Inc. ............................ 90,000 1,372,500
Scotsman Industries, Inc. ......... 50,000 1,221,875
----------
15,727,375
----------
ENTERTAINMENT & LEISURE -- 0.5%
Carmike Cinemas, Inc.* ............ 35,000 1,004,062
----------
EQUIPMENT SERVICES -- 4.2%
Cort Business Services Corp.* ..... 48,900 1,946,831
Rival Co. ......................... 87,000 1,141,875
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Unifirst Corp. .................... 85,000 $ 2,385,312
VWR Scientific Products, Inc.* .... 100,000 2,825,000
----------
8,299,018
----------
FINANCIAL-BANK & TRUST -- 5.3%
Commercial Federal Savings & Loan
Corp. ........................... 30,000 1,066,875
Community First Bankshares,
Inc. ............................ 50,000 2,662,500
First Republic Bank* .............. 70,000 2,235,625
Silicon Valley Bancshares* ........ 50,000 2,812,500
Sirrom Capital Corp. .............. 35,000 1,824,375
----------
10,601,875
----------
FINANCIAL SERVICES -- 5.0%
Amresco, Inc.* .................... 80,000 2,420,000
First Financial Fund, Inc. ........ 100,000 1,850,000
McGrath Rentcorp .................. 100,000 2,450,000
Medallion Financial Corp. ......... 100,000 2,200,000
Quick & Reilly Group, Inc. ........ 26,000 1,118,000
----------
10,038,000
----------
FOOD -- 0.7%
Suiza Foods Corp.* ................ 25,000 1,489,063
----------
INSURANCE -- 6.2%
FBL Financial Group, Inc. Cl-A .... 59,100 2,371,388
Harleysville Group, Inc. .......... 46,000 1,104,000
Markel Corp. ...................... 10,000 1,561,250
PXRE Corp. Cl-A ................... 50,000 1,659,375
Poe & Brown, Inc. ................. 71,700 3,199,613
Presidential Life Corp. ........... 80,000 1,620,000
Selective Insurance Group ......... 30,000 810,000
----------
12,325,626
----------
LUMBER & WOOD PRODUCTS -- 0.8%
Deltic Timber Corp. ............... 60,000 1,642,500
----------
MACHINERY & EQUIPMENT -- 4.5%
Alamo Group, Inc. ................. 50,000 1,084,375
Carbo Ceramics, Inc. .............. 70,000 2,240,000
Smith, (A.O.) Corp. ............... 70,000 2,957,500
Woodward Governor Co. ............. 82,400 2,667,700
----------
8,949,575
----------
MEDICAL SUPPLIES & EQUIPMENT -- 2.1%
Lunar Corp.* ...................... 130,000 2,665,000
Owens & Minor, Inc. ............... 110,000 1,595,000
----------
4,260,000
----------
METALS & MINING -- 3.9%
Cambior, Inc. ..................... 80,000 470,000
Dayton Mining Corp.* .............. 140,000 271,250
Golden Star Resources Ltd.* ....... 100,000 356,250
Layne Christensen Co.* ............ 80,000 1,040,000
Material Sciences Corp.* .......... 110,000 1,340,625
Penn Virginia Corp. ............... 70,000 2,065,000
</TABLE>
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Prime Resources Group, Inc. ....... 80,000 $ 545,000
TriMas Corp. ...................... 50,000 1,718,750
----------
7,806,875
----------
OFFICE EQUIPMENT -- 2.1%
Aaron Rents, Inc. Cl-A ............ 35,000 612,500
Aaron Rents, Inc. Cl-B ............ 60,000 1,162,500
IDEX Corp. ........................ 70,000 2,441,250
----------
4,216,250
----------
OIL & GAS -- 4.3%
Cross Timbers Oil Co. ............. 110,000 2,743,125
Devon Energy Corp. ................ 25,000 962,500
Lone Star Technologies, Inc.* ..... 90,000 2,553,750
Rutherford-Moran Oil Corp.* ....... 130,000 2,323,750
----------
8,583,125
----------
PAPER & FOREST PRODUCTS -- 2.0%
CSS Industries, Inc.* ............. 60,000 1,912,500
Wausau-Mosinee Paper Corp. ........ 100,000 2,012,500
----------
3,925,000
----------
PERSONAL SERVICES -- 1.1%
Matthews International Corp.
Cl-A ............................ 50,000 2,200,000
----------
REAL ESTATE -- 6.7%
Allied Capital Commercial Corp.
[REIT] .......................... 70,000 2,327,500
Apartment Investment & Management
Co. Cl-A [REIT] ................. 55,000 2,021,250
CCA Prison Realty Trust [REIT] .... 40,000 1,785,000
Glenborough Realty Trust, Inc.
[REIT] .......................... 30,000 888,750
Innkeepers USA Trust [REIT] ....... 100,000 1,550,000
National Health Investors, Inc.
[REIT] .......................... 40,000 1,675,000
Post Properties, Inc. [REIT] ...... 24,600 999,375
Sun Communities, Inc. [REIT] ...... 60,000 2,156,250
----------
13,403,125
----------
RESTAURANTS -- 3.3%
Consolidated Products, Inc.* ...... 137,500 2,251,563
Ruby Tuesday, Inc.* ............... 110,000 2,832,500
Sbarro, Inc. ...................... 60,000 1,578,750
----------
6,662,813
----------
RETAIL & MERCHANDISING -- 5.4%
Carson Pirie Scott & Co.* ......... 33,000 1,654,125
Casey's General Stores, Inc. ...... 90,000 2,283,750
Compucom Systems, Inc.* ........... 210,000 1,732,500
Fabri-Centers of America, Inc.
Cl-B* ........................... 110,000 2,275,625
Hancock Fabrics, Inc. ............. 100,000 1,450,000
Stein Mart, Inc.* ................. 50,000 1,337,500
----------
10,733,500
----------
SHARES VALUE
------- ------------
TELECOMMUNICATIONS -- 2.4%
Aliant Communications, Inc. ....... 100,000 $ 3,137,500
CommNet Cellular, Inc.* ........... 23,400 832,163
Mosaix, Inc.* ..................... 100,000 881,250
----------
4,850,913
----------
TRANSPORTATION -- 0.7%
Landstar Systems, Inc. ............ 50,000 1,318,750
----------
UTILITIES -- 1.2%
United Water Resources, Inc. ...... 120,000 2,347,500
----------
TOTAL COMMON STOCK
(COST $169,727,606).................. 186,661,620
----------
PREFERRED STOCK -- 0.2%
OIL & GAS
Cross Timbers Oil Co. $1.5625 Cl-A
[CVT]
(COST $453,022).................. 13,000 485,875
----------
FOREIGN STOCK -- 0.4%
METALS & MINING
Prime Resources Group,
Inc. -- (CAD)
(COST $956,274).................... 120,000 796,635
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS -- 5.1%
U.S. Treasury Bills
5.195%................... 01/22/98 $4,935 4,920,660
5.20%.................... 01/22/98 5,222 5,206,826
----------
(COST $10,126,205)....... 10,127,486
----------
COMMERCIAL PAPER -- 6.9%
Corporate Asset Funding,
Inc.
6.25%.................... 01/02/98 7,803 7,801,645
Hewlett-Packard Co., Inc.
5.95%.................... 01/21/98 1,453 1,448,197
Merck & Co., Inc.
6.10%.................... 01/05/98 4,625 4,621,865
----------
TOTAL COMMERCIAL PAPER
(COST $13,871,707)....... 13,871,707
----------
</TABLE>
<PAGE>
T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 0.0%
Temporary Investment Cash Fund
(COST $474).......................... 474 $ 474
------------
TOTAL INVESTMENTS -- 106.0%
(COST $195,135,288).................... 211,943,797
LIABILITIES IN EXCESS OF OTHER ASSETS --
(6.0%)................................. (12,048,277)
------------
NET ASSETS -- 100.0%..................... $199,895,520
============
</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>
MARSICO CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
COMMON STOCK -- 87.7%
AEROSPACE -- 3.0%
Boeing Co. ........................ 4,500 $ 220,219
----------
AIRLINES -- 3.3%
Southwest Airlines Co. ............ 3,850 94,806
UAL Corp.* ........................ 1,575 145,687
----------
240,493
----------
BEVERAGES -- 2.0%
Coca-Cola Enterprises, Inc. ....... 4,050 144,028
----------
CHEMICALS -- 8.0%
Cytec Industries, Inc.* ........... 4,725 221,780
Dow Chemical Co. .................. 1,425 144,637
Monsanto Co. ...................... 5,125 215,250
----------
581,667
----------
COMPUTER HARDWARE -- 2.9%
Dell Computer Corp.* .............. 2,525 212,100
----------
ELECTRONICS COMPONENTS &
EQUIPMENT -- 3.9%
General Electric Co. .............. 3,900 286,162
----------
ENTERTAINMENT & LEISURE -- 3.0%
Time Warner, Inc. ................. 3,500 217,000
----------
FARMING & AGRICULTURE -- 8.4%
Dekalb Genetics Corp. Cl-B ........ 5,575 218,819
Delta & Pine Land Co. ............. 5,825 177,662
Pioneer Hi-Bred International,
Inc. ............................ 2,000 214,500
----------
610,981
----------
FINANCIAL-BANK & TRUST -- 18.9%
Affiliated Managers Group,
Inc.* ........................... 425 12,325
AmSouth Bancorp ................... 2,625 142,570
Citicorp .......................... 1,700 214,944
Fannie Mae ........................ 2,550 145,509
Mercantile Bancorporation, Inc. ... 2,375 146,062
PFF Bancorp, Inc.* ................ 7,275 144,591
Star Banc Corp. ................... 2,425 139,134
Wells Fargo & Co. ................. 850 288,522
Zions Bancorp ..................... 3,200 145,200
----------
1,378,857
----------
FINANCIAL SERVICES -- 8.0%
Ahmanson, (H.F.) & Co. ............ 2,175 145,589
Friedman, Billings, Ramsey Group,
Inc. Cl-A* ...................... 4,200 75,337
Merrill Lynch & Co., Inc. ......... 1,975 144,052
SLM Holding Corp. ................. 1,575 219,122
----------
584,100
----------
MACHINERY & EQUIPMENT -- 2.0%
Caterpillar, Inc. ................. 3,000 145,688
----------
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
METALS & MINING -- 1.0%
Phelps Dodge Corp. ................ 1,150 $ 71,588
----------
OIL & GAS -- 2.9%
British Petroleum Co. PLC [ADR] ... 2,700 215,156
----------
PHARMACEUTICALS -- 14.5%
Lilly, (Eli) & Co. ................ 4,125 287,203
Pfizer, Inc. ...................... 3,800 283,338
Schering-Plough Corp. ............. 2,275 141,334
Warner-Lambert Co. ................ 2,810 348,440
----------
1,060,315
----------
RETAIL & MERCHANDISING -- 2.0%
Wal-Mart Stores, Inc. ............. 3,650 143,947
----------
TELECOMMUNICATIONS -- 3.9%
Lucent Technologies, Inc. ......... 1,800 143,775
SBC Communications, Inc. .......... 1,950 142,838
----------
286,613
----------
TOTAL COMMON STOCK
(COST $6,376,699).................... 6,398,914
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 14.0%
American Express Credit
Corp.
6.25%................ 01/02/98 $ 340 339,941
Ford Motor Credit Co.
5.75%................ 01/02/98 340 339,946
General Electric
Capital Services,
Inc.
5.65%................ 01/02/98 340 339,947
-----------
TOTAL COMMERCIAL PAPER
(COST $1,019,834).................. 1,019,834
-----------
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 6.2%
Federal Mortgage Corp.
Disc. Note
5.75%
(COST $449,928)...... 01/02/98 450 449,928
-----------
U.S. TREASURY OBLIGATIONS -- 56.1%
U.S. Treasury Bills
4.35%
(COST $4,099,505).... 01/02/98 4,100 4,099,505
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 3.8%
Temporary Investment Cash Fund ... 139,662 139,662
Temporary Investment Fund ........ 139,661 139,661
----------
(COST $279,323)................... 279,323
----------
</TABLE>
<PAGE>
MARSICO CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
-----------
<S> <C>
TOTAL INVESTMENTS -- 167.8%
(COST $12,225,289).................. $12,247,504
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (67.8%)................... (4,948,200)
----------
NET ASSETS -- 100.0%.................. $ 7,299,304
==========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
Definitions of abbreviations are included following the Schedules of
Investments.
See Notes to Financial Statements.
DEFINITION OF ABBREVIATIONS
- --------------------------------------------------------------------------------
THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THE SCHEDULES OF INVESTMENTS:
SECURITY DESCRIPTIONS:
- -----------------------
ADR-American Depositary Receipt
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 Receipt
IO-Interest Only Security
PIK-Payment in Kind Security
REIT-Real Estate Investment Trust
STEP-Stepped Coupon Bond (2)
TBA-To be Announced Security
VR-Variable Rate Bond (1)
WI-When Issued Security (2)
ZCB-Zero Coupon Bond (2)
(1)- Rates shown for variable and floating rate securities are the coupon rates
as of December 31, 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 Krone
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 Krone
NZD-New Zealand/New Zealand Dollar
PHP-Philippines/Philippine Peso
PTE-Portugal/Portuguese Escudo
SEK-Sweden/Swedish Krona
SGD-Singapore/Singapore Dollar
ZAR-South Africa/South African Rand
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(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)................... $ 410,801 $ 938,105 $1,524,174 $760,025 $200,825 $359,224 $429,823
Cash in bank, including
foreign currency holdings... 840 -- 410 -- -- 1,194 --
Receivable for:
Securities sold............. 2,935 828 1,344 -- 793 4,349 --
Forward foreign currency
exchange contracts
purchased................. -- -- -- -- -- -- --
Forward foreign currency
exchange contracts sold... -- -- 1,315 -- -- -- --
Dividends and interest...... 1,467 1,531 1,509 3,485 356 1,717 7,351
Fund shares sold............ 1,053 1,745 13,430 -- 348 -- --
Futures variation margin.... -- -- -- -- -- 1,070 --
Other assets.................. 43 9 16 6 1 4 314
Unrealized appreciation on
interest rate swap
agreements.................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- --------
TOTAL ASSETS.............. 417,139 942,218 1,542,198 763,516 202,323 367,558 437,488
-------- -------- -------- -------- -------- ------- --------
LIABILITIES
Cash overdraft................ -- -- -- 3 5 -- 1
Sale commitments, at value.... -- -- -- -- -- 207 --
Payable for:
Securities purchased........ 2,598 4,723 28,461 -- 1,066 7,395 --
Forward foreign currency
exchange contracts
purchased................. 844 -- 1,231 -- -- 53 --
Forward foreign currency
exchange contracts sold... 1,065 -- -- -- -- 58 --
Fund shares redeemed........ -- -- -- -- -- 1,966 2,872
Futures variation margin.... -- -- -- -- -- -- --
Advisory fees............... 199 326 624 101 49 128 105
Shareholder servicing
fees...................... 35 79 125 64 16 30 36
Accrued expenses............ 128 104 155 102 44 130 54
Accrued dividends........... -- -- -- 3,358 -- -- --
-------- -------- -------- -------- -------- ------- --------
TOTAL LIABILITIES......... 4,869 5,232 30,596 3,628 1,180 9,967 3,068
-------- -------- -------- -------- -------- ------- --------
NET ASSETS....................... $ 412,270 $ 936,986 $1,511,602 $759,888 $201,143 $357,591 $434,420
======== ======== ======== ======== ======== ======= ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of
shares authorized, $.001 par
value per share)................ $ 19 $ 46 $ 65 $ 760 $ 13 $ 26 $ 33
Additional paid-in capital....... 325,542 722,396 1,043,665 759,067 154,620 296,981 385,484
Undistributed net investment
income (loss)................... 4,058 11,541 3,000 -- 4,517 8,977 27,616
Accumulated net realized gain
(loss) on investments........... 48,420 50,500 84,601 61 16,064 21,948 1,492
Accumulated net unrealized
appreciation (depreciation) on
investments..................... 34,231 152,503 380,271 -- 25,929 29,659 19,795
-------- -------- -------- -------- -------- ------- --------
NET ASSETS....................... $ 412,270 $ 936,986 $1,511,602 $759,888 $201,143 $357,591 $434,420
======== ======== ======== ======== ======== ======= ========
Shares of common stock
outstanding..................... 19,365 45,650 65,302 759,826 13,278 26,226 33,139
Net asset value, offering and
redemption price per share...... $ 21.29 $ 20.53 $ 23.15 $ 1.00 $ 15.15 $ 13.64 $ 13.11
======== ======== ======== ======== ======== ======= ========
(A) Investments at cost.......... $ 374,598 $ 785,602 $1,143,979 $760,025 $174,897 $329,164 $410,028
======== ======== ======== ======== ======== ======= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
T. ROWE PIMCO T. ROWE T. ROWE
PRICE TOTAL INVESCO FOUNDERS PRICE PRICE BERGER
ASSET RETURN EQUITY CAPITAL INTERNATIONAL INTERNATIONAL CAPITAL FOUNDERS
ALLOCATION BOND INCOME APPRECIATION EQUITY BOND GROWTH PASSPORT
---------- -------- -------- ------------ ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$214,199 $756,345 $612,687 $278,904 $ 438,892 $ 126,727 $186,175 $117,970
99 -- 2,189 -- 21,732 5,293 -- 376
-- -- -- 3,351 434 574 -- 140
-- -- -- -- -- 67 -- --
-- 244 -- -- -- 5 -- --
1,643 6,902 2,492 19 667 3,238 83 151
-- 59,899 3,153 2,808 3,080 -- 871 214
-- 815 -- -- -- -- -- --
2 6 6 3 6 1 2 2
-- 188 -- -- -- -- -- --
---------- -------- -------- ------------ ------------- ------------- -------- ---------
215,943 824,399 620,527 285,085 464,811 135,905 187,131 118,853
---------- -------- -------- ------------ ------------- ------------- -------- ---------
-- 2,052 -- -- -- -- -- --
-- -- -- -- -- -- -- --
796 223,174 18,081 6,613 -- 1,311 1,951 752
-- -- -- -- -- -- -- 3
-- -- -- -- -- -- -- --
1,931 26,793 25 -- 5 4,071 -- --
-- -- -- -- -- -- -- --
55 137 187 136 198 47 71 60
18 50 49 23 38 11 16 10
68 93 80 55 114 57 43 90
-- -- -- -- -- -- -- --
---------- -------- -------- ------------ ------------- ------------- -------- ---------
2,868 252,299 18,422 6,827 355 5,497 2,081 915
---------- -------- -------- ------------ ------------- ------------- -------- ---------
$213,075 $572,100 $602,105 $278,258 $ 464,456 $ 130,408 $185,050 $117,938
=========== ========== ============ ============== ============== ============== ========== =========
$ 14 $ 49 $ 36 $ 15 $ 38 $ 13 $ 11 $ 10
174,348 526,126 464,642 223,153 410,442 131,693 147,564 109,631
4,904 25,494 12,069 -- 3,315 5,568 122 547
887 12,125 30,597 12,806 7,741 (4,256) 33,472 (3,466)
32,922 8,306 94,761 42,285 42,920 (2,610) 3,881 11,216
---------- -------- -------- ------------ ------------- ------------- -------- ---------
$213,075 $572,100 $602,105 $278,258 $ 464,456 $ 130,408 $185,050 $117,938
=========== ========== ============ ============== ============== ============== ========== =========
14,082 48,801 36,468 15,621 38,415 12,902 11,141 10,016
$ 15.13 $ 11.72 $ 16.51 $ 17.81 $ 12.09 $ 10.11 $ 16.61 $ 11.78
=========== ========== ============ ============== ============== ============== ========== =========
$181,276 $750,855 $517,926 $236,619 $ 395,941 $ 129,330 $182,295 $106,746
=========== ========== ============ ============== ============== ============== ========== =========
<CAPTION>
- -------------------------------
- -------------------------------
T. ROWE PIMCO
PRICE LIMITED
NATURAL MATURITY
RESOURCES BOND
---------- --------
--------- --------
<S> <C> <C>
$111,593 $342,243
-- 1
277 498
== ==
92 3,340
89 --
-- 8
1 3
-- 30
--------- --------
112,052 346,123
--------- --------
1 --
-- --
-- 49,438
-- --
-- --
-- 7,885
-- --
48 72
9 25
40 61
-- --
--------- --------
98 57,481
--------- --------
$111,954 $288,642
=========== ========
$ 8 $ 26
101,941 272,564
1,072 14,491
6,230 (1,027)
2,703 2,588
--------- --------
$111,954 $288,642
=========== ========
7,683 26,189
$ 14.57 $ 11.02
=========== ========
$108,891 $340,132
=========== ========
</TABLE>
- ----------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
ROBERTSON AST PUTNAM TWENTIETH TWENTIETH
STEPHENS AST JANUS VALUE CENTURY CENTURY
VALUE + OVERSEAS GROWTH & STRATEGIC INTERNATIONAL
GROWTH GROWTH INCOME BALANCED GROWTH
--------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at value (A)............. $233,855 $255,442 $116,496 $ 30,250 $34,072
Cash in bank, including foreign currency
holdings......................................... 148 1,273 -- 9 --
Receivable for:
Securities sold.................................. 9,143 2,389 2,746 -- 444
Forward foreign currency exchange contracts
purchased...................................... -- -- -- -- --
Forward foreign currency exchange contracts
sold........................................... -- 904 -- -- 98
Dividends and interest........................... 103 196 227 162 30
Fund shares sold................................. 17 15 340 -- 977
Futures variation margin......................... -- -- -- -- --
Other assets....................................... 2 2 1 -- 1
Unrealized appreciation on interest rate swap
agreements....................................... -- -- -- -- --
-------- -------- -------- -------- --------
TOTAL ASSETS................................... 243,268 260,221 119,810 30,421 35,622
-------- -------- -------- -------- --------
LIABILITIES
Cash overdraft..................................... -- -- -- -- 31
Sale commitments, at value......................... -- -- -- -- --
Payable for:
Securities purchased............................. 6,657 3,003 2,267 733 2,385
Forward foreign currency exchange contracts
purchased...................................... -- 1,027 -- -- 10
Forward foreign currency exchange contracts
sold........................................... -- -- -- -- --
Fund shares redeemed............................. 779 172 -- 713 1
Futures variation margin......................... -- -- -- -- --
Advisory fees.................................... 119 131 44 11 19
Shareholder servicing fees....................... 20 21 10 2 3
Accrued expenses................................. 45 162 51 15 48
Accrued dividends................................ -- -- -- -- --
-------- -------- -------- -------- --------
TOTAL LIABILITIES.............................. 7,620 4,516 2,372 1,474 2,497
-------- -------- -------- -------- --------
NET ASSETS............................................ $235,648 $255,705 $117,438 $ 28,947 $33,125
======== ======== ======== ======== ========
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares authorized,
$.001 par value per share)........................... $ 19 $ 22 $ 10 $ 3 $ 3
Additional paid-in capital............................ 231,812 243,382 109,238 27,248 32,230
Undistributed net investment income (loss)............ -- 452 686 273 (92)
Accumulated net realized gain (loss) on investments... (4,702) (1,787) 1,862 (407) (481)
Accumulated net unrealized appreciation (depreciation)
on investments....................................... 8,519 13,636 5,642 1,830 1,465
-------- -------- -------- -------- --------
NET ASSETS............................................ $235,648 $255,705 $117,438 $ 28,947 $33,125
======== ======== ======== ======== ========
Shares of common stock outstanding.................... 18,666 21,542 9,605 2,552 2,875
Net asset value, offering and redemption price per
share................................................ $ 12.62 $ 11.87 $ 12.23 $ 11.34 $ 11.52
======== ======== ======== ======== ========
(A) Investments at cost............................... $225,336 $241,668 $110,854 $ 28,419 $32,702
======== ======== ======== ======== ========
<CAPTION>
T. ROWE
PRICE SMALL MARISCO
COMPANY CAPITAL
VALUE GROWTH
----------- -------
<S> <C> <C>
ASSETS
Investments in securities at value (A)............. $ 211,944 $12,248
Cash in bank, including foreign currency
holdings......................................... 1 --
Receivable for:
Securities sold.................................. -- --
Forward foreign currency exchange contracts
purchased...................................... -- --
Forward foreign currency exchange contracts
sold........................................... -- --
Dividends and interest........................... 514 1
Fund shares sold................................. 643 341
Futures variation margin......................... -- --
Other assets....................................... 1 --
Unrealized appreciation on interest rate swap
agreements....................................... -- --
------- ------
TOTAL ASSETS................................... 213,103 12,590
------- ------
LIABILITIES
Cash overdraft..................................... -- --
Sale commitments, at value......................... -- --
Payable for:
Securities purchased............................. 13,070 5,289
Forward foreign currency exchange contracts
purchased...................................... -- --
Forward foreign currency exchange contracts
sold........................................... -- --
Fund shares redeemed............................. -- --
Futures variation margin......................... -- --
Advisory fees.................................... 82 2
Shareholder servicing fees....................... 16 --
Accrued expenses................................. 39 --
Accrued dividends................................ -- --
------- ------
TOTAL LIABILITIES.............................. 13,207 5,291
------- ------
NET ASSETS............................................ $ 199,896 $7,299
======= ======
COMPONENTS OF NET ASSETS
Common stock (unlimited number of shares authorized,
$.001 par value per share)........................... $ 15 $ 1
Additional paid-in capital............................ 181,101 7,269
Undistributed net investment income (loss)............ 949 6
Accumulated net realized gain (loss) on investments... 1,023 --
Accumulated net unrealized appreciation (depreciation)
on investments....................................... 16,808 23
------- -------
NET ASSETS............................................ $ 199,896 $7,299
======= =======
Shares of common stock outstanding.................... 15,520 727
Net asset value, offering and redemption price per
share................................................ $ 12.88 $10.03
======= ======
(A) Investments at cost............................... $ 195,135 $12,225
======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(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.................................. $ 865 $ 2,967 $ 5,797 $37,009 $ 512 $ 8,540 $ 30,106
Dividends................................. 7,022 15,331 10,730 -- 5,222 3,742 587
------- -------- -------- ------- ------- ------- -------
Total Investment Income............... 7,887 18,298 16,527 37,009 5,734 12,282 30,693
------- -------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees.................. 3,429 5,424 11,423 3,268 887 2,388 2,345
Shareholder servicing fees................ 390 723 1,269 654 135 320 313
Administration and accounting fees........ 311 410 519 372 135 272 267
Custodian fees............................ 309 110 199 110 40 225 54
Professional fees......................... 25 48 84 44 9 21 21
Trustees' fees and expenses............... 11 20 35 18 4 9 9
Insurance expenses........................ 4 7 13 7 1 3 3
Miscellaneous expenses.................... 10 15 24 13 6 67 65
------- -------- -------- ------- ------- ------- -------
Total Expenses........................ 4,489 6,757 13,566 4,486 1,217 3,305 3,077
Less: Advisory fee waivers and expense
reimbursements...................... -- -- (39) (566) -- -- --
------- -------- -------- ------- ------- ------- -------
Net Expenses.......................... 4,489 6,757 13,527 3,920 1,217 3,305 3,077
------- -------- -------- ------- ------- ------- -------
Net Investment Income (Loss)................. 3,398 11,541 3,000 33,089 4,517 8,977 27,616
------- -------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities............................ 38,273 50,708 82,896 61 16,208 18,283 1,491
Foreign currency transactions......... 10,981 -- 1,955 -- (68) 334 --
Futures contracts..................... -- -- -- -- -- 3,387 --
Option contracts...................... -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net realized gain (loss).................. 49,254 50,708 84,851 61 16,140 22,004 1,491
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation) on:
Securities............................ 12,325 81,537 199,694 -- 13,833 22,357 10,886
Futures contracts..................... -- -- -- -- -- (289) --
Written option contracts.............. -- -- -- -- -- -- --
Interest rate swaps................... -- -- -- -- -- -- --
Translation of assets and liabilities
denominated in foreign currencies... (2,248) -- (170) -- (4) (105) --
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation).......................... 10,077 81,537 199,524 -- 13,829 21,963 10,886
------- -------- -------- ------- ------- ------- -------
Net gain (loss) on investments............ 59,331 132,245 284,375 61 29,969 43,967 12,377
------- -------- -------- ------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations............... $62,729 $ 143,786 $287,375 $33,150 $34,486 $ 52,944 $ 39,993
======= ======== ======== ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
PIMCO
T. ROWE TOTAL INVESCO FOUNDERS T. ROWE PRICE T. ROWE PRICE BERGER
PRICE 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................................ $ 5,153 $29,452 $9,582 $ 1,390 $ 881 $ 6,876 $ 894
Dividends............................... 1,629 1 7,015 616 8,085 -- 891
------- -------- -------- ------- ------- ------- -------
Total Investment Income............. 6,782 29,453 16,597 2,006 8,966 6,876 1,785
------- -------- -------- ------- ------- ------- -------
EXPENSES
Investment advisory fees................ 1,414 2,980 3,565 2,220 4,640 942 1,260
Shareholder servicing fees.............. 166 458 475 247 464 118 168
Administration and accounting fees...... 166 334 340 228 340 119 167
Custodian fees.......................... 49 112 77 55 297 100 45
Professional fees....................... 11 30 31 16 30 8 11
Trustees' fees and expenses............. 5 13 13 7 13 3 5
Insurance expenses...................... 2 4 5 2 5 1 2
Miscellaneous expenses.................. 65 28 22 8 57 17 5
------- -------- -------- ------- ------- ------- -------
Total Expenses...................... 1,878 3,959 4,528 2,783 5,846 1,308 1,663
Less: Advisory fee waivers and
expense reimbursements............ -- -- -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net Expenses........................ 1,878 3,959 4,528 2,783 5,846 1,308 1,663
------- -------- -------- ------- ------- ------- -------
Net Investment Income (Loss)............... 4,904 25,494 12,069 (777) 3,120 5,568 122
------- -------- -------- ------- ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Securities.......................... 932 6,709 30,597 13,326 9,578 3,325 33,536
Foreign currency transactions....... (43) 287 -- 1 (674) (8,170) --
Futures contracts................... -- 9,091 -- -- -- -- --
Option contracts.................... -- 291 -- -- -- -- --
------- -------- -------- ------- ------- ------- -------
Net realized gain (loss)................ 889 16,378 30,597 13,327 8,904 (4,845) 33,536
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation) on:
Securities.......................... 21,216 1,133 52,553 4,904 (3,594) (4,444) (11,415)
Futures contracts................... -- 1,499 -- -- -- -- --
Written option contracts............ -- (607) -- -- -- -- --
Interest rate swaps................. -- 176 -- -- -- -- --
Translation of assets and
liabilities denominated in foreign
currencies........................ -- 1,428 -- (1) (27) 519 --
------- -------- -------- ------- ------- ------- -------
Net change in unrealized appreciation
(depreciation)........................ 21,216 3,629 52,553 4,903 (3,621) (3,925) (11,415)
------- -------- -------- ------- ------- ------- -------
Net gain (loss) on investments.......... 22,105 20,007 83,150 18,230 5,283 (8,770) 22,121
------- -------- -------- ------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations............. $27,009 $45,501 $95,219 $ 17,453 $ 8,403 $(3,202) $ 22,243
======= ======== ======== ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on January 2, 1997.
(2) Commenced operations on December 22, 1997.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
PIMCO ROBERTSON TWENTIETH TWENTIETH
T. ROWE LIMITED STEPHENS AST JANUS AST PUTNAM CENTURY CENTURY
FOUNDERS PRICE NATURAL MATURITY VALUE + OVERSEAS VALUE GROWTH STRATEGIC INTERNATIONAL
PASSPORT RESOURCES BOND GROWTH GROWTH(1) & INCOME(1) BALANCED(1) GROWTH(1)
- -------- ------------- -------- --------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,053 $ 552 $16,719 $ 323 $ 1,162 $ 212 $ 390 $ 63
1,187 1,792 -- 639 991 1,157 53 121
- ------- ------- ------- ------- ------- ------- ------ ------
2,240 2,344 16,719 962 2,153 1,369 443 184
- ------- ------- ------- ------- ------- ------- ------ ------
1,258 986 1,649 1,502 1,261 416 116 158
126 110 254 150 126 56 14 16
126 110 232 147 123 56 25 27
160 44 55 34 170 145 24 67
8 7 17 10 9 4 1 1
3 3 7 4 3 1 -- 1
1 1 2 1 1 1 -- --
11 11 12 4 8 4 4 6
- ------- ------- ------- ------- ------- ------- ------ ------
1,693 1,272 2,228 1,852 1,701 683 184 276
-- -- -- -- -- -- (14) --
- ------- ------- ------- ------- ------- ------- ------ ------
1,693 1,272 2,228 1,852 1,701 683 170 276
- ------- ------- ------- ------- ------- ------- ------ ------
547 1,072 14,491 (890) 452 686 273 (92)
- ------- ------- ------- ------- ------- ------- ------ ------
(3,144) 6,280 403 (4,645) (2,346) 1,862 (367) (388)
(293) (17) (134) -- 559 -- (40) (93)
-- -- 114 -- -- -- -- --
-- -- 44 -- -- -- -- --
- ------- ------- ------- ------- ------- ------- ------ ------
(3,437) 6,263 427 (4,645) (1,787) 1,862 (407) (481)
- ------- ------- ------- ------- ------- ------- ------ ------
5,952 (5,033) 3,362 5,704 13,774 5,642 1,831 1,371
-- -- (37) -- -- -- -- --
-- -- (35) -- -- -- -- --
-- -- 30 -- -- -- -- --
(9) 1 292 -- (138) -- (1) 94
- ------- ------- ------- ------- ------- ------- ------ ------
5,943 (5,032) 3,612 5,704 13,636 5,642 1,830 1,465
- ------- ------- ------- ------- ------- ------- ------ ------
2,506 1,231 4,039 1,059 11,849 7,504 1,423 984
- ------- ------- ------- ------- ------- ------- ------ ------
$ 3,053 $ 2,303 $18,530 $ 169 $12,301 $8,190 $ 1,696 $ 892
======= ======= ======= ======= ======= ======= ====== ======
<CAPTION>
- ----------------------------
PORTFOLIO
- ----------------------------
T. ROWE
PRICE SMALL MARSICO
COMPANY CAPITAL
VALUE(1) GROWTH(2)
- ---------- ---------
<C> <C>
$ 504 $ 8
1,365 --
- ------- ------
1,869 8
- ------- ------
713 2
79 --
79 --
36 --
6 --
2 --
1 --
4 --
- ------- ------
920 2
-- --
- ------- ------
920 2
- ------- ------
949 6
- ------- ------
1,070 --
-- --
(47) --
-- --
- ------- ------
1,023 --
- ------- ------
16,808 23
-- --
-- --
-- --
-- --
- ------- ------
16,808 23
- ------- ------
17,831 23
- ------- ------
$18,780 $29
======= ======
</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
------------------------ ------------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)......................... $ 3,398 $ 2,746 $ 11,541 $ 7,379
Net realized gain (loss) on investments.............. 49,254 20,748 50,708 13,085
Net change in unrealized appreciation (depreciation)
on investments..................................... 10,077 4,755 81,537 46,955
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations...................................... 62,729 28,249 143,786 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............................ 125,193 101,730 426,438 217,780
Net asset value of shares issued in reinvestment of
dividends and distributions........................ 22,856 10,955 20,647 10,673
Cost of shares redeemed.............................. (121,863) (51,824) (163,736) (43,451)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions.................................... 26,186 60,861 283,349 185,002
--------- -------- --------- --------
Total Increase in Net Assets.................... 66,059 78,155 406,489 241,748
NET ASSETS
Beginning of Period.................................. 346,211 268,056 530,497 288,749
--------- -------- --------- --------
End of Period........................................ $ 412,270 $346,211 $ 936,986 $530,497
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold.......................................... 6,183 5,530 22,448 13,666
Shares issued in reinvestment of dividends and
distributions...................................... 1,229 610 1,185 707
Shares redeemed...................................... (6,057) (2,856) (8,879) (2,755)
--------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding...... 1,355 3,284 14,754 11,618
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
FEDERATED UTILITY
JANCAP GROWTH AST MONEY MARKET INCOME AST PUTNAM BALANCED
- ------------------------ --------------------------- --------------------- ---------------------
1997 1996 1997 1996 1997 1996 1997 1996
- ---------- --------- ----------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 3,000 $ 1,593 $ 33,089 $ 22,641 $ 4,517 $ 3,613 $ 8,977 $ 7,010
84,851 42,941 61 80 16,140 7,915 22,004 29,898
199,524 108,269 -- -- 13,829 978 21,963 (8,583)
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
287,375 152,803 33,150 22,721 34,486 12,506 52,944 28,325
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
(2,524) (753) (33,089) (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) (33,169) (22,790) (8,752) (4,103) (36,957) (14,028)
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
862,306 517,512 2,492,066 1,478,919 90,589 59,384 42,308 27,031
44,596 24,915 31,988 22,199 8,752 4,103 36,957 14,028
(530,403) (209,312) (2,313,617) (1,295,804) (47,070) (56,151) (24,140) (24,083)
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
376,499 333,115 210,437 205,314 52,271 7,336 55,125 16,976
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
619,278 461,003 210,418 205,245 78,005 15,739 71,112 31,273
892,324 431,321 549,470 344,225 123,138 107,399 286,479 255,206
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
$1,511,602 $ 892,324 $ 759,888 $ 549,470 $201,143 $123,138 $357,591 $286,479
========== ========== ======== ========== ========== ======== ======== ========
40,825 30,067 2,492,065 1,478,919 6,689 4,958 3,259 2,155
2,311 1,569 31,988 22,199 711 351 3,095 1,158
(25,329) (12,155) (2,313,617) (1,295,804) (3,718) (4,710) (1,850) (1,954)
- ---------- ---------- -------- ---------- ---------- -------- -------- --------
17,807 19,481 210,436 205,314 3,682 599 4,504 1,359
========== ========== ======== ========== ========== ======== ======== ========
</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
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........................... $ 27,616 $ 10,610 $ 4,904 $ 2,587
Net realized gain (loss) on investments................ 1,491 1,294 889 2,313
Net change in unrealized appreciation (depreciation) on
investments.......................................... 10,886 6,820 21,216 6,558
--------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations........................................ 39,993 18,724 27,009 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.............................. 269,597 151,204 74,080 52,390
Net asset value of shares issued in reinvestment of
dividends and distributions.......................... 11,874 4,032 4,987 1,542
Cost of shares redeemed................................ (80,433) (48,358) (8,162) (3,098)
--------- -------- --------- --------
Increase in Net Assets from Capital Share
Transactions...................................... 201,038 106,878 70,905 50,834
--------- -------- --------- --------
Total Increase in Net Assets...................... 229,158 121,570 92,926 60,750
NET ASSETS
Beginning of Period.................................... 205,262 83,692 120,149 59,399
--------- -------- --------- --------
End of Period.......................................... $434,420 $205,262 $213,075 $120,149
========= ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold............................................ 21,771 13,287 5,224 4,228
Shares issued in reinvestment of dividends and
distributions........................................ 1,000 368 377 128
Shares redeemed........................................ (6,550) (4,248) (570) (249)
--------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding........ 16,221 9,407 5,031 4,107
========= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PORTFOLIO
- -------------------------------------------------------------------------------------------------------
PIMCO FOUNDERS CAPITAL T. ROWE PRICE
TOTAL RETURN BOND INVESCO EQUITY INCOME APPRECIATION INTERNATIONAL EQUITY
- --------------------- ---------------------- ----------------------- ----------------------
1997 1996 1997 1996 1997 1996 1997 1996
- -------- -------- --------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 25,494 $ 15,701 $ 12,069 $ 7,107 $ (777) $ (527) $ 3,120 $ 2,541
16,378 (3,854) 30,597 9,984 13,327 (527) 8,904 2,395
3,629 1,208 52,553 24,709 4,903 24,027 (3,621) 34,967
- -------- -------- -------- --------- -------- --------- --------- ---------
45,501 13,055 95,219 41,800 17,453 22,973 8,403 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)
-------- -------- --------- -------- --------- --------- ---------
239,491 196,298 325,090 184,426 159,953 237,559 303,075 222,719
15,321 12,814 17,091 8,671 -- 1,655 5,042 1,759
(72,902) (74,678) (166,884) (54,262) (119,216) (130,924) (249,581) (55,730)
- -------- -------- -------- --------- -------- --------- --------- ---------
181,910 134,434 175,297 138,835 40,737 108,290 58,536 168,748
- -------- -------- -------- --------- -------- --------- --------- ---------
212,090 134,675 253,425 171,964 58,190 129,608 61,897 206,892
360,010 225,335 348,680 176,716 220,068 90,460 402,559 195,667
- -------- -------- -------- --------- -------- --------- --------- ---------
$572,100 $360,010 $ 602,105 $348,680 $ 278,258 $ 220,068 $ 464,456 $402,559
======== ======== ======== ========= ======== ========= ========= =========
21,382 18,267 21,367 14,201 9,416 15,149 24,350 19,721
1,429 1,211 1,227 705 -- 115 419 161
(6,415) (6,938) (11,049) (4,116) (6,897) (8,512) (19,694) (4,907)
- -------- -------- -------- --------- -------- --------- --------- ---------
16,396 12,540 11,545 10,790 2,519 6,752 5,075 14,975
======== ======== ======== ========= ======== ========= ========= =========
</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
----------------------- ------------------------
1997 1996 1997 1996
-------- -------- --------- --------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).......................... $ 5,568 $ 3,520 $ 122 $ 223
Net realized gain (loss) on investments............... (4,845) 1,092 33,536 1,487
Net change in unrealized appreciation (depreciation)
on investments...................................... (3,925) 458 (11,415) 10,400
-------- -------- --------- --------
Net Increase (Decrease) in Net Assets from
Operations....................................... (3,202) 5,070 22,243 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............................. 57,168 60,046 210,696 147,599
Net asset value of shares issued in reinvestment of
dividends and distributions......................... 4,066 1,581 1,570 150
Cost of shares redeemed............................... (21,793) (12,483) (184,136) (69,441)
-------- -------- --------- --------
Increase (Decrease) in Net Assets from Share
Transactions..................................... 39,441 49,144 28,130 78,308
-------- -------- --------- --------
Total Increase in Net Assets..................... 32,173 52,633 48,803 90,268
NET ASSETS
Beginning of Period................................... 98,235 45,602 136,247 45,979
-------- -------- --------- --------
End of Period......................................... $130,408 $ 98,235 $ 185,050 $136,247
======== ======== ========= ========
SHARES ISSUED AND REDEEMED
Shares sold........................................... 5,634 5,742 13,595 10,695
Shares issued in reinvestment of dividends and
distributions....................................... 405 156 109 12
Shares redeemed....................................... (2,152) (1,183) (12,032) (4,945)
-------- -------- --------- --------
Net Increase (Decrease) in Shares Outstanding....... 3,887 4,715 1,672 5,762
======== ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on May 2, 1996.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------
T. ROWE PRICE PIMCO LIMITED ROBERTSON STEPHENS
FOUNDERS PASSPORT NATURAL RESOURCES MATURITY BOND VALUE + GROWTH
- --------------------- ----------------------- --------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996(1)
- -------- -------- ---------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 547 $ 974 $ 1,072 $ 423 $ 14,491 $ 10,849 $ (890) $ (66)
(3,437) (20) 6,263 2,036 427 (1,321) (4,645) (57)
5,943 5,257 (5,032) 7,352 3,612 (1,512) 5,704 2,814
- -------- -------- -------- -------- ------- -------- -------- --------
3,053 6,211 2,303 9,811 18,530 8,016 169 2,691
- -------- -------- -------- -------- ------- -------- -------- --------
(805) (129) (417) (29) (10,857) (761) -- --
(129) -- (2,073) (34) -- (303) -- --
- -------- -------- -------- -------- ------- -------- -------- --------
(934) (129) (2,490) (63) (10,857) (1,064) -- --
- -------- -------- -------- -------- ------- -------- -------- --------
74,511 103,946 63,364 87,969 141,511 104,208 265,275 52,408
933 129 2,489 63 10,857 1,064 -- --
(77,268) (20,969) (42,246) (18,508) (80,412) (65,151) (78,586) (6,309)
- -------- -------- -------- -------- ------- -------- -------- --------
(1,824) 83,106 23,607 69,524 71,956 40,121 186,689 46,099
- -------- -------- -------- -------- ------- -------- -------- --------
295 89,188 23,420 79,272 79,629 47,073 186,858 48,790
117,643 28,455 88,534 9,262 209,013 161,940 48,790 --
- -------- -------- -------- -------- ------- -------- -------- --------
$117,938 $117,643 $ 111,954 $ 88,534 $288,642 $209,013 $235,648 $48,790
======== ======== ======== ======== ======= ======== ======== ========
6,247 9,188 4,198 6,706 13,311 9,943 20,523 5,032
78 12 172 5 1,049 102 -- --
(6,422) (1,843) (2,804) (1,428) (7,504) (6,177) (6,296) (593)
- -------- -------- -------- -------- ------- -------- -------- --------
(97) 7,357 1,566 5,283 6,856 3,868 14,227 4,439
======== ======== ======== ======== ======= ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
TWENTIETH TWENTIETH T. ROWE PRICE
AST JANUS AST PUTNAM CENTURY CENTURY SMALL MARSICO
OVERSEAS VALUE GROWTH STRATEGIC INTERNATIONAL COMPANY CAPITAL
GROWTH & INCOME BALANCED GROWTH VALUE GROWTH
--------- ------------ --------- ------------- ------------- -------
1997(2) 1997(2) 1997(2) 1997(2) 1997(2) 1997(3)
--------- ------------ --------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)........... $ 452 $ 686 $ 273 $ (92) $ 949 $ 6
Net realized gain (loss) on
investments.......................... (1,787) 1,862 (407) (481) 1,023 --
Net change in unrealized appreciation
(depreciation) on investments........ 13,636 5,642 1,830 1,465 16,808 23
-------- -------- ------- -------- -------- -------
Net Increase (Decrease) in Net Assets
from Operations................... 12,301 8,190 1,696 892 18,780 29
-------- -------- ------- -------- -------- -------
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.............. 295,567 121,563 29,464 48,070 210,455 9,665
Net asset value of shares issued in
reinvestment of dividends and
distributions........................ -- -- -- -- -- --
Cost of shares redeemed................ (52,163) (12,315) (2,213) (15,837) (29,339) (2,395)
-------- -------- ------- -------- -------- -------
Increase in Net Assets from Capital
Share Transactions................ 243,404 109,248 27,251 32,233 181,116 7,270
-------- -------- ------- -------- -------- -------
Total Increase in Net Assets...... 255,705 117,438 28,947 33,125 199,896 7,299
NET ASSETS
Beginning of Period.................... -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
End of Period.......................... $255,705 $117,438 $28,947 $ 33,125 $ 199,896 $ 7,299
======== ======== ======= ======== ======== =======
SHARES ISSUED AND REDEEMED
Shares sold............................ 25,962 10,693 2,754 4,258 17,898 966
Shares issued in reinvestment of
dividends and distributions.......... -- -- -- -- -- --
Shares redeemed........................ (4,420) (1,088) (202) (1,383) (2,378) (239)
-------- -------- ------- -------- -------- -------
Net Increase (Decrease) in Shares
Outstanding....................... 21,542 9,605 2,552 2,875 15,520 727
======== ======== ======= ======== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(2) Commenced operations on January 2, 1997.
(3) Commenced operations on December 22, 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
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- --------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AST Putnam 1997 $ 19.22 $ 0.36 $ 2.96 $ 3.32 $ (0.30) $ (0.95) $ (1.25) $21.29
International 1996 18.20 0.16 1.55 1.71 (0.32) (0.37) (0.69) 19.22
Equity 1995 17.61 0.14 1.44 1.58 -- (0.99) (0.99) 18.20
1994 17.34 0.10 0.36 0.46 (0.03) (0.16) (0.19) 17.61
1993 12.74 0.14 4.46 4.60 -- -- -- 17.34
Lord Abbett 1997 $ 17.17 $ 0.24 $ 3.76 $ 4.00 $ (0.23) $ (0.41) $ (0.64) $20.53
Growth and 1996 14.98 0.23 2.48 2.71 (0.17) (0.35) (0.52) 17.17
Income 1995 12.00 0.16 3.22 3.38 (0.20) (0.20) (0.40) 14.98
1994 12.06 0.20 0.06 0.26 (0.12) (0.20) (0.32) 12.00
1993 10.70 0.11 1.35 1.46 (0.04) (0.06) (0.10) 12.06
JanCap Growth 1997 $ 18.79 $ 0.06 $ 5.16 $ 5.22 $ (0.05) $ (0.81) $ (0.86) $23.15
1996 15.40 0.02 4.19 4.21 (0.02) (0.80) (0.82) 18.79
1995 11.22 0.06 4.18 4.24 (0.06) -- (0.06) 15.40
1994 11.78 0.06 (0.59) (0.53) (0.03) -- (0.03) 11.22
1993 10.53 0.03 1.22 1.25 -- -- -- 11.78
AST Money 1997 $ 1.00 $ 0.0507 $ 0.0002 $ 0.0509 $ (0.0507) $(0.0002) $ (0.0509) $ 1.00
Market 1996 1.00 0.0492 0.0005 0.0497 (0.0492) (0.0005) (0.0497) 1.00
1995 1.00 0.0494 -- 0.0494 (0.0494) -- (0.0494) 1.00
1994 1.00 0.0367 0.0002 0.0369 (0.0367) (0.0002) (0.0369) 1.00
1993 1.00 0.0252 -- 0.0252 (0.0252) -- (0.0252) 1.00
Federated 1997 $ 12.83 $ 0.32 $ 2.87 $ 3.19 $ (0.36) $ (0.51) $ (0.87) $15.15
Utility 1996 11.94 0.36 0.97 1.33 (0.44) -- (0.44) 12.83
Income 1995 9.87 0.40 2.09 2.49 (0.42) -- (0.42) 11.94
1994 10.79 0.46 (1.20) (0.74) (0.16) (0.02) (0.18) 9.87
1993(2) 10.00 0.17 0.62 0.79 -- -- -- 10.79
AST Putnam 1997 $ 13.19 $ 0.33 $ 1.85 $ 2.18 $ (0.31) $ (1.42) $ (1.73) $13.64
Balance 1996 12.53 0.32 1.02 1.34 (0.25) (0.43) (0.68) 13.19
1995 10.49 0.26 2.06 2.32 (0.28) -- (0.28) 12.53
1994 10.57 0.27 (0.26) 0.01 (0.07) (0.02) (0.09) 10.49
1993(2) 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 4, 1993.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) 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>
18.15% $ 412,270 116% $ 0.0209 1.15% 1.15% 1.04% 1.04%
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%
23.92% $ 936,986 41% $ 0.0640 0.93% 0.93% 1.60% 1.60%
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%
28.66% $ 1,511,563 94% $ 0.0628 1.07% 1.08% 0.24% 0.23%
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%
5.18% $ 759,888 N/A N/A 0.60% 0.69% 5.06% 4.98%
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%
26.42% $ 201,143 91% $ 0.0395 0.90% 0.90% 3.34% 3.34%
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)
18.28% $ 357,591 170% $ 0.0282 1.03% 1.03% 2.81% 2.81%
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
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ----------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federated 1997 $ 12.13 $ 0.75 $ 0.83 $ 1.58 $(0.54) $(0.06) $ (0.60) $ 13.11
High 1996 11.14 0.56 0.90 1.46 (0.47) -- (0.47) 12.13
Yield 1995 9.69 0.38 1.46 1.84 (0.39) -- (0.39) 11.14
1994(3) 10.00 0.55 (0.86) (0.31) -- -- -- 9.69
T. Rowe Price 1997 $ 13.27 $ 0.33 $ 2.03 $ 2.36 $(0.26) $(0.24) $ (0.50) $ 15.13
Asset 1996 12.01 0.27 1.28 1.55 (0.25) (0.04) (0.29) 13.27
Allocation 1995 9.94 0.26 2.02 2.28 (0.21) -- (0.21) 12.01
1994(3) 10.00 0.21 (0.27) (0.06) -- -- -- 9.94
PIMCO Total 1997 $ 11.11 $ 0.48 $ 0.58 $ 1.06 $(0.45) $ -- $ (0.45) $ 11.72
Return Bond 1996 11.34 0.46 (0.10) 0.36 (0.28) (0.31) (0.59) 11.11
1995 9.75 0.25 1.55 1.80 (0.21) -- (0.21) 11.34
1994(3) 10.00 0.26 (0.51) (0.25) -- -- -- 9.75
INVESCO Equity 1997 $ 13.99 $ 0.31 $ 2.84 $ 3.15 $(0.26) $(0.37) $ (0.63) $ 16.51
Income 1996 12.50 0.27 1.79 2.06 (0.24) (0.33) (0.57) 13.99
1995 9.75 0.25 2.65 2.90 (0.15) -- (0.15) 12.50
1994(3) 10.00 0.16 (0.41) (0.25) -- -- -- 9.75
Founders 1997 $ 16.80 $(0.05) $ 1.06 $ 1.01 $ -- $ -- $ -- $ 17.81
Capital 1996 14.25 (0.03) 2.85 2.82 -- (0.27) (0.27) 16.80
Appreciation 1995 10.84 (0.04) 3.54 3.50 (0.09) -- (0.09) 14.25
1994(3) 10.00 0.11 0.73 0.84 -- -- -- 10.84
T. Rowe Price 1997 $ 12.07 $ 0.09 $ 0.08 $ 0.17 $(0.07) $(0.08) $ (0.15) $ 12.09
International 1996 10.65 0.06 1.44 1.50 (0.08) -- (0.08) 12.07
Equity 1995 9.62 0.07 0.99 1.06 (0.01) (0.02) (0.03) 10.65
1994(3) 10.00 0.02 (0.40) (0.38) -- -- -- 9.62
T. Rowe Price 1997 $ 10.90 $ 0.20 $(0.57) $(0.37) $(0.16) $(0.26) $ (0.42) $ 10.11
International 1996 10.60 0.23 0.38 0.61 (0.14) (0.17) (0.31) 10.90
Bond 1995 9.68 0.31 0.75 1.06 (0.14) -- (0.14) 10.60
1994(4) 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.
(3) Commenced operations on January 4, 1994.
(4) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) 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> <C>
13.59% $ 434,420 28% N/A 0.98% 0.98% 8.83% 8.83%
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)
18.40% $ 213,075 10% $ 0.0299 1.13% 1.13% 2.95% 2.95%
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)
9.87% $ 572,100 320% N/A 0.86% 0.86% 5.56% 5.56%
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)
23.33% $ 602,105 73% $ 0.0595 0.95% 0.95% 2.54% 2.54%
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)
6.01% $ 278,258 77% $ 0.0538 1.13% 1.13% (0.32%) (0.32%)
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)
1.36% $ 464,456 19% $ 0.0036 1.26% 1.26% 0.71% 0.71%
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)
(3.42%) $ 130,408 173% N/A 1.11% 1.11% 4.73% 4.73%
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
YEAR VALUE INVESTMENT NET REALIZED TOTAL FROM FROM NET FROM NET VALUE
ENDED BEGINNING INCOME & UNREALIZED INVESTMENT INVESTMENT REALIZED TOTAL END
PORTFOLIO DECEMBER 31, OF PERIOD (LOSS) GAIN (LOSS) OPERATIONS INCOME GAINS DISTRIBUTIONS OF PERIOD
- ----------- ------------ --------- ---------- ------------ ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gerger Capital 1997 $ 14.39 $ 0.01 $ 2.36 $ 2.37 $(0.02) $(0.13) $ (0.15) $ 16.61
Growth 1996 12.40 0.01 2.01 2.02 (0.03) -- (0.03) 14.39
1995 9.97 0.04 2.40 2.44 (0.01) -- (0.01) 12.40
1994(5) 10.00 0.01 (0.04) (0.03) -- -- -- 9.97
Founders 1997 $ 11.63 $ 0.03 $ 0.21 $ 0.24 $(0.08) $(0.01) $ (0.09) $ 11.78
Passport 1996 10.33 0.09 1.24 1.33 (0.03) -- (0.03) 11.63
1995(6) 10.00 0.03 0.30 0.33 -- -- -- 10.33
T. Rowe Price 1997 $ 14.47 $ 0.14 $ 0.35 $ 0.49 $(0.07) $(0.32) $ (0.39) $ 14.57
Natural 1996 11.11 0.05 3.35 3.40 (0.02) (0.02) (0.04) 14.47
Resources 1995(6) 10.00 0.04 1.07 1.11 -- -- -- 11.11
PIMCO 1997 $ 10.81 $ 0.55 $ 0.22 $ 0.77 $(0.56) $ -- $ (0.56) $ 11.02
Limited 1996 10.47 0.56 (0.15) 0.41 (0.05) (0.02) (0.07) 10.81
Maturity Bond 1995(6) 10.00 0.05 0.42 0.47 -- -- -- 10.47
Robertson 1997 $ 10.99 $(0.05) $ 1.68 $ 1.63 $ -- $ -- $ -- $ 12.62
Stephens Value (7) 10.00 (0.01) 1.00 0.99 -- -- -- 10.99
+ Growth
AST Janus 1997(8) $ 10.00 $ 0.02 $ 1.85 $ 1.87 $ -- $ -- $ -- $ 11.87
Overseas
Growth
AST Putnam 1997(8) $ 10.00 $ 0.07 $ 2.16 $ 2.23 $ -- $ -- $ -- $ 12.23
Value
Growth & Income
Twentieth 1997(8) $ 10.00 $ 0.11 $ 1.23 $ 1.34 $ -- $ -- $ -- $ 11.34
Century
Strategic
Balanced
Twentieth 1997(8) $ 10.00 $(0.03) $ 1.55 $ 1.52 $ -- $ -- $ -- $ 11.52
Century
International
Growth
T. Rowe Price 1997(8) $ 10.00 $ 0.06 $ 2.82 $ 2.88 $ -- $ -- $ -- $ 12.88
Small Company
Marsico 1997(9) $ 10.00 $ 0.01 $ 0.02 $ 0.03 $ -- $ -- $ -- $ 10.03
Capital
Growth
</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.
(5) Commenced operations on October 20, 1994.
(6) Commenced operations on May 2, 1995.
(7) Commenced operations on May 2, 1996.
(8) Commenced operations on January 2, 1997.
(9) Commenced operations on December 22, 1997.
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS OF EXPENSES RATIOS OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS (LOSS) 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> <C>
16.68% $ 185,050 305% $ 0.0603 0.99% 0.99% 0.07% 0.07%
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)
2.03% $ 117,938 73% $ 0.0110 1.35% 1.35% 0.43% 0.43%
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)
3.39% $ 111,954 44% $ 0.0221 1.16% 1.16% 0.98% 0.98%
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)
7.46% $ 288,642 54% N/A 0.88% 0.88% 5.71% 5.71%
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)
14.83% $ 235,648 219% $ 0.0568 1.23% 1.23% (0.59%) (0.59%)
9.90% 48,790 77% 0.0529 1.33%(1) 1.33%(1) (0.56%)(1) (0.56%)(1)
18.70% $ 255,705 94% $ 0.0158 1.35%(1) 1.35%(1) 0.36%(1) 0.36%(1)
22.30% $ 117,438 81% $ 0.0375 1.23%(1) 1.23%(1) 1.24%(1) 1.24%(1)
13.40% $ 28,947 76% $ 0.0337 1.25%(1) 1.35%(1) 2.02%(1) 1.92%(1)
15.10% $ 33,125 171% $ 0.0064 1.75%(1) 1.75%(1) (0.58%)(1) (0.58%)(1)
28.80% $ 199,896 7% $ 0.0477 1.16%(1) 1.16%(1) 1.20%(1) 1.20%(1)
0.30% $ 7,299 -- $ 0.0550 1.00%(1) 1.00%(1) 3.62%(1) 3.62%(1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION
American Skandia Trust (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940, as amended. The
Trust was organized on October 31, 1988 as a Massachusetts business trust. The
Trust operates as a series company and, at December 31, 1997, issued 24 classes
of shares of beneficial interest: AST Putnam International Equity Portfolio
("Putnam International Equity"), Lord Abbett Growth and Income Portfolio
("Growth and Income"), JanCap Growth Portfolio ("Growth"), AST Money Market
Portfolio ("Money Market"), Federated Utility Income Portfolio ("Utility
Income"), AST Putnam Balanced Portfolio ("Balanced"), Federated High Yield
Portfolio ("High Yield"), T. Rowe Price Asset Allocation Portfolio ("Asset
Allocation"), PIMCO Total Return Bond Portfolio ("Total Return Bond"), INVESCO
Equity Income Portfolio ("Equity Income"), Founders Capital Appreciation
Portfolio ("Capital Appreciation"), T. Rowe Price International Equity Portfolio
("T. Rowe International Equity"), T. Rowe Price International Bond Portfolio
("International Bond"), Berger Capital Growth Portfolio ("Berger Capital
Growth"), Founders Passport Portfolio ("Passport"), T. Rowe Price Natural
Resources Portfolio ("Natural Resources"), PIMCO Limited Maturity Bond Portfolio
("Limited Maturity Bond"), Robertson Stephens Value + Growth Portfolio ("Value +
Growth"), AST Janus Overseas Growth Portfolio ("Overseas Growth"), AST Putnam
Value Growth & Income Portfolio ("Value Growth & Income"), Twentieth Century
Strategic Balanced Portfolio ("Strategic Balanced"), Twentieth Century
International Growth Portfolio ("International Growth"), T. Rowe Price Small
Company Value Portfolio ("Small Company Value"), and Marsico Capital Growth
Portfolio ("Marsico Capital Growth") (collectively the "Portfolios").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Trust, in conformity with generally accepted accounting principals, in the
preparation of its financial statements. The preparation of financial statements
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security Valuation
Portfolio securities are valued at the close of trading on the New York Stock
Exchange. Equity securities are valued at the last reported sales price on the
securities exchange on which they are primarily traded, or at the last reported
sales price on the NASDAQ National Securities Market. 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.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service. Debt
securities of Money Market are valued at amortized cost, which approximates
market value. 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. For Portfolios other than Money Market, debt securities
which mature in 60 days or less are valued at cost (or market value 60 days
prior to maturity), adjusted for amortization to maturity of any premium or
discount.
Securities for which 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.
<PAGE>
- --------------------------------------------------------------------------------
Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign
currencies are converted each business day into U.S. dollars based on the
prevailing rates of exchange. Purchases and sales of portfolio securities and
income and expenses are converted into U.S. dollars on the respective dates of
such transactions.
Gains and losses resulting from changes in exchange rates applicable to foreign
securities are not reported separately from gains and losses arising from
movements in securities prices.
Net realized foreign exchange gains and losses include gains and losses from
sales and maturities of foreign currency exchange contracts, gains and losses
realized between the trade and settlement dates of foreign securities
transactions, and the difference between the amount of net investment income
accrued on foreign securities and the U.S. dollar amount actually received. Net
unrealized foreign exchange gains and losses include gains and losses from
changes in the value of assets and liabilities other than portfolio securities,
resulting from changes in exchange rates.
Foreign Currency Exchange Contracts
A foreign currency exchange contract ("FCEC") is a commitment to purchase or
sell a specified amount of a foreign currency at a specified future date, in
exchange for either a specified amount of another foreign currency or U.S.
dollars.
FCECs are valued at the forward exchange rates applicable to the underlying
currencies, and changes in market value are recorded as unrealized gains and
losses until the contract settlement date.
Risks could arise from entering into FCECs if the counterparties to the
contracts were unable to meet the terms of their contracts. In addition, the use
of FCECs may not only hedge against losses on securities denominated in foreign
currency, but may also reduce potential gains on securities from favorable
movements in exchange rates.
Futures Contracts and Options
A financial futures contract calls for delivery of a particular security, market
index, or currency at a specified price and future date. The seller of the
contract agrees to make delivery called for in the contract and the buyer agrees
to take delivery at a specified future date. Such contracts require an initial
deposit, in cash or cash equivalents, equal to a certain percentage of the
contract amount. Subsequent payments are made or received by the Portfolio each
day, depending on the daily change in the value of the contract. Futures
contracts are valued based on their quoted daily settlement prices. Fluctuations
in value are recorded as unrealized gains and losses until such time that the
contracts are terminated.
An option is a right to buy or sell a particular security at a specified price
within a limited period of time. The buyer of the option, in return for a
premium paid to the seller, has the right to buy, in the case of a call option,
or sell, in the case of a put option, the underlying security of the contract.
The premium received in cash from writing options is recorded as an asset with
an equal liability that is adjusted to reflect the option's value. The premium
received from writing options which expire is recorded as realized gains. The
premium 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
<PAGE>
- --------------------------------------------------------------------------------
option is exercised, the premium reduces the cost basis of the security or
currency purchased. Options are valued based on their quoted daily settlement
prices.
Risks could arise from entering into futures and written options transactions
from the potential inability of counterparties to meet the terms of their
contracts, the potential inability to enter into a closing transaction because
of an illiquid secondary market, and from unexpected movements in interest or
exchange rates or securities values.
Repurchase Agreements
A repurchase agreement is a commitment to purchase government securities from a
seller who agrees to repurchase the securities at an agreed upon price and date.
The excess of the resale price over the purchase price determines the yield on
the transaction. Under the terms of the agreement, the market value, including
accrued interest, of the government securities will be at least equal to their
repurchase price. Repurchase agreements are recorded at cost, which, combined
with accrued interest, approximates market value.
Repurchase agreements entail a risk of loss in the event that the seller
defaults on its obligation to repurchase the securities. In such case, the
Portfolio may be delayed or prevented from exercising its right to dispose of
the securities.
Swap Agreements
A swap agreement is a two-party contract under which an agreement is made to
exchange returns from predetermined investments or instruments, such as a
particular interest rate, foreign currency, or "basket" of securities
representing a particular index. The gross returns to be exchanged or "swapped"
between the parties are calculated based on a "notional amount", which, each
business day, is valued to determine each party's obligation under the contract.
Fluctuations in value are recorded as unrealized gains and losses during the
term of the contract.
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.
Risks could arise from entering into swap agreements from the potential
inability of counterparties to meet the terms of their contracts, and from the
potential inability to enter into a closing transaction. It is possible that
developments in the swaps market, including potential governmental regulation,
could affect the Portfolios's ability to terminate existing swap agreements or
to realize amounts to be received under such agreements.
Investment Transactions and Investment Income
Securities transactions are accounted for on the trade date. Realized gains and
losses from securities sold 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 and includes the accretion of discount and amortization of premium.
<PAGE>
- --------------------------------------------------------------------------------
Distributions to Shareholders
Dividends, if any, from net investment income are declared and paid at least
annually by all Portfolios other than Money Market. In the case of Money Market,
dividends are declared daily and paid monthly. Net realized gains from
investment transactions, if any, are distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
3. AGREEMENTS AND OTHER 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 Equity, Balanced,
and Value Growth & Income; Lord Abbett & Co. for Growth and Income; Janus
Capital Corporation for Growth and Overseas Growth; J. P. Morgan Investment
Management Inc. for Money Market; Federated Investment Counseling for Utility
Income and High Yield; T. Rowe Price Associates, Inc. for Asset Allocation,
Natural Resources, and Small Company Value; Pacific Investment Management Co.
for Total Return Bond and Limited Maturity Bond; INVESCO Trust Co. for Equity
Income; Founders Asset Management, Inc. for Capital Appreciation and Passport;
Rowe Price-Fleming International, Inc., a United Kingdom Corporation, for T.
Rowe International Equity and International Bond; Berger Associates, Inc. for
Berger Capital Growth; Robertson, Stephens & Company Investment Management, L.P.
for Value + Growth; American Century Investment Management, Inc. for Strategic
Balanced and International Growth; and Marsico Capital Management, LLC for
Marsico Capital Growth. 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%, .90%, and .90% of the average daily net assets of the
Putnam International Equity, Growth and Income, Growth, Money Market, Utility
Income, Balanced, High Yield, Asset Allocation, Total Return Bond, Equity
Income, Capital Appreciation, T. Rowe International Equity, International Bond,
Berger Capital Growth, Passport, Natural Resources, Limited Maturity Bond, Value
+ Growth, Overseas Growth, Value Growth & Income, Strategic Balanced,
International Growth, Small Company Value, and Marsico Capital Growth
Portfolios, respectively. The fees for Putnam International Equity are at the
rate of .85% for average daily net assets in excess of $75 million, for Utility
Income are at the rate of .60% for average daily net assets in excess of $50
million, and for Balanced are at the rate of .70% for average daily net assets
in excess of $300 million. The Investment Manager voluntarily waived .05% from
its fee for the Money Market Portfolio during 1997 and, since November 1, 1997,
voluntarily waived .05% from its fee for the Growth Portfolio on average daily
net assets in excess of $1 billion.
The Investment Manager pays each Sub-advisor a fee, computed daily and paid
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%, .60%, and .45% of the average daily net assets of the Putnam
International Equity, Growth and Income, Growth, Money Market, Utility Income,
Balanced, High Yield, Asset Allocation, Total Return Bond, Equity Income,
Capital Appreciation, T. Rowe International Equity, International Bond, Berger
Capital Growth, Passport, Natural Resources, Limited Maturity Bond, Value +
Growth, Overseas Growth, Value Growth & Income, Strategic Balanced,
International Growth, Small Company Value, and Marsico Capital Growth
Portfolios, respectively. The
<PAGE>
- --------------------------------------------------------------------------------
Sub-advisors for the Growth, Money Market, and T. Rowe International Equity
Portfolios are currently voluntarily waiving a portion of their fee payable 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 and
Marsico Capital Growth, 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 year ended December 31, 1997,
the Investment Manager reimbursed Money Market and Strategic Balanced in the
amount of $238,802 and $13,582, respectively.
Certain officers and Trustees of the Trust are officers or directors of the
Investment Manager. The Trust pays no compensation directly to its officers or
interested Trustees.
4. TAX MATTERS
Each Portfolio intends to qualify as a regulated investment company under the
Internal Revenue Code and to distribute all of its taxable income, including any
net realized gains on investments, to shareholders. Accordingly, no provision
for federal income or excise tax has been made.
Income and capital gains of the Portfolios are determined in accordance with
both tax regulations and generally accepted accounting principles. Such may
result in temporary and permanent differences between tax basis earnings and
earnings reported for financial statement purposes. Temporary differences that
result in over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. Permanent differences in the recognition of earnings are reclassified to
additional paid-in capital. Distributions in excess of tax-basis earnings are
recorded as a return of capital.
Capital Loss Carryforwards
At December 31, 1997, the following Portfolios had, for federal income tax
purposes, capital loss carryforwards available to offset future net realized
capital gains.
<TABLE>
<CAPTION>
EXPIRATION
DECEMBER 31,
-----------------------
AMOUNT 2004 2005
---------- -------- ----------
<S> <C> <C> <C>
Capital Appreciation........................................... $3,166,259 $ -- $3,166,259
Limited Maturity Bond.......................................... 606,299 606,299 --
Value + Growth................................................. 3,619,886 7,892 3,611,994
Overseas Growth................................................ 1,943,421 -- 1,943,421
Strategic Balanced............................................. 355,092 -- 355,092
International Growth........................................... 225,626 -- 225,626
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
5. PORTFOLIO SECURITIES
Purchases and sales of securities, during the period ended December 31, 1997,
were as follows ($ in thousands):
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES OTHER SECURITIES
--------------------------------- ---------------------------------
PURCHASES SALES PURCHASES SALES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Putnam International Equity........ $ -- $ -- $ 425,935 $ 425,960
Growth and Income.................. 8,109 21,269 555,171 258,368
Growth............................. -- -- 1,317,930 1,094,418
Utility Income..................... -- -- 154,803 119,144
Balanced........................... 234,531 228,482 257,620 269,777
High Yield......................... 7,308 6,876 271,987 76,730
Asset Allocation................... 5,807 275 83,864 16,321
Total Return Bond.................. 1,197,416 1,267,253 269,034 58,102
Equity Income...................... 16,605 4,833 475,191 319,797
Capital Appreciation............... -- -- 202,210 170,805
T. Rowe International Equity....... -- -- 134,593 85,493
International Bond................. 1,568 1,471 220,738 183,519
Berger Capital Growth.............. -- -- 489,257 459,117
Passport........................... -- -- 76,161 84,692
Natural Resources.................. -- -- 64,251 43,047
Limited Maturity Bond.............. 238,995 85,503 49,558 27,245
Value + Growth..................... -- -- 492,568 311,200
Overseas Growth.................... -- -- 332,226 109,443
Value Growth & Income.............. -- -- 148,264 45,951
Strategic Balanced................. 4,825 -- 33,423 10,211
International Growth............... -- -- 57,563 27,744
Small Company Value................ -- -- 175,690 5,616
Marsico Capital Growth............. -- -- 6,378 --
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1997, the cost and unrealized appreciation or depreciation in
value of the investments owned by the Portfolios, for federal income tax
purposes, were as follows ($ in thousands):
<TABLE>
<CAPTION>
GROSS GROSS NET UNREALIZED
AGGREGATE UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Putnam International Equity..................... $ 375,161 $ 50,793 $(15,153) $ 35,640
Growth and Income............................... 785,810 167,311 (15,016) 152,295
Growth.......................................... 1,143,981 401,726 (21,533) 380,193
Money Market.................................... 760,025 -- -- --
Utility Income.................................. 132,632 26,731 (895) 25,836
Balanced........................................ 329,116 34,456 (4,555) 29,901
High Yield...................................... 410,043 21,129 (1,349) 19,780
Asset Allocation................................ 181,278 36,825 (3,904) 32,921
Total Return Bond............................... 750,932 6,797 (1,384) 5,413
Equity Income................................... 517,926 98,176 (3,415) 94,761
Capital Appreciation............................ 236,635 56,715 (14,446) 42,269
T. Rowe International Equity.................... 396,300 89,073 (46,481) 42,592
International Bond.............................. 129,399 1,978 (4,650) (2,672)
Berger Capital Growth........................... 183,355 13,453 (10,633) 2,820
Passport........................................ 106,801 18,002 (6,833) 11,169
Natural Resources............................... 93,500 16,066 (13,348) 2,718
Limited Maturity Bond........................... 340,201 2,877 (835) 2,042
Value + Growth.................................. 226,418 19,307 (11,870) 7,437
Overseas Growth................................. 242,071 22,319 (8,948) 13,371
Value Growth & Income........................... 110,884 8,026 (2,414) 5,612
Strategic Balanced.............................. 28,430 1,986 (166) 1,820
International Growth............................ 32,864 2,081 (873) 1,208
Small Company Value............................. 195,135 22,490 (5,681) 16,809
Marsico Capital Growth.......................... 12,225 52 (29) 23
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
6. WRITTEN OPTIONS TRANSACTIONS
Written options transactions, during the year ended December 31, 1997, were as
follows (in thousands):
<TABLE>
<CAPTION>
TOTAL RETURN BOND LIMITED MATURITY BOND
--------------------- ---------------------
NUMBER OF NUMBER OF
CONTRACTS PREMIUM CONTRACTS PREMIUM
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Balance at beginning of year............................. 962 $ 669 143 $ 44
Written.................................................. 750 495 -- --
Expired.................................................. (1,712) (1,164) (143) (44)
Exercised................................................ -- -- -- --
Closed................................................... -- -- -- --
------ ------- ---- ----
Balance at end of year................................... -- $ -- -- $ --
====== ======= ==== ====
</TABLE>
<PAGE>
APPENDIX B
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.
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.
<PAGE>
<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, 1998.
Financial Statements contained in Part B:
(2) Unaudited Financial Statements for the Trust for the year
ended June 30, 1998.
(a) Schedules of Investments as of June 30, 1998;
(b) Statements of Assets and Liabilities as of June 30, 1998;
(c) Statements of Operations for the period ended June 30, 1998;
(d) Statements of Changes in Net Assets for the year ended December 31, 1996 and the six-month
period ended June 30, 1998;
(e) Financial Highlights for the period April 19,
1989 (commencement of operations) to June 30, 1998; and
(f) Notes to Financial Statements.
(3) Audited Financial Statements for the Trust for the year ended December 31, 1997.
(a) Independent Auditors' Report;
(b) Schedules of Investments as of December 31, 1997;
(c) Statements of Assets and Liabilities as of December 31, 1997;
(d) Statements of Operations for the year ended December 31, 1997;
(e) Statements of Changes in Net Assets for the years ended December 31, 1996 and
December 31, 1997;
(f) Financial Highlights for the period April
19, 1989 (commencement of operations) to
December 31, 1997; and
(g) Notes to Financial Statements.
(b) Exhibits
vi 1. (a) Declaration of Trust of Registrant.
vi (b) Amendment to Agreement and Declaration of Trust of Registrant.
vi (c) Amendment to Declaration of Trust of Registrant.
vi 2. By-laws of Registrant.
3. None.
vi 4. Articles III and VI of the Registrant's Declaration of Trust and Article 11 of the Registrant's By-laws.
vi 5. (a) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the Lord Abbett Growth and Income Portfolio.
vi (b) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the JanCap Growth Portfolio.
vi (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 High Yield Portfolio.
vi (e) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the T. Rowe Price Asset Allocation Portfolio.
vi (f) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the T. Rowe Price International Equity Portfolio.
vi (g) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the INVESCO Equity Income Portfolio.
vi (h) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for the PIMCO Total Return Portfolio.
vi (i) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for T. Rowe Price Natural Resources Portfolio.
vi (j) Investment Management Agreement between Registrant and American Skandia Life Investment
Management, Inc. for PIMCO Limited Maturity Bond Portfolio.
i (k) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the T. Rowe Price International Bond Portfolio.
ii (l) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Janus Overseas Growth Portfolio.
ii (m) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the T. Rowe Price Small Company Value Portfolio.
ii (n) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Founders Passport Portfolio.
ii (o) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Twentieth Century International Growth Portfolio.
ii (p) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Twentieth Century Strategic Balanced Portfolio.
ii (q) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Putnam Value Growth & Income Portfolio.
ii (r) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Putnam International Equity Portfolio.
ii (s) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Putnam Balanced Portfolio.
v (t) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Lord Abbett Small Cap Value Portfolio.
v (u) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Cohen & Steers Realty Portfolio.
v (v) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Stein Roe Venture Portfolio.
v (w) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Bankers Trust Enhanced 500 Portfolio.
v (x) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Marsico Capital Growth Portfolio.
vii (y) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Neuberger&Berman Mid-Cap Value Portfolio.
vii (z) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the Neuberger&Berman Mid-Cap Growth Portfolio.
(aa) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Janus Small-Cap Growth Portfolio.
(bb) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Oppenheimer Large-Cap Growth Portfolio.
(cc) Investment Management Agreement between Registrant and American Skandia Investment Services,
Incorporated for the AST Kemper Small-Cap Growth Portfolio.
vii (dd) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Lord, Abbett & Co.
for the Lord Abbett Growth and Income Portfolio.
vi (ee) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and Janus
Capital Corporation for the JanCap Growth Portfolio.
vi (ff) Sub-advisory Agreement between American Skandia Investment Services, Inc. and J.P. Morgan
Investment Management Inc. for the AST Money Market Portfolio.
vi (gg) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Federated
Investment Counseling for the Federated High Yield Portfolio.
vii (hh) Sub-advisory Agreement between American Skandia Investment Services, Inc. and T. Rowe Price
Associates, Inc. for the T. Rowe Price Asset Allocation Portfolio.
vi (ii) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Rowe
Price-Fleming International, Inc. for the T. Rowe Price International Equity Portfolio.
vi (jj) Sub-advisory Agreement between American Skandia Investment Services Inc.and Pacific Investment
Management Company for the PIMCO Total Return Portfolio.
vi (kk) Sub-advisory Agreement between American Skandia Investment Services, Inc. and T. Rowe Price
Associates, Inc. for the T. Rowe Price Natural Resources Portfolio.
vi (ll) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Pacific Investment
Management Company for the PIMCO Limited Maturity Bond Portfolio.
i (mm) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Rowe
Price-Fleming International, Inc. for the T. Rowe Price International Bond Portfolio.
ii (nn) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Janus Capital Corporation for the AST Janus Overseas Growth Portfolio.
ii (oo) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and T. Rowe
Price Associates, Inc. for the T. Rowe Price Small Company Value Portfolio.
vii (pp) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Founders
Asset Management LLC for the Founders Passport Portfolio.
ii (qq) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Investors
Research Corporation for the Twentieth Century International Growth Portfolio.
ii (rr) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Investors
Research Corporation for the Twentieth Century Strategic Balanced Portfolio.
ii (ss) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Putnam
Investment Management, Inc. for the AST Putnam Value Growth & Income Portfolio.
ii (tt) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Putnam
Investment Management, Inc. for the AST Putnam International Equity Portfolio.
ii (uu) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Putnam
Investment Management, Inc. for the AST Putnam Balanced Portfolio.
iv (vv) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and INVESCO
Trust Company for the INVESCO Equity Income Portfolio.
viii (ww) Amendment to Sub-advisory Agreement between American Skandia Investment Services, Incorporated,
INVESCO Trust Company and INVESCO Funds Group, Inc. for the INVESCO Equity Income Portfolio.
v (xx) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Lord, Abbett & Co. for the Lord Abbett Small Cap Value Portfolio.
v (yy) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Cohen &
Steers Capital Management, Inc. for the Cohen & Steers Realty Portfolio.
v (zz) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Stein Roe
& Farnham Incorporated for the Stein Roe Venture Portfolio.
v (aaa) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Bankers Trust Global Investment Management for the Bankers Trust Enhanced 500
Portfolio.
v (bbb) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Marsico Capital Management, LLC for the Marsico Capital Growth Portfolio.
vii (ccc) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Neuberger&Berman Management, Incorporated for the Neuberger&Berman MidCap Value Portfolio.
vii (ddd) Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Neuberger&Berman Management, Incorporated for the
Neuberger&Berman MidCap Growth Portfolio.
(eee) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Janus Capital Corporation for the AST Janus Small-Cap Growth Portfolio.
(fff) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
OppenheimerFunds, Inc. for the AST Oppenheimer Large-cap Growth Portfolio.
(ggg) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and Scudder
Kemper Investments, Inc. for the AST Kemper Small-Cap Growth Portfolio
vi 6. (a) Sales Agreement between Registrant and American Skandia Life Assurance
Corporation.
ii (b) Sales Agreement between Registrant and Kemper Investors Life Insurance Company.
7. None.
viii 8. (a) Amended and Restated Custody Agreement between Registrant and Morgan Stanley Trust Company.
viii (b) Foreign Custody Manager Delegation Amendment
vi (c) Amended Custodian Agreement between Registrant and Provident National Bank.
viii (d) Amendment to Custodian Services Agreement between Registrant and PNC Bank, N.A.
vi (e) Amended Transfer Agency Agreement between Registrant and Provident Financial Processing
Corporation.
vi 9. (a) Amended Administration Agreement between Registrant and Provident Financial Processing
Corporation.
iii (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.
vi 13. Certificate re: initial $100,000 capital.
14. None.
15. None.
16. None
17. Financial Data Schedules.
18. None.
- --------------------------
</TABLE>
* To be filed by future amendment.
i Filed as an Exhibit to Post-Effective Amendment No. 18 to Registration
Statement, which Amendment was filed via EDGAR on April 30, 1996, and is
incorporated herein by reference.
ii Filed as an Exhibit to Post-Effective Amendment No. 20 to Registration
Statement, which Amendment was filed via EDGAR on December 24, 1996, and is
incorporated herein by reference.
iii Filed as an Exhibit to Post-Effective Amendment No. 21 to Registration
Statement, which Amendment was filed via EDGAR on February 28, 1997, and is
incorporated herein by reference.
iv Filed as an Exhibit to Post-Effective Amendment No. 23 to Registration
Statement, which Amendment was filed via EDGAR on October 7, 1997, and is
incorporated herein by reference.
v Filed as an Exhibit to Post-Effective Amendment No. 24 to Registration
Statement, which Amendment was filed via EDGAR on December 19, 1997, and is
incorporated herein by reference.
vi Filed as an Exhibit to Post-Effective Amendment No. 25 to Registration
Statement, which Amendment was filed via EDGAR on March 2, 1998, and is
incorporated herein by reference.
vii Filed as an Exhibit to Post-Effective Amendment No. 26 to Registration
Statement, which Amendment was filed via EDGAR on May 1, 1998, and is
incorporated herein by reference.
viii Filed as an Exhibit to Post-Effective Amendment No. 27 to Registration
Statement, which Amendment was filed via EDGAR on October 16, 1998, 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."
ITEM 26. Omitted
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.
With respect to liability of the Investment Manager to Registrant or to
shareholders of Registrant's Portfolios under the Investment Management
Agreements, reference is made to Section 13 or 14 of each form of Investment
Management Agreement filed herewith or incorporated by reference herein.
With respect to the Sub-Advisors' indemnification of the Investment
Manager and its affiliated and controlling persons, and the Investment Manager's
indemnification of each Sub-advisor and its affiliated and controlling persons,
reference is made to Section 14 (Section 9 in the case of the Sub-Advisory
Agreement for the Jan-Cap Growth Portfolio) of each form of Sub-Advisory
Agreement filed herewith or incorporated by reference herein.
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
American Skandia Investment Services, Incorporated ("ASISI"), One
Corporate Drive, Shelton, Connecticut 06484, serves as the investment manager to
the Registrant. Information as to the officers and directors of ASISI is
included in ASISI's Form ADV (File No. 801-40532), including the amendments to
such Form ADV filed with the Commission on April 7, 1998, August 13, 1997, April
11, 1997, October 22, 1996, March 22, 1996 and April 11, 1995, and is
incorporated herein by reference.
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 the Skandia Qualified Plan and
other qualified plans. If Registrant sells its shares to other qualified plans,
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 ASISI and
American Skandia Life Assurance Corporation, being a wholly-owned subsidiary of
American Skandia Investment Holding Corporation.
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.:
<TABLE>
<CAPTION>
<S> <C>
Jan R. Carendi Chairman, Chief Executive Officer & Director
Gordon C. Boronow Deputy Chief Executive Officer &Director
Wade A. Dokken President, Deputy Chief Executive Officer & Director
Thomas M. Mazzaferro Executive Vice President, Chief Financial Officer & Director
Anders O. Soderstrom Executive Vice President and Chief Information Officer
Patricia J. Abram Senior Vice President and National Sales Manager, Variable Life
Kimberly A. Bradshaw Vice President & National Accounts Manager
Robert Brinkman Senior Vice President, National Sales Manager
Lucinda C. Ciccarello Vice President, Mutual Funds
William F. Cordner, Jr. Vice President, Customer Focus Teams
Walter G. Kenyon Vice President & National Accounts Manager
Lawrence Kudlow Senior Vice President & Chief Economist
N. David Kuperstock Vice President, Product Development & Director
David R. Monroe Treasurer
Michael A. Murray Vice President and National Sales Manager/American Skandia Advisor Funds,
Inc.
Brian O'Connor Vice President & National Sales Manager, Internal Wholesaling
M. Patricia Paez Director
Kathleen A. Pritchard Vice President and National Key Accounts/Financial Institutions
Hayward L. Sawyer Senior Vice President, National Sales Manager & Director
Leslie S. Sutherland Vice President & National Accounts Manager
Amanda C. Sutyak Vice President
Christian Thwaites Senior Vice President, National Marketing Director
Bayard F. Tracy Senior Vice President, National Sales Manager & Director
Mary Toumpas Vice President & Compliance Director
Deborah G. Ullman Senior Vice President and Chief Operating Officer, Finance and Business
Operations
M. Priscilla Pannell Corporate Secretary
Kathleen A. Chapman 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
(Trustee).
ITEM 30. Location of Accounts and Records
Records regarding the Registrant's securities holdings are maintained
at Registrant's Custodians, PNC Bank, Airport Business Center, International
Court 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201. Certain records
with respect to the Registrant's securities transactions are maintained at the
offices of the various sub-advisors to the Registrant. The Registrant's
corporate records are maintained at its offices at One Corporate Drive, Shelton,
Connecticut 06484. The Registrant's financial and interestholder ledgers and
similar financial records are maintained at the offices of its Administrator,
PFPC Inc., 103 Bellevue Parkway, Wilmington, DE 19809.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
(a) none
(b) none
(c) The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholder upon
request and without charge if the Registrant includes the information called for
by Item 5A of Form N-1A in such annual report.
<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 28th day of December, 1998.
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 12/28/98
Jan R. Carendi Executive Officer)
and Trustee
/s/ Gordon Boronow* Vice President 12/28/98
Gordon C. Boronow and Trustee
/s/ Eric C. Freed Secretary 12/28/98
Eric C. Freed
/s/ Richard G. Davy, Jr. Treasurer (Chief 12/28/98
Richard G. Davy, Jr. Financial and Accounting
Officer)
/s/ David E. A. Carson* Trustee 12/28/98
David E. A. Carson
/s/ Julian A. Lerner* Trustee 12/28/98
Julian A. Lerner
/s/ Thomas M. Mazzaferro* Trustee 12/28/98
Thomas M. Mazzaferro
/s/ Thomas M. O'Brien* Trustee 12/28/98
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 12/28/98
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. 28
TO FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 AND
INVESTMENT COMPANY ACT OF 1940
AMERICAN SKANDIA TRUST
<PAGE>
<TABLE>
<CAPTION>
Exhibits
Table of Contents
Exhibit Number Description
<S> <C>
5(aa) Investment Management Agreement between Registrant and American
Skandia Investment Services, Inc. for AST Janus Small-Cap
Growth Portfolio.
5(bb) Investment Management Agreement between Registrant and American
Skandia Investment Services, Inc. for AST Oppenheimer Large-Cap
Growth Portfolio.
5(cc) Investment Management Agreement between Registrant and American
Skandia Investment Services, Inc. for AST Kemper Small-Cap
Growth Portfolio.
5(fff) Sub-advisory Agreement between American Skandia Investment
Services, Inc. and Janus Capital Corporation for the AST Janus
Small-Cap Growth Portfolio.
5(ggg) Sub-advisory Agreement between American Skandia Investment
Services, Inc. and OppenheimerFunds, Inc. for the AST
Oppenheimer Large-Cap Growth Portfolio.
5(hhh) Sub-advisory Agreement between American Skandia Investment
Services, Inc. and Scudder Kemper Investments, Inc. for the AST
Kemper Small-Cap Growth Portfolio.
10 Consent of Counsel for the Registrant
11 Independent Auditors' Consent
17 Financial Data Schedules
</TABLE>
AMERICAN SKANDIA TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1ST day of January, 1999 by and between American
Skandia Trust, a Massachusetts business trust (the "Fund"), and American Skandia
Investment Services, Inc., a Connecticut corporation (the "Investment Manager");
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the rules and regulations promulgated thereunder;
and
WHEREAS, the Investment Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the 'Investment Advisers Act); and
WHEREAS, the Fund and the Investment Manager desire to enter into an agreement
to provide for the management of the assets of the AST Janus Small-Cap Growth
Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt where-of is hereby
acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the
Portfolio and shall, in such capacity, manage the investment operations of the
Portfolio, including the purchase, retention, disposition and lending of
securities, subject at all times to the policies and control of the Fund's Board
of Trustees. The Investment Manager shall give the Portfolio the benefit of its
best judgments, efforts and facilities in rendering its services as investment
manager.
2. Duties of Investment Manager. In carrying out its obligation under
paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such
executive, administrative, clerical and shareholder servicing services as are
deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and
supplements thereto, proxy material, tax returns, reports to the Portfolio's
shareholders, reports to and filings with the Securities and Exchange
Commission, state Blue Sky authorities and other applicable regulatory
authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis,
written financial reports and analyses On the Portfolios securities transactions
and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolio, and whether
concerning the individual issuers whose securities are included in the Portfolio
or the activities in which they engage, or with respect to securities which the
Investment Manager considers desirable for inclusion in the Portfolio,
(f) determine what issuers and securities shall be represented in the
Portfolio's portfolio and regularly report them in writing to the Board of
Trustees;
(g) formulate and implement continuing programs for the purchases and sales
of the securities of such issuers and regularly report in writing thereon to the
Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund
necessary to carry into effect such purchase and sale programs and supervisory
functions as aforesaid including the placing of orders for the purchase and sale
of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for
decisions to buy and sell securities for the Portfolio, broker-dealer selection,
and negotiation of its brokerage commission rates. The Investment Manager shall
determine the securities to be purchased or sold by the Portfolio pursuant to
its determinations with or through such persons, brokers or dealers, in
conformity with the policy with respect to brokerage as set forth in the Fund's
Prospectus and Statement of Additional Information, or as the Board of Trustees
may determine from time to time. Generally, the Investment Manager's primary
consideration in placing Portfolio securities transactions with broker-dealers
for execution is to obtain and maintain the availability of, execution at the
best net price and in the most effective manner possible. The, Investment
Manager may consider the sale of the shares of the Portfolio, subject to the
requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order, and the value of the expected contribution of
the broker-dealer to the investment performance of the Portfolio an a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio maybe
greater than that available from other brokers if the difference is reasonably
justified by other aspects of the portfolio execution services offered. Subject
to such policies and procedures as the Board of Trustees of the Fund may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Portfolio
to pay a broker or dealer that provides research services to the Investment
Manager for the Portfolio's use an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Investment Manager, determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's ongoing responsibilities with respect to the Portfolio. The Investment
Manager is further authorized to allocate the orders placed by it on behalf of
the Portfolio to such brokers and dealers who also provide research or
statistical material or other services to the Fund or the Investment Manager.
Such allocation shall be in such amounts and proportions as the Investment
Manager shall determine and the Investment Manager will report on said
allocations to the Board of Trustees of the Fund regularly as requested by the
Board and, in any event, at least once each calendar year if no specific request
is made, indicating the brokers to whom such allocations have been made and the
basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by the
Investment Manager pursuant to this Agreement, as well as any other activities
undertaken by the Investment Manager on behalf of the Fund pursuant thereto,
shall at all times be subject to any directives of the Board of Trustees of the
Fund.
5. Compliance with Applicable Requirements. In carrying out its obligations
under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the Investment Company Act and Investment
Advisers Act and any rules and regulations adopted thereunder, as amended, and
(b) the provisions of the Registration Statements of the Fund under the
Securities Act of 1933 and the Investment Company Act, including the investment
objectives, policies and restrictions, and permissible investments specified
therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable
between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost
to the Fund, the services of a President Secretary, and one or more Vice
Presidents of the Fund, to the extent at such additional officers may be
required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and
without cost to the Fund, a trading in order to carry out its obligations under
subparagraphs (f), (g) and (h) of paragraph 2 hereof to place orders for the
purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the
Investment Manager to bear:
(i) any of the costs (including applicable office space,
facilities and equipment) of the services of a principal
financial officer of the Fund whose normal duties consist of
maintaining the financial accounts and books and records of
the Fund; including the reviewing of calculations of net asset
value and preparing tax returns; or
(ii) any of the costs (including applicable office space,
facilities and equipment) of the services, of any of the
personnel operating under the direction of such principal
financial officer. Notwithstanding the obligation of the Fund
to bear the expense of the functions referred to in clauses
(i) and (ii) of this subparagraph (c), the Investment Manager
may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal
financial officer and other personnel carrying out such
functions and the Fund shall reimburse the Investment Manager
therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the
Fund and the offering of its shares shall be home by the Fund unless
specifically provided otherwise in this paragraph 6. These expenses include but
are not limited to brokerage commissions, legal auditing, taxes or governmental
fees, the cost of preparing share certificates, custodian, depository, transfer
and shareholder service agent costs, expenses of issue, sale, redemption and
repurchase of shares, expenses of registering and qualifying shares for sale,
insurance premiums on property or personnel (including officers and trustees if
available) of the Fund which inure to its benefit, expenses relating to trustee
and shareholder meetings, the cost of preparing and distributing reports and
notices to shareholders, the fees and other expenses incurred by the Fund in
connection with membership in investment company organizations and the cost of
printing copies of prospectuses and statements of additional information
distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board of
Trustees, the Investment Manager may perform services on behalf of the Fund
which are not required by this Agreement. Such services will be performed on
behalf of the Fund and the Investment Manager's cost, in rendering such services
may be billed monthly to the Fund, subject to examination by the Fund's
independent accountants. Payment or assumption by the Investment Manager of any
Fund expense that the Investment Manager is not required to pay or assume under
this Agreement shall not relieve the Investment Manager of any of its
obligations to the Fund nor obligate the Investment Manager to pay or assume any
similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment Manager may
engage, subject to approval of the Fund's Board of Trustees, and where
required, the shareholders of the Portfolio, a sub-advisor to provide advisory
services in relation to the Portfolio. Under such sub-advisory agreement the
Investment Manager may delegate to the sub-advisor the duties outlined in
subparagraphs (c), (f), (g) and (h) of paragraph 2 hereof
9. Compensation. The Fund shall pay the Investment Manager in full
compensation for services rendered hereunder an annual investment advisory
fee. The fee shall be payable monthly in arrears, based on the average daily
net assets of the Portfolio for each month, at the annual rate set forth in
Exhibit A to this Agreement.
10. Expense Limitation. If, for any fiscal year of the Fund, the total of all
ordinary business expenses of the Portfolio, including all investment
advisory and administration fees but excluding brokerage commissions and
fees, taxes, interest and extraordinary expenses such as litigation, would
exceed 1.30% of the average daily net assets of the Portfolio, the Investment
Manager agrees to pay the Fund such excess expenses, and if required to do so
pursuant to such a statute or regulatory authority, to pay to the Fund such
expenses no later than the last day of the first month of the next succeeding
fiscal year of the Fund. For the purposes of this paragraph, the term "fiscal
year" shall exclude the portion of Fund's current fiscal year which shall
have elapsed prior to the date hereof and shall include the portion of the
then current fiscal year which shall have elapsed at the date of termination
of this Agreement.
11. Non-Exclusivity, The services of the Investment Manager to the Portfolio
are not to be deemed to be exclusive and the Investment Manager shall be free
to render investment advisory and corporate administrative or other services
to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers or directors of the
Investment Manager may serve as officers or trustees of the Fund, and that
officers or trustees of Fund way serve as officers or directors of the
Investment Manager to the extent permitted by law, and that the officers and
directors of the Investment, Manager are not prohibited from engaging in any
other business activity or from rendering services to any other person, or
from serving as partners, officers or directors of any other firm or
corporation, including other investment companies.
12. Term and Approval. This Agreement shall become effective on January 1,
1999 and shall continue in force and effect from you to year, provided that
such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a
majority of the Portfolio's outstanding voting securities (as defined in
Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not
parties to this Agreement or interested persons of a party to this Agreement
(other than as Fund trustees), by votes cast in person at a meeting
specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without the
payment of any penalty or prejudice to the completion of any transactions
already initiated on behalf of the Portfolio, by vote of the Fund's Board of
Trustees or by vote of a majority of the Portfolio's outstanding voting
securities, or by the Investment Manager, on sixty (60) days' written notice
to the other party. The notice provided for herein may be waived by either
party. This Agreement automatically terminates in the event of its assignment,
the term "assignment" for the purpose having the meaning defined in Section
2(a)(4) of the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Investment Manager or any
of its officers, trustees or employees, it shall not be subject to liability
to the Fund or to any shareholder of the Portfolio for any act or omission in
the course of or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and
Declaration of Trust of the Fund is on file with the Secretary of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the trustees of the Fund as trustees and not
individually and that the obligations of this instrument are not binding upon
any of the trustees or shareholders individually but are binding only upon the
assets and property of the Fund. Federal and state laws impose
responsibilities under certain circumstances on persons who act in good faith,
and therefore, nothing herein shall in any way constitute a waiver of
limitation of any rights which the Fund or Investment Manager may have under
applicable law.
16. Notices. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage paid to the other party at such address as
such other party may designate for the receipt of such notice. Until further
notice it is agreed that the address of the Fund shall be 126 High Street,
Boston, Massachusetts, 02110, and the address of the Investment Manager shall
be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from
a term or provision of the Investment Company Act, shall be resolved by
reference to such term or provision of the Act and to interpretations thereof,
if any, by the United States Courts or in the absence of any controlling
decision of any such court, by rules, regulations or orders of the Securities
and Exchange Commission issued pursuant to said Act. In addition, where the
effect of a requirement of the Investment Company Act, reflected in any
provision of this Agreement is released by rules, regulation or order of the
Securities and Exchange Commission, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: AMERICAN SKANDIA TRUST
By:
Gordon C. Boronow
Vice President
Attest: AMERICAN SKANDIA INVESTMENT SERVICES,
INCORPORATED
By:
John Birch
Senior Vice President & Chief
Operating Officer
<PAGE>
American Skandia Trust
AST Janus Small-Cap Growth Portfolio
Investment Management Agreement
EXHIBIT A
An annual rate of 0.90% of the average daily net assets of the Portfolio.
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 31st day of December 1998 by and between
American Skandia Trust, a Massachusetts business trust (the "Fund"), and
American Skandia Investment Services, Incorporated, a Connecticut corporation
(the "Investment Manager");
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the rules and regulations promulgated thereunder;
and
WHEREAS, the Investment Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Investment Advisers
Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into an
agreement to provide for the management of the assets of the AST Oppenheimer
Large-Cap Growth Portfolio (the "Portfolio") on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager
for the Portfolio and shall, in such capacity, manage the investment operations
of the Portfolio, including the purchase, retention, disposition and lending of
securities, subject at all times to the policies and control of the Fund's Board
of Trustees. The Investment Manager shall give the Portfolio the benefit of its
best judgments, efforts and facilities in rendering its services as investment
manager.
2. Duties of Investment Manager. In carrying out its obligation under
paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such
executive, administrative, clerical and shareholder servicing services as are
deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and
supplements thereto, proxy material, tax returns, reports to the Portfolio's
shareholders, reports to and filings with the Securities and Exchange
Commission, state Blue Sky authorities and other applicable regulatory
authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis,
written financial reports and analyses on the Portfolio's securities
transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolio, and whether
concerning the individual issuers whose securities are included in the Portfolio
or the activities in which they engage, or with respect to securities which the
Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the
Portfolio's portfolio and regularly report them in writing to the Board of
Trustees;
(g) formulate and implement continuing programs for the purchases and sales
of the securities of such issuers and regularly report in writing thereon to the
Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund
necessary to carry into effect such purchase and sale programs and supervisory
functions as aforesaid, including the placing of orders for the purchase and
sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible
for decisions to buy and sell securities for the Portfolio, broker-dealer
selection, and negotiation of its commission rates. The Investment Manager shall
determine the securities to be purchased or sold by the Portfolio pursuant to
its determinations with or through such persons, brokers or dealers, in
conformity with the policy with respect to brokerage as set forth in the Fund's
Prospectus and Statement of Additional Information, or as the Board of Trustees
may determine from time to time. Generally, the Investment Manager's primary
consideration in placing Portfolio securities transactions with broker-dealers
for execution is to obtain and maintain the availability of, execution at the
best net price and in the most effective manner possible. The Investment Manager
may consider sale of the shares of the Portfolio, subject to the requirements of
best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Fund may determine, the Investment Manager shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker or dealer that provides research services to the
Investment Manager for the Portfolio's use an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Investment Manager, determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's ongoing responsibilities with respect to the Portfolio. The Investment
Manager is further authorized to allocate the orders placed by it on behalf of
the Portfolio to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Manager.
Such allocation shall be in such amounts and proportions as the Investment
Manager shall determine and the Investment Manager will report on said
allocations to the Board of Trustees of the Fund regularly as requested by the
Board and, in any event, at least once each calendar year if no specific request
is made, indicating the brokers to whom such allocations have been made and the
basis therefor.
4. Control by Board of Trustees. Any investment program undertaken by
the Investment Manager pursuant to this Agreement, as well as any other
activities undertaken by the Investment Manager on behalf of the Fund pursuant
thereto, shall at all times be subject to any directives of the Board of
Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Manager shall at all times
conform to:
(a) all applicable provisions of the Investment Company Act and Investment
Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the
Securities Act of 1933 and the Investment Company Act, including the investment
objectives, policies and restrictions, and permissible investments specified
therein, and
(c) the provisions of the Declaration of Trust of the Fund as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be allocable
between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost
to the Fund, the services of a President, Secretary, and one or more Vice
Presidents of the Fund, to the extent that such additional officers may be
required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and
without cost to the Fund, a trading function in order to carry out its
obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place
orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the
Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities
and equipment) of the services of a principal financial officer of the
Fund whose normal duties consist of maintaining the financial accounts
and books and records of the Fund; including the reviewing of
calculations of net asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space, facilities
and equipment) of the services of any of the personnel operating under
the direction of such principal financial officer. Notwithstanding the
obligation of the Fund to bear the expense of the functions referred
to in clauses (i) and (ii) of this subparagraph (c), the Investment
Manager may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal financial
officer and other personnel carrying out such functions and the Fund
shall reimburse the Investment Manager therefor upon proper
accounting.
(d) All of the ordinary business expenses incurred in the operations of the
Fund and the offering of its shares shall be borne by the Fund unless
specifically provided otherwise in this paragraph 6. These expenses include but
are not limited to brokerage commissions, legal, auditing, taxes or governmental
fees, the cost of preparing share certificates, custodian, depository, transfer
and shareholder service agent costs, expenses of issue, sale, redemption and
repurchase of shares, expenses of registering and qualifying shares for sale,
insurance premiums on property or personnel (including officers and trustees if
available) of the Fund which inure to its benefit, expenses relating to trustee
and shareholder meetings, the cost of preparing and distributing reports and
notices to shareholders, the fees and other expenses incurred by the Fund in
connection with membership in investment company organizations and the cost of
printing copies of prospectuses and statements of additional information
distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's Board
of Trustees, the Investment Manager may perform services on behalf of the Fund
which are not required by this Agreement. Such services will be performed on
behalf of the Fund and the Investment Manager's cost in rendering such services
may be billed monthly to the Fund, subject to examination by the Fund's
independent accountants. Payment or assumption by the Investment Manager of any
Fund expense that the Investment Manager is not required to pay or assume under
this Agreement shall not relieve the Investment Manager of any of its
obligations to the Fund nor obligate the Investment Manager to pay or assume any
similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment
Manager may engage, subject to approval of the Fund's Board of Trustees, and
where required, the shareholders of the Portfolio, a sub-advisor to provide
advisory services in relation to the Portfolio. Under such sub-advisory
agreement, the Investment Manager may delegate to the sub-advisor the duties
outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager in full
compensation for services rendered hereunder an annual investment advisory fee,
payable monthly, of .90% of the portion of the average daily net assets of the
Portfolio not in excess of $1 billion; plus .85% of the portion of the net
assets over $1 billion.
10. Expense Limitation. If, for any fiscal year of the Fund, the total
of all ordinary business expenses of the Portfolio, including all investment
advisory and administration fees but excluding brokerage commissions and fees,
taxes, interest and extraordinary expenses such as litigation, would exceed
1.45% of the average daily net assets of the Portfolio, the Investment Manager
agrees to pay the Fund such excess expenses, and if required to do so pursuant
to such applicable statute or regulatory authority, to pay to the Fund such
excess expenses no later than the last day of the first month of the next
succeeding fiscal year of the Fund. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the Fund's current fiscal year which
shall have elapsed prior to the date hereof and shall include the portion of the
then current fiscal year which shall have elapsed at the date of termination of
this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to the
Portfolio are not to be deemed to be exclusive, and the Investment Manager shall
be free to render investment advisory and corporate administrative or other
services to others (including other investment companies) and to engage in other
activities. It is understood and agreed that officers or directors of the
Investment Manager may serve as officers or trustees of the Fund, and that
officers or trustees of the Fund may serve as officers or directors of the
Investment Manager to the extent permitted by law; and that the officers and
directors of the Investment Manager are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporation,
including other investment companies.
12. Term and Approval. This Agreement shall become effective on
December 31, 1998 and shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of
a majority of the Portfolio's outstanding voting securities (as defined in
Section 2(a)(42) of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who
are not parties to this Agreement or interested persons of a party to this
Agreement (other than as Fund trustees), by votes cast in person at a meeting
specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time without
the payment of any penalty or prejudice to the completion of any transactions
already initiated on behalf of the Portfolio, by vote of the Fund's Board of
Trustees or by vote of a majority of the Portfolio's outstanding voting
securities, or by the Investment Manager, on sixty (60) days' written notice to
the other party. The notice provided for herein may be waived by either party.
This Agreement automatically terminates in the event of its assignment, the term
"assignment" for the purpose having the meaning defined in Section 2(a)(4) of
the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Investment Manager or any of
its officers, trustees or employees, it shall not be subject to liability to the
Fund or to any shareholder of the Portfolio for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
15. Liability of Trustees and Shareholders. A copy of the Agreement and
Declaration of Trust of the Fund is on file with the Secretary of The
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the trustees of the Fund as trustees and not
individually and that the obligations of this instrument are not binding upon
any of the trustees or shareholders individually but are binding only upon the
assets and property of the Fund. Federal and state laws impose responsibilities
under certain circumstances on persons who act in good faith, and therefore,
nothing herein shall in any way constitute a waiver of limitation of any rights
which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice, it is agreed that the address of the Fund shall be 126 High
Street, Boston, Massachusetts, 02110, and the address of the Investment Manager
shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the Investment Company Act, shall be resolved by
reference to such term or provision of the Act and to interpretations thereof,
if any, by the United States Courts or in the absence of any controlling
decision of any such court, by rules, regulations or orders of the Securities
and Exchange Commission issued pursuant to said Act. In addition, where the
effect of a requirement of the Investment Company Act, reflected in any
provision of this Agreement is released by rules, regulation or order of the
Securities and Exchange Commission, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
AMERICAN SKANDIA TRUST
By _________________________
Gordon C. Boronow
Vice President
Attest:
- ---------------------------
AMERICAN SKANDIA INVESTMENT
SERVICES, INCORPORATED
By _________________________
John Birch
Senior Vice President &
Chief Operating Officer
Attest:
- --------------------------
AMERICAN SKANDIA TRUST
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 4th day of January, 1999 by and between American
Skandia Trust, a Massachusetts business trust (the "Trust"), and American
Skandia Investment Services, Incorporated, a Connecticut corporation (the
"Investment Manager").
W I T N E S S E T H
WHEREAS, the Trust is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "ICA"), and the rules
and regulations promulgated thereunder; and
WHEREAS, the Investment Manager is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Trust and the Investment Manager desire to enter into an agreement
to provide for the management of the assets of the AST Kemper Small-Cap Growth
Portfolio (the "Portfolio") on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt whereof is hereby
acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment manager for the
Portfolio and shall, in such capacity, manage the investment operations of the
Portfolio, including the purchase, retention, disposition and lending of
securities, subject at all times to the policies and control of the Board of
Trustees of the Trust (the "Trustees"). The Investment Manager shall give the
Portfolio the benefit of its best judgments, efforts and facilities in rendering
its services as investment manager.
2. Duties of Investment Manager. In carrying out its obligation under paragraph
1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise,
such executive, administrative, clerical and shareholder servicing services as
are deemed advisable by the Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and
supplements thereto, proxy material, tax returns, reports to the Portfolio's
shareholders, reports to and filings with the Securities and Exchange
Commission, state Blue Sky authorities and other applicable regulatory
authorities;
(d) provide to the Trustees on a regular basis, written financial
reports and analyses on the Portfolio's securities transactions and the
operations of comparable investment companies;
(e) determine what issuers and securities shall be represented in the
Portfolio's portfolio and regularly report them in writing to the Trustees;
(f) formulate and implement continuing programs for the purchases and
sales of the securities of such issuers and regularly report in writing thereon
to the Trustees; and
(g) take, on behalf of the Portfolio, all actions which appear to the
Trust necessary to carry into effect such purchase and sale programs and
supervisory functions as aforesaid, including the placing of orders for the
purchase and sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is responsible for
decisions to buy and sell securities for the Portfolio, broker-dealer selection,
and negotiation of the Portfolio's brokerage commission rates. The Investment
Manager shall determine the securities to be purchased or sold by the Portfolio
pursuant to its determinations with or through such persons, brokers or dealers,
in conformity with the policy with respect to brokerage as set forth in the
Trust's Prospectus and Statement of Additional Information as in effect from
time to time (together, the "Registration Statement"), or as the Trustees may
determine from time to time. Generally, the Investment Manager's primary
consideration in placing Portfolio securities transactions with broker-dealers
for execution will be to obtain, and maintain the availability of, best
execution at the best available price. The Investment Manager may consider the
sale of shares of the Portfolio in allocating Portfolio securities transactions,
subject to the requirements of best net price available and most favorable
execution.
Consistent with this policy, the Investment Manager, in allocating
Portfolio securities transactions, will take all relevant factors into
consideration, including, but not limited to: the best 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. Subject to such policies and procedures as the Trustees
may determine, the Investment Manager shall have discretion to effect investment
transactions for the Portfolio through broker-dealers (including, to the extent
permissible under applicable law, broker-dealers affiliated with the Investment
Manager) qualified to obtain best execution of such transactions who provide
brokerage and/or research services, as such services are defined in section
28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
to cause the Portfolio to pay any such broker-dealers 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 Investment Manager determines in good faith that such amount
of commission is reasonable in relation to the value of the brokerage or
research services provided by such broker-dealer, viewed in terms of either that
particular investment transaction or the Investment Manager's overall
responsibilities with respect to the Portfolio and other accounts as to which
the Investment Manager exercises investment discretion (as such term is defined
in section 3(a)(35) of the 1934 Act). Allocation of orders placed by the
Investment Manager on behalf of the Portfolio to such broker-dealers shall be in
such amounts and proportions as the Investment Manager shall determine in good
faith in conformity with its responsibilities under applicable laws, rules and
regulations. The Investment Manager will report on such allocations to the
Trustees regularly as requested by the Trustees, indicating the broker-dealers
to whom such allocations have been made and the basis therefor.
4. Control by the Trustees. Any investment program undertaken by the Investment
Manager pursuant to this Agreement, as well as any other activities undertaken
by the Investment Manager on behalf of the Trust pursuant hereto, shall at all
times be subject to any directives of the Trustees.
5. Compliance with Applicable Requirements. In carrying out its obligations
under this Agreement, the Investment Manager shall at all times conform to:
(a) all applicable provisions of the ICA and the Advisers Act and any rules
and regulations adopted thereunder; and
(b) the provisions of the Registration Statement, including the investment
objectives, policies and restrictions, and permissible investments specified
therein; and
(c) the provisions of the Agreement and Declaration of Trust of the Trust,
as amended; and
(d) the provisions of the By-laws of the Trust, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Trust shall be allocable between
the Trust and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost
to the Trust, the services of a President, Secretary, and one or more Vice
Presidents of the Trust, to the extent that such additional officers may be
required by the Trust for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and
without cost to the Trust, a trading function in order to carry out its
obligations under subparagraphs (e), (f) and (g) of paragraph 2 hereof to place
orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the
Investment Manager to bear:
(i) any of the costs (including applicable office space,
facilities and equipment) of the services of a principal
financial officer of the Trust whose normal duties consist of
maintaining the financial accounts and books and records of
the Trust, including the reviewing of calculations of net
asset value and preparing tax returns; or
(ii) any of the costs (including applicable office space,
facilities and equipment) of the services of any of the
personnel operating under the direction of such principal
financial officer.
Notwithstanding the obligation of the Trust to bear the expense of the
functions referred to in clauses (i) and (ii) of this subparagraph (c), the
Investment Manager may pay the salaries, including any applicable employment or
payroll taxes and other salary costs, of the principal financial officer and
other personnel carrying out such functions, and the Trust shall reimburse the
Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the
Trust and the offering of its shares shall be borne by the Trust unless
specifically provided otherwise in this paragraph 6. These expenses include, but
are not limited to: (i) brokerage commissions, legal, auditing, taxes or
governmental fees; (ii) the cost of preparing share certificates; (iii)
custodian, depository, transfer and shareholder service agent costs; (iv)
expenses of issue, sale, redemption and repurchase of shares; (v) expenses of
registering and qualifying shares for sale; (vi) insurance premiums on property
or personnel (including officers and trustees if available) of the Trust which
inure to the Trust's benefit; (vii) expenses relating to trustee and shareholder
meetings; (viii) the cost of preparing and distributing reports and notices to
shareholders; (ix) the fees and other expenses incurred by the Trust in
connection with membership in investment company organizations; and (x) and the
cost of printing copies of prospectuses and statements of additional
information, as well as any supplements thereto, distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Trustees, the
Investment Manager may perform services on behalf of the Trust which are not
required by this Agreement. Such services will be performed on behalf of the
Trust and the Investment Manager's cost in rendering such services may be billed
monthly to the Trust, subject to examination by the Trust's independent
accountants. Payment or assumption by the Investment Manager of any Trust
expense that the Investment Manager is not required to pay or assume under this
Agreement shall not relieve the Investment Manager of any of its obligations to
the Trust nor obligate the Investment Manager to pay or assume any similar Trust
expense on any subsequent occasion.
8. Engagement of Sub-Advisers and Broker-Dealers. The Investment Manager may
engage, subject to approval of the Trustees and where required, the shareholders
of the Portfolio, a sub-adviser to provide advisory services in relation to the
Portfolio. Under such sub-advisory agreement, the Investment Manager may
delegate to the sub-adviser the duties outlined in subparagraphs (e), (f) and
(g) of paragraph 2 hereof.
9. Compensation. The Trust shall pay the Investment Manager in full compensation
for services rendered hereunder an annual investment advisory fee. The fee shall
be payable monthly in arrears, based on the average daily net assets of the
Portfolio for each month, at the annual rate set forth in Exhibit A to this
Agreement.
10. Non-Exclusivity. The services of the Investment Manager to the Portfolio are
not to be deemed to be exclusive, and the Investment Manager shall be free to
render investment advisory and corporate administrative or other services to
others (including other investment companies) and to engage in other activities.
It is understood and agreed that officers or directors of the Investment Manager
may serve as officers or trustees of the Trust, and that officers or trustees of
the Trust may serve as officers or directors of the Investment Manager to the
extent permitted by law; and that the officers and directors of the Investment
Manager are not prohibited from engaging in any other business activity or from
rendering services to any other person, or from serving as partners, officers or
directors of any other firm or corporation, including other investment
companies.
11. Term and Approval. This Agreement shall become effective on January 4, 1999
and by shall continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually by:
(a) the Trustees or the vote of a majority of the Portfolio's
outstanding voting securities (as defined in Section 2(a)(42) of the ICA); and
(b) the affirmative vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of a party to this Agreement
(other than as Trust trustees), by votes cast in person at a meeting
specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time without the
payment of any penalty or prejudice to the completion of any transactions
already initiated on behalf of the Portfolio, by vote of the Trustees or by vote
of a majority of the Portfolio's outstanding voting securities, or by the
Investment Manager, on sixty (60) days' written notice to the other party. The
notice provided for herein may be waived by either party. This Agreement
automatically terminates in the event of its "assignment," as such term is
defined in the ICA.
13. Liability of Investment Manager and Indemnification. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Investment Manager or any of
its officers, directors or employees, it shall not be subject to liability to
the Trust or to any shareholder of the Portfolio for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
14. Liability of the Trustees and Shareholders. A copy of the Agreement and
Declaration of Trust of the Trust is on file with the Secretary of the
Commonwealth of Massachusetts, and notice is hereby given that this instrument
is executed on behalf of the Trustees as trustees and not individually and that
the obligations of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Trust. Federal and state laws impose responsibilities under certain
circumstances on persons who act in good faith, and therefore, nothing herein
shall in any way constitute a waiver of limitation of any rights which the Trust
or the Investment Manager may have under applicable law.
15. Notices. Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice,
it is agreed that the address of the Trust and the Investment Manager shall be
One Corporate Drive, Shelton, Connecticut 06484.
16. Questions of Interpretation. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the ICA, shall be resolved by reference to such term or
provision of the ICA and to interpretations thereof, if any, by the United
States courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the Securities and Exchange Commission issued
pursuant to the ICA. In addition, where the effect of a requirement of the ICA,
reflected in any provision of this Agreement, is released by rules, regulation
or order of the Securities and Exchange Commission, such provision shall be
deemed to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
AMERICAN SKANDIA TRUST
Attest: By: ____________________________________
Gordon C. Boronow
____________________________________ Vice President
AMERICAN SKANDIA INVESTMENT
SERVICES, INCORPORATED
Attest: By: ____________________________________
John Birch
____________________________________ Senior Vice President & Chief
Operating Officer
<PAGE>
American Skandia Trust
AST Kemper Small-Cap Growth Portfolio
Investment Management Agreement
EXHIBIT A
An annual rate of .95% of the portion of the average daily net assets of
the Portfolio not in excess of $1 billion; plus .90% of the portion of the net
assets over $1 billion.
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Janus Capital Corporation (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 AST Janus Small-Cap Growth
Portfolio (the "Portfolio") under the terms of a management agreement, dated
January 1, 1999 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 upon
reasonable request 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 shall not be responsible for the provision of
administrative, bookkeeping or accounting services to the Portfolio except as
specifically provided herein.
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 provided to the Sub-Advisor by the
Investment Manager, 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), and (3)) of the
Internal Revenue Code, applicable to the Portfolio, and the regulations
promulgated thereunder. Sub-Advisor shall comply with (i) other applicable
provisions of state or federal law; (ii) the provision of the Declaration of
Trust and By-Laws of the Trust; (iii) policies and determinations of the Trust
and Investment Manager communicated to the Sub-Advisor in writing; (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. Notwithstanding the above, the Sub-Advisor shall have
no responsibility to monitor compliance with limitations or restrictions for
which it has not received sufficient information from the Investment Manager or
its authorized agents to enable the Sub-Advisor to monitor compliance with such
limitations or restrictions. 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.
The Sub-Advisor shall be responsible for the preparation and filing of
Schedule 13G and Form 13-F on behalf of the Portfolio. The Sub-Advisor shall not
be responsible for the preparation or filing of any other reports required of
the Portfolio by any governmental or regulatory agency, except as expressly
agreed to in writing.
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. The Investment Manager shall promptly furnish the Sub-Advisor with
additional information as may be reasonably necessary for, or reasonably
requested by, the Sub-Advisor to perform its responsibilities pursuant to this
Agreement.
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. The Investment Manager shall, to
the extent necessary and within its control, assist in the establishment and
maintenance of brokerage accounts and other accounts the Sub-Advisor deems
advisable to allow for the purchase or sale of securities for the Portfolio
pursuant to this Agreement. 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, including, to the extent permissible
under applicable law, brokers or dealers affiliated with the Sub-Advisor, 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. Allocations of
orders placed by the Sub-Advisor on behalf of the Trust to such broker-dealers
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 indicating the brokers to whom
such allocations have been made and the basis therefor. Purchase or sell orders
for the Portfolio may be aggregated with contemporaneous purchase or sell orders
of other clients of the Sub-Advisor to the extent permissible under applicable
law.
The Sub-Advisor shall have no liability for the acts or omissions of
any custodian of the Portfolio's assets. The Sub-Advisor shall have no
responsibility for the segregation requirement of the ICA or other applicable
law other than to provide notice to the Custodian of any positions requiring
segregation and the Portfolio's assets that may be segregated.
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 relating to the
Sub-Advisor or the Sub-Advisor's activities in connection with the investment
program for the Portfolio. Notwithstanding the foregoing, the Sub-Advisor is not
required to provide proprietary information to the Investment Manager not
otherwise required for the Sub-Advisor to perform its responsibilities pursuant
to this Agreement; nor is the Sub-Advisor responsible for Portfolio accounting
or required to generate information derived from Portfolio accounting data.
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
average daily net assets of the Portfolio not in excess of $100 million; plus
.45 of 1% of the portion of the net assets over $100 million but not in excess
of $500 million; plus .40 of 1% of the portion of the net assets over $500
million but not in excess of $1 billion; plus .35 of 1% of the portion of the
net assets over $1 billion.
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. Any reimbursement of management fees required by
any expense limitation provision or in connection with any liability arising out
of its violation of Section 36(b) of the ICA shall be the sole responsibility of
the Investment Manager.
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 (a) 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; (b) it has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of its state of incorporation; (c)
it has all requisite corporate power and authority under the laws of its state
of incorporation and federal securities laws to execute, deliver and to perform
its obligations under this Agreement; (d) all necessary corporate proceedings
have been duly taken by it to authorize the execution, delivery and performance
of this Agreement; and (e) the shares of the Trust have been duly registered
with the Securities and Exchange Commission to the extent required by applicable
law. The Sub-Advisor further represents that it has adopted a written Code of
Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Advisor shall be
subject to such Code of Ethics and shall not be subject to any other Code of
Ethics, including the Investment Manager's Code of Ethics, unless specifically
adopted by the Sub-Advisor.
The Investment Manager acknowledges and agrees that the Sub-Advisor
makes no representation or warranty, express or implied, that any level of
performance or investment results will be achieved by the Portfolio or that the
Portfolio will perform comparably with any standard or index, including other
clients of the Sub-Advisor, whether public or private.
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. The Investment Manager understands that the Sub-Advisor
shall not favor or disfavor any of the Sub-Advisor's clients or class of clients
in the allocation of investment opportunities, so that to the extent practical,
such opportunities will be allocated among the Sub-Advisor's clients over a
period of time on a fair and equitable basis. Nothing in this agreement shall
impose upon the Sub-Advisor any obligation (i) 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, or (ii) to abstain from the purchase or
sale of any security for the Sub-Advisor's other clients, advisory or otherwise,
which the Investment Manager has placed on the list provided pursuant to
paragraph 6(g) of this Agreement.
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: John Birch
Senior Vice President & Chief Operating Officer
Sub-Advisor: Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206-4923
Attention: General Counsel
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. Governing Law. This agreement is made under, and shall be governed by
and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is January 1, 1999.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
- -------------------------------- ----------------------------------
John Birch
Senior Vice President & Chief Operating
Officer
Date: _____________________ Date:____________________
Attest: _____________________ Attest:___________________
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services,
Incorporated (the "Investment Manager") and OppenheimerFunds, Inc. (the
"Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust
organized with one or more series of shares, and is registered as an investment
company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment
Manager to act as investment manager for the AST Oppenheimer Large-Cap Growth
Portfolio (the "Portfolio") under the terms of a management agreement, dated
December 31, 1998, 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 information deemed pertinent
by it 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 and provided to or reviewed by the Sub-Advisor, such Registration
Statement or Proxy Statement contains, as of the date of such review, 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.
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 the following as provided
(except in the case of clause (i)) to the Sub-Advisor (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.
The Investment Manager shall provide the Sub-Adviser, or shall
cause the Portfolio's Custodian or Administrator to provide to the Sub-Advisor,
on each business day as of a time deadline to be mutually agreed upon, a report
or a computer download in a mutually acceptable software program and format,
detailing the Portfolio's portfolio holdings, uninvested cash, current
valuations and other information reasonably requested by the Sub-Advisor to
assist it in carrying out its duties under this Agreement, as of the close of
the prior business day. In performing its obligations under this Agreement, the
Sub-Advisor may rely upon the accuracy and completeness of information provided
to it by or on behalf of the Investment Manager or the Portfolio's Custodian or
Administrator if the Sub-Advisor cannot readily verify such information from
records that it can reasonably keep as Sub-advisor.
The Sub-Advisor shall be responsible for the preparation and filing of
Schedule 13G and Form 13-F reflecting the Portfolio's securities holdings. The
Sub-Advisor shall not be responsible for the preparation or filing of any other
reports, required of the Portfolio by any governmental or regulatory agency,
except as expressly agreed to in writing. It is understood that the Sub-Advisor
is not responsible for daily pricing of the Portfolio's assets.
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;
(g) The Trust's registration statement; and
(h) 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 (g) above will be provided reasonably promptly after such
materials became available to the Investment Manager. Such amendments or
supplements as to item (h) 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 audited 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 for its use, 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 of other funds managed by the Sub-Advisor or its
affiliates, as well as recommendations of the Investment Manager, subject to the
requirements of best net price and most favorable execution.
The Investment Manager recognizes that a broker-dealer affiliated with
the Sub-Adviser (i) may act as one of the Portfolio's regular brokers so long as
it is lawful for it so to act; (ii) may be a major recipient of brokerage
commissions paid by the Portfolio; and (iii) may effect portfolio transactions
for the Portfolio only if expressly approved by the Trustees, and if the
commissions, fees or other remuneration received or to be received by it are
determined in accordance with procedures contemplated by any rule, regulation or
order adopted under the ICA for determining the permissible level of such
commissions.
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 in violation of this Agreement 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 ongoing responsibilities of the Sub-Advisor and its affiliates with
respect to the Portfolio and/or other accounts for which they exercise
investment discretion. In reaching such determination, the Sub-Advisor will not
be required to place or attempt to place a specific dollar value on the
brokerage and/or research services provided or being provided by such broker.
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
concerning the Sub-Advisor or the Sub-Advisor's management of the Portfolio
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 .35% of the portion of the average
daily net assets of the Portfolio not in excess of $500 million; plus .30% of
the portion of the net assets over $500 million but not in excess of $1 billion;
plus .25% of the portion of the net assets over $1 billion.
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 by it 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 that the
Investment Manager provides to the Sub-Advisor 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 for as long as such registration is required for the party to carry
out its obligations under this Agreement, 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 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 the use of 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 officers or employees, and persons affiliated with it
or with any such officers or employees 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. The Investment Manager understands that the Sub-Advisor
shall not favor or disfavor any of the Sub-Advisor's clients or class of clients
in the allocation of investment opportunities, so that to the extent
practicable, such opportunities will be allocated among the Sub-Advisor's
clients over a period of time on a fair and equitable basis. 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
officers, affiliates or employees may purchase or sell for the Sub-Advisor or
such officer'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, pursuant to its requirements. 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: John Birch
Senior Vice President & Chief Operating Officer
Sub-Advisor: OppenheimerFunds, Inc.
Two World Trade Center, 34th Floor
New York, NY 10048-0203
Attention: Andrew J. Donohue
Executive Vice President & General Counsel
Copy to:
OppenheimerFunds, Inc.
6801 Tucson Way
Englewood, CO 80112
Attention: Treasurer
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 and in conformity with 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
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 Sub-Advisor shall not be liable to the
Investment Manager or the Portfolio for any losses that may be sustained as a
result of (1) instructions provided by the Sub-Advisor to the Investment Manager
or the Portfolio's Custodian or Administrator if the recipient had reason to
believe that such instruction was not genuine or authorized, or (2) delays in or
the inaccuracy of information that the Sub-Advisor cannot reasonably verify as
provided in paragraph 1 of 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 has obtained all
requisite corporate and governmental authorizations necessary to perform the
services contemplated to be performed by it 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, except to
the extent governed by the federal securities laws.
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 December 31, 1998.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
- -------------------------------- -----------------------------------------
John Birch
Senior Vice President & Chief Operating Officer
Date: _________________________ Date:_________________________
Attest: _________________________ Attest:________________________
AMERICAN SKANDIA TRUST
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services,
Incorporated (the "Investment Manager") and Scudder Kemper Investments, Inc.
(the "Sub-Adviser").
W I T N E S S E T H
WHEREAS, American Skandia Trust (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 Investment Company Act of 1940, as
amended (the "ICA"); and
WHEREAS, the Investment Manager and the Sub-Adviser each is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"); and
WHEREAS, the Board of Trustees of the Trust (the "Trustees") have engaged the
Investment Manager to act as investment manager for the AST Kemper Small-Cap
Growth Portfolio (the "Portfolio"), one series of the Trust, under the terms of
a management agreement, dated January 4, 1999, with the Trust (the "Management
Agreement"); and
WHEREAS, the Investment Manager, acting pursuant to the Management Agreement,
wishes to engage the Sub-Adviser, and the Trustees have approved the engagement
of the Sub-Adviser, to provide investment advice and other investment services
set forth below.
NOW, THEREFORE, the Investment Manager and the Sub-Adviser agree as follows:
1. Investment Services. The Sub-Adviser will formulate and implement a
continuous investment program for the Portfolio conforming to the investment
objective, investment policies and restrictions of the Portfolio as set forth in
the Prospectus and Statement of Additional Information of the Trust as in effect
from time to time (together, the "Registration Statement"), the Agreement and
Declaration of Trust and By-laws of the Trust, and any investment guidelines or
other instructions received by the Sub-Adviser in writing from the Investment
Manager from time to time. Any amendments to the foregoing documents will not be
deemed effective with respect to the Sub-Adviser until the Sub-Adviser's receipt
thereof. The appropriate officers and employees of the Sub-Adviser will be
available to consult with the Investment Manager, the Trust and Trustees at
reasonable times and upon reasonable notice concerning the business of the
Trust, including valuations of securities which are not registered for public
sale, not traded on any securities market or otherwise may be deemed illiquid
for purposes of the ICA; provided it is understood that the Sub-Adviser is not
responsible for daily pricing of the Portfolio's assets.
Subject to the supervision and control of the Investment Manager, which
in turn is subject to the supervision and control of the Trustees, the
Sub-Adviser in its discretion will determine which issuers and securities will
be purchased, held, sold or exchanged by the Portfolio or otherwise represented
in the Portfolio's investment portfolio from time to time and, subject to the
provisions of paragraph 3 of this Agreement, will place orders with and give
instructions to brokers, dealers and others for all such transactions and cause
such transactions to be executed. Custody of 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-Adviser
designated by the Sub-Adviser 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-Adviser will not be responsible for the provision of
administrative, bookkeeping or accounting services to the Portfolio except as
specifically provided herein, as required by the ICA or the Advisers Act or as
may be necessary for the Sub-Adviser to supply to the Investment Manager, the
Portfolio or the Portfolio's shareholders the information required to be
provided by the Sub-Adviser hereunder. In compliance with the requirements of
Rule 31a-3 under the ICA, any records that the Sub-Adviser maintains hereunder
shall be the property of the Trust and the Sub-Adviser agrees to surrender
promptly any such records to the Trust of the Investment Manager upon the
Trust's or the Investment Manager's request. The Sub-Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the ICA the records it
maintains for the Trust.
In furnishing the services under this Agreement, the Sub-Adviser will
comply with and use its best efforts to enable the Portfolio to conform to the
requirements of: (i) the ICA and the regulations promulgated thereunder; (ii)
Subchapters L and M (including, respectively, Section 817(h) and Sections
851(b)(1), (2) and (3)) of the Internal Revenue Code and the regulations
promulgated thereunder; (iii) other applicable provisions of state or federal
law; (iv) the Agreement and Declaration of Trust and By-laws of the Trust; (v)
policies and determinations of the Trust and the Investment Manager provided to
the Sub-Adviser in writing; (vi) the fundamental and non-fundamental investment
policies and restrictions applicable to the Portfolio, as set out in the
Registration Statement in effect, or as such investment policies and
restrictions from time to time may be amended by the Portfolio's shareholders or
the Trustees and communicated to the Sub-Adviser in writing; (vii) the
Registration Statement; and (viii) investment guidelines or other instructions
received in writing from the Investment Manager. Notwithstanding the foregoing,
the Sub-Adviser shall have no responsibility to monitor compliance with
limitations or restrictions for which information from the Investment Manager or
its authorized agents is required to enable the Sub-Adviser to monitor
compliance with such limitations or restrictions unless such information is
provided to the Sub-adviser in writing. The Sub-Adviser shall supervise and
monitor the activities of its representatives, personnel and agents in
connection with the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisers to provide investment advice and other
services to the Portfolio or to series or portfolios of the Trust for which the
Sub-Adviser does not provide such services, or to prevent the Investment Manager
from providing such services itself in relation to the Portfolio or such other
series or portfolios.
The Sub-Adviser shall be responsible for the preparation and filing of
Schedule 13-G and Form 13-F reflecting the Portfolio's securities holdings. The
Sub-Adviser shall not be responsible for the preparation or filing of any other
reports required of the Portfolio by any governmental or regulatory agency,
except as expressly agreed to in writing.
2. Investment Advisory Facilities. The Sub-Adviser, at its expense, will furnish
all necessary investment facilities, including salaries of personnel, required
for it to execute its duties hereunder.
3. Execution of Portfolio Transactions. In connection with the investment and
reinvestment of the assets of the Portfolio, the Sub-Adviser is responsible for
the selection of broker-dealers (which may include broker-dealers affiliated
with the Sub-Adviser) to execute purchase and sale transactions for the
Portfolio in conformity with the policy regarding brokerage as set forth in the
Registration Statement, or as the Trustees may determine from time to time, as
well as the negotiation of brokerage commission rates with such executing
broker-dealers. Generally, the Sub-Adviser's primary consideration in placing
Portfolio investment transactions with broker-dealers for execution will be to
obtain, and maintain the availability of, best execution at the best net
available price.
Consistent with this policy, the Sub-Adviser, in selecting
broker-dealers and negotiating brokerage commission rates, will take all
relevant factors into consideration, including, but not limited to: 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 brokerage commission
rates paid by the Portfolio may be greater than those available from other
brokers if the difference is reasonably justified by other aspects of the
execution services offered. Subject to such policies and procedures as the
Trustees may determine, the Sub-Adviser shall have the discretion, and shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason
of such discretion, (i) to effect investment transactions for the Portfolio
through broker-dealers (including, to the extent permissible under applicable
law, broker-dealers affiliated with the Sub-Adviser) qualified to obtain best
execution of such transactions who provide brokerage and/or research services,
as such services are defined in section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), and (ii) to cause the Portfolio to pay any
such broker-dealers 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-Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided by such broker-dealer, viewed in
terms of either that particular investment transaction or the Sub-Adviser's
overall responsibilities with respect to the Portfolio and other accounts as to
which the Sub-Adviser exercises investment discretion (as such term is defined
in section 3(a)(35) of the 1934 Act). In accordance with the preceding sentence,
the Sub-Adviser is authorized to allocate orders placed by it on behalf of the
Portfolio to broker-dealers who provide research or statistical material to the
Portfolio or the Sub-Adviser. Allocation of orders placed by the Sub-Adviser on
behalf of the Portfolio to such broker-dealers shall be in such amounts and
proportions as the Sub-Adviser shall determine in good faith in conformity with
its responsibilities under applicable laws, rules and regulations. The
Sub-Adviser will submit reports on such allocations to the Investment Manager
regularly as requested by the Investment Manager, in such form as may be
mutually agreed to by the parties hereto, indicating the broker-dealers to whom
such allocations have been made and the basis therefor.
Subject to the foregoing provisions of this paragraph 3, the
Sub-Adviser may also consider sales of shares of the Portfolio, or may consider
or follow recommendations of the Investment Manager that take such sales into
account, as factors in the selection of broker-dealers to effect the Portfolio's
investment transactions. Notwithstanding the above, nothing shall require the
Sub-Adviser to use a broker-dealer which provides research services or to use a
particular broker-dealer which the Investment Manager has recommended.
4. Reports by the Sub-Adviser. The Sub-Adviser shall furnish the Investment
Manager monthly, quarterly and annual reports, in such form as may be mutually
agreed to by the parties hereto, concerning transactions and performance of the
Portfolio, including information required in the Registration Statement or
information necessary for the Investment Manager to review the Portfolio or
discuss the management of it. The Sub-Adviser shall permit the books and records
maintained with respect to the Portfolio to be inspected and audited by the
Trust, the Investment Manager or their respective agents at all reasonable times
during normal business hours upon reasonable notice. The Sub-Adviser shall
immediately notify both the Investment Manager and the Trust of any legal
process served upon it in connection with its activities hereunder, including
any legal process served upon it on behalf of the Investment Manager, the
Portfolio or the Trust. The Sub-Adviser shall promptly notify the Investment
Manager of any changes in any information regarding the Sub-Adviser or the
investment program for the Portfolio as described in the Registration Statement.
5. Compensation of the Sub-Adviser. The amount of the compensation to the
Sub-Adviser is computed at an annual rate. The fee shall be payable monthly in
arrears, based on the average daily net assets of the Portfolio for each month,
at the annual rate set forth in Exhibit A to this Agreement.
In computing the fee to be paid to the Sub-Adviser, the net asset value
of the Portfolio shall be valued as set forth in the then current Registration
Statement. If this Agreement is terminated, the payment described herein shall
be prorated to the date of termination.
The Investment Manager and the Sub-Adviser shall not be considered as
partners or participants in a joint venture. The Sub-Adviser 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 the Investment Manager, the Portfolio or the
Trust. Except as otherwise specifically provided herein, the Investment Manager,
the Portfolio and the Trust will not be obligated to pay any expenses of the
Sub-Adviser.
6. Delivery of Documents to the Sub-Adviser. The Investment Manager has
furnished the Sub-Adviser with true, correct and complete copies of each of the
following documents:
(a) The Agreement and Declaration of Trust of the Trust, as in effect on
the date hereof;
(b) The By-laws of the Trust, as in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of the
Sub-Adviser as portfolio manager of the Portfolio and approving the
form of this Agreement;
(d) The resolutions of the Trustees selecting the Investment Manager as
investment manager to the Portfolio and approving the form of the
Management Agreement;
(e) The Management Agreement;
(f) The Code of Ethics of the Trust and of the Investment Manager, as in
effect on the date hereof; and
(g) A list of companies the securities of which are not to be bought or
sold for the Portfolio.
The Investment Manager will furnish the Sub-Adviser 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 become 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. Any amendments or supplements to the foregoing will
not be deemed effective with respect to the Sub-Adviser until the Sub-Adviser's
receipt thereof. The Investment Manager will provide such additional information
as the Sub-Adviser may reasonably request in connection with the performance of
its duties hereunder.
7. Delivery of Documents to the Investment Manager. The Sub-Adviser has
furnished the Investment Manager with true, correct and complete copies of each
of the following documents:
(a) The Sub-Adviser's Form ADV as filed with the Securities and Exchange
Commission as of the date hereof;
(b) The Sub-Adviser's most recent balance sheet;
(c) Separate lists of persons who the Sub-Adviser wishes to have authorized
to give written and/or oral instructions to Custodians of Trust assets for the
Portfolio; and
(d) The Code of Ethics of the Sub-Adviser, as in effect on the date hereof.
The Sub-Adviser will furnish the Investment Manager 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 will be
provided within 30 days of the time such materials become available to the
Sub-Adviser. Any amendments or supplements to the foregoing will not be deemed
effective with respect to the Investment Manager until the Investment Manager's
receipt thereof. The Sub-Adviser will provide additional information as the
Investment Manager may reasonably request in connection with the Sub-Adviser's
performance of its duties under this Agreement.
8. Confidential Treatment. The parties hereto understand that any information or
recommendation supplied by the Sub-Adviser 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. The parties also understand that any
information supplied to the Sub-Adviser in connection with the performance of
its obligations hereunder, particularly, but not limited to, any list of
securities which may not be bought or sold for the Portfolio (as such list may
be amended from time to time), is to be regarded as confidential and for use
only by the Sub-Adviser in connection with its obligation to provide investment
advice and other services to the Portfolio.
9. Representations of the Parties. Each party hereto hereby further represents
and warrants to the other that: (i) it is registered as an investment adviser
under the Advisers Act and is registered or licensed as an investment adviser
under the laws of all jurisdictions in which its activities require it to be so
registered or licensed; and (ii) it will use its reasonable best efforts to
maintain each such registration or license in effect at all times during the
term of this Agreement; and (iii) 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; and (iv) it is duly authorized to enter into this Agreement and to
perform its obligations hereunder.
The Sub-Adviser further represents that it has adopted a written Code
of Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Adviser shall be
subject to such Code of Ethics and shall not be subject to any other Code of
Ethics, including the Investment Manager's Code of Ethics, unless specifically
adopted by the Sub-Adviser. The Investment Manager further represents and
warrants to the Sub-Adviser that (i) the appointment of the Sub-Adviser 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 law.
Sub-Adviser represents that it is the sole owner of the name and mark
"Kemper." The Investment Manager agrees and acknowledges that Sub-Adviser is the
sole owner of the name and mark "Kemper" and that any and all use of any
designation comprised in whole or in part of Kemper ("Kemper Mark(s)") under
this Agreement, except as otherwise provided herein, shall inure to the benefit
of Kemper. Upon termination of this Agreement for any reason, the Investment
Manager shall cease, and shall use its best efforts to cause the Trust to cease,
all use of any Kemper Mark(s) as soon as reasonably practicable, provided
however, that the Trust and the Investment Manager are permitted to use the
Kemper Mark(s) as long as required by law, rule or regulation and to the extent
necessary to refer to or illustrate the historical performance of the Portfolio.
Sub-Adviser acknowledges and agrees that it will not use any designation
comprised in whole or in part of the names "American Skandia Trust" or "American
Skandia Investment Services, Incorporated" on its own behalf, or in relation to
any investment company for which Kemper or its successors and any subsidiary or
affiliate thereof acts as investment adviser, without the express written
permission of the Trust and the Investment Manager, respectively, except that
Kemper may state that it acts as a sub-adviser to the Trust and the Investment
Manager.
10. Liability. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard for its obligations hereunder, the Sub-Adviser
shall not be liable to the Trust, the Portfolio, the Portfolio's shareholders or
the Investment Manager for any act or omission resulting in any loss suffered by
the Trust, the Portfolio, the Portfolio's shareholders or the Investment Manager
in connection with any service to be provided herein, including, without
limitation, any loss suffered as a result of the Sub-Adviser's reliance on
information provided by the Portfolio's Custodian or Administrator that the
Sub-Adviser cannot readily verify from records that it can reasonably keep as
Sub-Adviser. 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 or limitation of any rights which the
Trust, the Portfolio or the Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Adviser shall not be liable
for the failure to recommend the purchase or sale of any security on behalf of
the Portfolio on the basis of any information which might, in the Sub-Adviser's
reasonable opinion, constitute a violation of any federal or state laws, rules
or regulations.
11. Other Activities of the Sub-Adviser. The Investment Manager agrees that the
Sub-Adviser and any of its officers, directors or employees, and persons
affiliated with the Sub-Adviser or with any such officer, director or employee,
may render investment management or advisory services to other investors and
institutions, and that such investors and institutions may own, purchase or
sell, securities or other interests in property that are the same as, similar
to, or different from those which are selected for purchase, holding or sale for
the Portfolio. The Investment Manager further acknowledges that the Sub-Adviser
shall be in all respects free to take action with respect to investments in
securities or other interests in property that are the same as, similar to, or
different from those selected for purchase, holding or sale for the Portfolio.
The Investment Manager understands that the Sub-Adviser shall not favor or
disfavor any of the Sub-Adviser's clients or class of clients in the allocation
of investment opportunities, so that to the extent practical, such opportunities
will be allocated among the Sub-Adviser's clients over a period of time on a
fair and equitable basis. Nothing in this Agreement shall impose upon the
Sub-Adviser any obligation (i) to purchase or sell, or recommend for purchase or
sale, for the Portfolio any security which the Sub-Adviser, its officers,
directors, affiliates or employees may purchase or sell for the Sub-Adviser or
such officer's, director's, affiliate's or employee's own accounts or for the
account of any other client of the Sub-Adviser, advisory or otherwise, or (ii)
to abstain from the purchase or sale of any security for the Sub-Adviser's other
clients, advisory or otherwise, which the Investment Manager has placed on the
list provided pursuant to paragraph 6(g) of this Agreement.
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 Trustees 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 the Sub-Adviser upon 60 days written notice, and will automatically
terminate in the event of (i) its "assignment" by either party to this
Agreement, as such term is defined in the ICA, subject to such exemptions as may
be granted by the Securities and Exchange Commission by rule, regulation or
order, or (ii) upon termination of the Management Agreement, provided the
Sub-Adviser has received prior written notice thereof.
13. Notification. The Sub-Adviser will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Adviser with
responsibility for making investment decisions in relation to the Portfolio (the
"Portfolio Manager(s)") or who have been authorized to give instructions to the
Custodian. The Sub-Adviser shall be responsible for reasonable out-of-pocket
costs and expenses incurred by the Investment Manager, the Portfolio or the
Trust to amend or supplement the Trust's Prospectus to reflect a change in
Portfolio Manager(s) or otherwise to comply with the ICA, the Securities Act of
1933, as amended (the "1933 Act") or any other applicable statute, law, rule or
regulation, as a result of such change; provided, however, that the Sub-Adviser
shall not be responsible for such costs and expenses where the change in
Portfolio Manager(s) reflects the termination of employment of the Portfolio
Manager(s) with the Sub-Adviser and its affiliates or is the result of a request
by the Investment Manager or is due to other circumstances beyond the
Sub-Adviser's control.
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 recipient and/or address for such
party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: John Birch
Senior Vice President & Chief Operating Officer
Sub-Adviser: Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154-0010
Attention: Nicholas J. Griparich
Trust: American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Attention: Eric C. Freed, Esq.
14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless the
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the ICA ("affiliated person") of the Investment Manager and each person, if
any who, within the meaning of Section 15 of the 1933 Act, controls
("controlling person") the Investment Manager, against any and all losses,
claims, damages, liabilities or litigation (including reasonable legal and other
expenses), to which the Investment Manager or such affiliated person or
controlling person of the Investment Manager may become subject under the 1933
Act, the ICA, the Advisers Act, under any other statute, law, rule or
regulation, at common law or otherwise, arising out of the Sub-Adviser's
responsibilities hereunder (1) to the extent of and as a result of the willful
misconduct, bad faith, or gross negligence by the Sub-Adviser, any of the
Sub-Adviser's employees or representatives or any affiliate of or any person
acting on behalf of the Sub-Adviser, or (2) as a result of any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including 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 and in conformity with
written information furnished by the Sub-Adviser to the Investment Manager, the
Portfolio, the Trust or any affiliated person of the Investment Manager, the
Portfolio or the Trust expressly for use in the Registration Statement or upon
verbal information confirmed by the Sub-Adviser in writing, or (3) to the extent
of, and as a result of, the failure of the Sub-Adviser to execute, or cause to
be executed, portfolio investment transactions according to the requirements of
the ICA; provided, however, that in no case is the Sub-Adviser's indemnity in
favor of the Investment Manager or any affiliated person or controlling person
of the 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 the
Sub-Adviser, any affiliated person of the Sub-Adviser and each controlling
person of the Sub-Adviser, if any, against any and all losses, claims, damages,
liabilities or litigation (including reasonable legal and other expenses), to
which the Sub-Adviser or such affiliated person or controlling person of the
Sub-Adviser may become subject under the 1933 Act, the ICA, the Advisers Act,
under any other statute, law, rule or regulation, at common law or otherwise,
arising out of the 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 the Investment Manager, any of the Investment
Manager's employees or representatives or any affiliate of or any person acting
on behalf of the Investment Manager, or (2) as a result of any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, including 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 other than in reliance upon and in
conformity with written information furnished by the Sub-Adviser, or any
affiliated person of the Sub-Adviser expressly for use in the Registration
Statement or other than upon verbal information confirmed by the Sub-Adviser in
writing; provided, however, that in no case is the Investment Manager's
indemnity in favor of the Sub-Adviser or any affiliated person or controlling
person of the Sub-Adviser 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. It is agreed that the Investment Manager's indemnification
obligations under this Section 14 will extend to expenses and costs (including
reasonable attorneys fees) incurred by the Sub-Adviser as a result of any
litigation brought by the Investment Manager alleging the Sub-Adviser's failure
to perform its obligations and duties in the manner required under this
Agreement unless judgment is rendered for the Investment Manager.
15. Conflict of Laws. The provisions of this Agreement shall be subject to all
applicable statutes, laws, rules and regulations, including, without limitation,
the applicable provisions of the ICA and rules and regulations promulgated
thereunder. To the extent that any provision contained herein conflicts with any
such applicable provision of law or regulation, the latter shall control. The
terms and provisions of this Agreement shall be interpreted and defined in a
manner consistent with the provisions and definitions of the ICA. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall continue in
full force and effect and shall not be affected by such invalidity.
16. Amendments, Waivers, etc. Provisions of this Agreement may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought. This Agreement (including Exhibit A hereto) may be amended at any
time by written mutual consent of the parties, subject to the requirements of
the ICA and rules and regulations promulgated and orders granted thereunder.
17. Governing State Law. This Agreement is made under, and shall be governed by
and construed in accordance with, the laws of the State of Connecticut without
regard to the conflict of laws provisions thereof.
18. 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 January 4, 1999.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
____________________________ ______________________________________
John Birch
Senior Vice President
& Chief Operating Officer
Date: ____________________________ Date: ____________________________
Attest: ____________________________ Attest: ____________________________
20630-1 (8/97)
<PAGE>
American Skandia Trust
AST Kemper Small-Cap Growth Portfolio
Sub-Advisory Agreement
EXHIBIT A
An annual rate of .50% of the average daily net assets of the Portfolio not in
excess of $100 million; plus .45% of the portion of the net assets over $100
million but not in excess of $400 million; plus .40% of the portion of the net
assets over $400 million but not in excess of $900 million; plus .35% of the
portion of the net assets over $900 million.
WERNER & KENNEDY
1633 Broadway
New York, NY 10019
---------
EMAIL: [email protected]
TELEPHONE (212) 408-6900
FACSIMILE (212) 408-6950
December 28, 1998
American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Re: American Skandia Trust Form N-1A
Post-Effective Amendment No. 28 to the Registration Statement
under the Securities Act of 1933
Amendment No. 30 to the Registration Statement under
the Investment Company Act of 1940
Securities Act Registration No.: 33-24962
Investment Company Act No.: 811-5186
CIK #814679
Dear Mesdames and Messrs.:
You have requested us, as counsel to American Skandia Trust (the
"Company"), to furnish you with this opinion in connection with the
above-referenced registration statement (the "Registration Statement") filed by
the Company 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 Company 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 Company and others.
Based upon the foregoing, we are of the opinion that the Company 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 "Legal Counsel and Independent
Accountants" included in the Registration Statement.
Very truly yours,
Werner & Kennedy
By: /s/Robert K. Fulton
Robert K. Fulton
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
American Skandia Trust:
We consent to the use in Post-Effective Amendment No. 28 to Registration
Statement No. 33-24962 of our report dated February 10, 1998 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/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Princeton, New Jersey
December 23, 1998
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