File No. 33-24962
Investment Company No. 811-5186
As filed with the Securities and Exchange Commission on August 4, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
Registration Statement under The Securities Act of 1933
Post-Effective Amendment No. 31
Registration Statement under The Investment Company Act of 1940
Amendment No. 33
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.
STRADLEY RONON STEVENS & YOUNG
2600 ONE COMMERCE SQUARE, PHILADEPHIA, PA 19103-7098
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
_____ on _______ pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
X 75 days after filing pursuant to paragraph (a)(2).
_____ on pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Shares of Beneficial Interest of the Various Series of American Skandia Trust
(Title of Securities Being Registered)
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PROSPECTUS October 18, 1999
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
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American Skandia Trust (the "Trust") is an investment company made up of the
following 31 separate portfolios ("Portfolios"):
AST Founders Passport Portfolio
AST T. Rowe Price International Equity Portfolio
AST AIM International Equity Portfolio
AST Janus Overseas Growth Portfolio
AST American Century International Growth Portfolio
AST MFS Global Equity Portfolio
AST Janus Small-Cap Growth Portfolio
AST Kemper Small-Cap Growth Portfolio
AST Lord Abbett Small Cap Value Portfolio
AST T. Rowe Price Small Company Value Portfolio
AST Neuberger Berman Mid-Cap Growth Portfolio
AST Neuberger Berman Mid-Cap Value Portfolio
AST T. Rowe Price Natural Resources Portfolio
AST Oppenheimer Large-Cap Growth Portfolio
AST MFS Growth Portfolio
AST Marsico Capital Growth Portfolio
AST JanCap Growth Portfolio
AST Bankers Trust Managed Index 500 Portfolio
AST Cohen & Steers Realty Portfolio
AST American Century Income & Growth Portfolio
AST Lord Abbett Growth and Income Portfolio
AST MFS Growth with Income Portfolio
AST INVESCO Equity Income Portfolio
AST AIM Balanced Portfolio
AST American Century Strategic Balanced Portfolio
AST T. Rowe Price Asset Allocation Portfolio
AST T. Rowe Price International Bond Portfolio
AST Federated High Yield Portfolio
AST PIMCO Total Return Bond Portfolio
AST PIMCO Limited Maturity Bond Portfolio
AST Money Market Portfolio
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Trust is an investment vehicle for life insurance companies ("Participating
Insurance Companies") writing variable annuity contracts and variable life
insurance policies. Shares of the Trust may also be sold directly to certain
tax-deferred retirement plans. Each variable annuity contract and variable life
insurance policy involves fees and expenses not described in this Prospectus.
Please read the Prospectus for the variable annuity contract and variable life
insurance policy for information regarding the contract or policy, including its
fees and expenses.
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TABLE OF CONTENTS
Caption Page
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Risk/Return Summary...............................................................................................3
Past Performance.................................................................................................16
Fees and Expenses of the Portfolios..............................................................................30
Investment Objectives and Policies...............................................................................33
AST Founders Passport Portfolio.............................................................................34
AST T. Rowe Price International Equity Portfolio............................................................36
AST AIM International Equity Portfolio......................................................................38
AST Janus Overseas Growth Portfolio.........................................................................40
AST American Century International Growth Portfolio.........................................................42
AST MFS Global Equity Portfolio...............................................................................
AST Janus Small-Cap Growth Portfolio........................................................................44
AST Kemper Small-Cap Growth Portfolio.......................................................................46
AST Lord Abbett Small Cap Value Portfolio...................................................................48
AST MFS Growth Portfolio......................................................................................
AST T. Rowe Price Small Company Value Portfolio.............................................................49
AST Neuberger Berman Mid-Cap Growth Portfolio...............................................................51
AST Neuberger Berman Mid-Cap Value Portfolio................................................................53
AST T. Rowe Price Natural Resources Portfolio...............................................................55
AST Oppenheimer Large-Cap Growth Portfolio..................................................................56
AST Marsico Capital Growth Portfolio........................................................................57
AST JanCap Growth Portfolio.................................................................................59
AST Bankers Trust Managed Index 500 Portfolio...............................................................61
AST Cohen & Steers Realty Portfolio.........................................................................63
AST American Century Income & Growth Portfolio..............................................................65
AST Lord Abbett Growth and Income Portfolio.................................................................66
AST MFS Growth with Income Portfolio..........................................................................
AST INVESCO Equity Income Portfolio.........................................................................67
AST AIM Balanced Portfolio..................................................................................68
AST American Century Strategic Balanced Portfolio...........................................................70
AST T. Rowe Price Asset Allocation Portfolio................................................................72
AST T. Rowe Price International Bond Portfolio..............................................................74
AST Federated High Yield Portfolio..........................................................................76
AST PIMCO Total Return Bond Portfolio.......................................................................78
AST PIMCO Limited Maturity Bond Portfolio...................................................................81
AST Money Market Portfolio..................................................................................84
Portfolio Turnover...............................................................................................86
Net Asset Values.................................................................................................86
Purchase and Redemption of Shares................................................................................86
Management of the Trust..........................................................................................87
Tax Matters......................................................................................................94
Financial Highlights.............................................................................................96
Certain Risk Factors and Investment Methods.....................................................................104
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RISK/RETURN SUMMARY
American Skandia Trust (the "Trust") is comprised of twenty-eight
investment portfolios (the "Portfolios"). The Portfolios are designed to provide
a wide range of investment options. Each Portfolio has its own investment goal
and style (and, as a result, its own level of risk). Some of the Portfolios
offer potential for high returns with correspondingly higher risk, while others
offer stable returns with relatively less risk. It is possible to lose money
when investing even in the most conservative of the Portfolios. Investments in
the Portfolios are not bank deposits and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
It is not possible to provide an exact measure of the risk to which a
Portfolio is subject, and a Portfolio's risk will vary based on the securities
that it holds at a given time. Nonetheless, based on each Portfolio's investment
style and the risks typically associated with that style, it is possible to
assess in a general manner the risks to which a Portfolio will be subject. The
following discussion highlights the investment strategies and risks of each
Portfolio. Additional information about each Portfolio's potential investments
and its risks is included in this Prospectus under "Investment Objectives and
Policies."
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International and Global Portfolios:
Portfolio: Investment Goal: Primary Investments:
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Founders Passport Capital growth The Portfolio invests primarily in equity
securities of small capitalization
foreign companies.
T. Rowe Price Int'l Equity Total return on assets The Portfolio invests primarily in marketable equity
from long-term growth of securities of foreign companies.
capital and income
AIM International Capital growth The Portfolio invests primarily in equity
securities of foreign companies.
Janus Overseas Growth Long-term capital growth The Portfolio invests primarily in common
stocks of foreign companies.
American Century Int'l Capital growth The Portfolio invests primarily in equity
Growth securities of foreign companies.
MFS Global Equity Capital growth The Portfolio invests primarily in common stocks and related
securities of U.S. and foreign issuers.
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Principal Investment Strategies:
The AST Founders Passport Portfolio normally invests primarily in securities
issued by foreign companies that 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 growth.
The Sub-advisor to the Portfolio looks for companies whose fundamental strengths
indicate potential for growth in earnings per share. The Sub-advisor generally
takes a "bottom up" approach to building the Portfolio, which means that the
Sub-advisor will search for individual companies that demonstrate the best
potential for significant earnings growth, rather than choose investments based
on broader economic characteristics of countries or industries.
The Sub-advisor to the AST T. Rowe Price International Equity Portfolio expects
to invest substantially all of the Portfolio's assets (with a minimum of 65%) in
established foreign companies. Geographic diversification will be wide,
including both developed and developing countries, and there will normally be at
least three different countries represented in the Portfolio. Stocks can be
purchased without regard to a company's market capitalization, but the
Sub-advisor's focus typically will be on large and, to a lesser extent,
medium-sized companies.
The Portfolio will invest in stocks that have the potential for growth of
capital or income or both. Stocks are selected by using a "bottom-up" approach
(an approach based on the Sub-advisor's fundamental research on particular
companies) in an effort to identify companies capable of achieving and
sustaining above-average long-term earnings growth. The Sub-advisor seeks to
purchase stocks at reasonable prices in relation to anticipated earnings, cash
flow or book value. Valuation factors often influence the Sub-advisor's
allocations among large-, mid-, and small-cap companies.
While bottom-up stock selection is the focus of its decision making, the
Sub-advisor also invests with an awareness of the global economic backdrop and
its outlook for individual companies. Country allocation is driven largely by
stock selection, though the Sub-advisor may limit investments in markets that
appear to have poor overall prospects.
The AST AIM International Equity Portfolio seeks to meet its investment
objective by investing, normally, at least 70% of its assets in marketable
equity securities of foreign companies that are listed on a recognized foreign
securities exchange or traded in a foreign over-the-counter market. The
Portfolio will normally invest in a diversified portfolio that includes
companies located in at least four countries outside the United States,
emphasizing investment in companies in the developed countries of Western Europe
and the Pacific Basin. The Sub-advisor does not intend to invest more than 20%
of the Portfolio's total assets in companies located in developing countries.
The Sub-advisor focuses on companies that have experienced above-average,
long-term growth in earnings and have strong prospects for future growth. In
selecting countries in which the Portfolio will invest, the Sub-advisor also
considers such factors as the prospect for relative economic growth among
countries or regions, economic or political conditions, currency exchange
fluctuations, tax considerations and the liquidity of a particular security. The
Sub-advisor considers whether to sell a particular security when any of those
factors materially changes.
The AST Janus Overseas Growth 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 stocks selected for their growth potential.
The Sub-advisor generally takes a "bottom up" approach to choosing investments
for 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 where the companies are organized or where they
primarily conduct business. 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 similar selection
procedure.
The AST American Century International Growth Portfolio will seek to achieve its
investment objective by investing primarily in equity securities of
international companies that the Sub-advisor believes will increase in value
over time. The Sub-advisor uses a growth investment strategy it developed that
looks for companies with earnings and revenue growth. Ideally, the Sub-advisor
looks for companies whose earnings and revenues are not only growing, but are
growing at an accelerating pace. For purposes of the Portfolio, equity
securities include common stocks, preferred stocks and convertible securities.
The Sub-advisor tracks financial information for thousands of companies to
research and select the stocks it believes will be able to sustain accelerating
growth. This strategy is based on the premise that, over the long term, the
stocks of companies with accelerating earnings and revenues have a
greater-than-average chance to increase in value.
The Sub-advisor recognizes that, in addition to locating strong companies with
accelerating earnings, the allocation of assets among different countries and
regions also is an important factor in managing an international portfolio. For
this reason, the Sub-advisor will 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. Under
normal conditions, the Portfolio will invest at least 65% of its assets in
equity securities of issuers from at least three countries outside of the United
States. While the Portfolio's focus will be on issuers in developed markets, the
Sub-advisor expects to invest to some degree in issuers in developing countries.
The AST MFS Global Equity Portfolio invests, under normal market conditions, at
least 65% of its total assets in common stocks and related securities, such as
preferred stock, convertible securities and depositary receipts, of U.S. and
foreign issuers (including issuers in developing countries). The Portfolio
spreads its investments across these markets, and may invest up to 50% of its
net assets in U.S. and Canadian issuers and up to 100% of its net assets in
foreign securities.
The Portfolio focuses on companies that the Sub-advisor believes have
favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. The Portfolio generally seeks to purchase
securities of companies with relatively large market capitalizations relative to
the market in which they are traded. The Portfolio's investments may include
securities traded in the over-the-counter markets, rather than on securities
exchanges. The Sub-advisor uses a "bottom up," as opposed to "top down,"
investment style in managing the Portfolio. This means that securities are
selected based upon fundamental analysis of individual companies by the
Sub-advisor.
Principal Risks:
o All six of the international and global portfolios are equity funds, and
the primary risk of each is that the value of the stocks they hold will
decline. Stocks can decline for many reasons, including reasons related to
the particular company, the industry of which it is a part, or the
securities markets generally.
o The level of risk of the international portfolios will generally be higher
than the level of risk associated with domestic equity funds. Foreign
investments involve risks such as fluctuations in currency exchange rates,
less liquid and more volatile securities markets, unstable political and
economic structures, reduced availability of information, and lack of
uniform financial reporting and regulatory practices such as those that
apply to U.S. issuers. The level of risk of the AST MFS Global Equity
Portfolio, as a global fund that invests in both U.S. and foreign
securities, may be lower than that of many international funds but higher
than that of many domestic equity funds. While none of the international
and global portfolios invest primarily in companies located in developing
countries, each may invest in those companies to some degree, and the risks
of foreign investment may be accentuated by investment in developing
countries.
o As a fund that invests primarily in the securities of smaller foreign
issuers, the AST Founders Passport Portfolio may be subject to a greater
level of risk than the other international funds. Securities of smaller
companies tend to be subject to more abrupt and erratic price movements
than securities of larger companies, in part because they may have limited
product lines, markets, or financial resources.
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Capital Growth Portfolios:
Portfolio: Investment Goal: Primary Investments:
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Janus Small-Cap Growth Capital growth The Portfolio invests primarily in common
stocks of small capitalization companies.
Kemper Small-Cap Growth Maximum capital growth The Portfolio invests primarily in equity
securities of small capitalization
companies.
Lord Abbett Small Cap Value Long-term capital growth The Portfolio invests primarily in equity
securities small capitalization
companies that are believed to be
undervalued.
T. Rowe Price Small Long-term capital growth The Portfolio invests primarily in stocks and equity-related
Company Value securities of small capitalization companies that appear to
be undervalued.
Neuberger Berman Mid-Cap Capital growth The Portfolio invests primarily in common stocks of medium
Growth capitalization companies.
Neuberger Berman Mid-Cap Capital growth The Portfolio invests primarily in common stocks of medium
Value capitalization companies, using a value-oriented investment
approach.
T. Rowe Price Natural Long-term capital growth The Portfolio invests primarily in common stocks of companies
Resources that own or develop natural resources and other basic commodities.
Oppenheimer Large-Cap Capital growth The Portfolio invests primarily in common
stocks of large Growth capitalization growth companies.
MFS Growth Long-term capital growth The Portfolio invests primarily in common stocks and related
and future income securities.
Marsico Capital Growth Capital growth The Portfolio invests primarily in common stocks, with the
majority of the Portfolio's assets in large capitalization
stocks.
JanCap Growth Capital growth The Portfolio invests primarily in common stocks.
Bankers Trust Managed To outperform the S&P 500 The Portfolio invests primarily in common stocks included in
Index 500 Stock Index the S&P 500.
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Principal Investment Strategies:
The AST Janus Small-Cap Growth Portfolio pursues its objective by normally
investing at least 65% of its total assets in the common stocks of small-sized
companies. For purposes of the Portfolio, small-sized companies are those that
have market capitalizations of less than $1.5 billion or annual gross revenues
of less than $500 million. To a lesser extent, the Portfolio may also invest in
stocks of larger companies with potential for capital appreciation.
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 similar selection
procedure.
At least 65% of the AST Kemper Small-Cap Growth 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.
Equity securities include common stocks and securities convertible into or
exchangeable for common stocks, including warrants and rights. The Portfolio
intends to invest primarily in stocks of companies whose earnings per share are
expected by the Sub-advisor to grow faster than the market average ("growth
stocks").
In managing the Portfolio, the Sub-advisor emphasizes stock selection and
fundamental research. The Sub-advisor considers a number of 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 are patterns of increasing
sales growth, 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 may grow rapidly. The Portfolio seeks attractive
areas for investment that arise from factors such as technological advances, new
marketing methods, and changes in the economy and population.
The AST Lord Abbett Small Cap Value Portfolio will seek its objective through
investments primarily in equity securities that are believed to be undervalued
in the marketplace. Typically, in choosing stocks, the Sub-advisor looks for
companies using the following process:
o Quantitative research is performed to evaluate various criteria, including
the price of shares in relation to book value, sales, asset value,
earnings, dividends and cash flow;
o Fundamental research is conducted to assess the dynamics of each company
within its industry and within the company. The Sub-advisor evaluates the
company's business strategies by assessing management's ability to execute
the strategies, and evaluating the adequacy of its financial resources.
Usually, 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 assets in foreign
securities.
The stocks in which the Portfolio generally invests are those which, in the
Sub-advisor's judgment, are selling below their 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 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 if they are expected to help
it attain its objective.
The AST T. Rowe Price Small Company Value Portfolio will invest at least 65% of
its total assets in stocks and equity-related securities of small companies ($1
billion or less in market capitalization). 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 Sub-advisor's research
team seeks to identify companies that appear to be undervalued by various
measures, and may be temporarily out of favor, but have good prospects for
capital appreciation. In selecting investments, the Sub-advisor generally looks
to the following:
(1) Above-average dividend yield (the stock's annual dividend divided by
the stock price) relative to a company's peers or its own historic norm.
(2) Low price/earnings, price/book value or price/cash flow ratios relative
to the S&P 500 Index, the company's peers, or its own historic norm.
(3) Low stock price relative to a company's underlying asset values.
(4) A plan to improve the business through restructuring.
(5) A sound balance sheet and other positive financial characteristics.
The Portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses or re-deploy assets into more promising opportunities. The
Portfolio may on occasion purchase companies with a market cap more than $1
billion.
To pursue its objective, the AST Neuberger Berman Mid-Cap Growth Portfolio
primarily invests in the common stocks of mid-cap companies. Companies with
equity market capitalizations from $300 million to $10 billion at the time of
investment are considered mid-cap companies for purposes of the Portfolio. Some
of the Portfolio's assets may be invested in the securities of large-cap
companies as well as in small-cap companies. The Portfolio seeks to reduce risk
by diversifying among many companies and industries.
The Portfolio is normally managed using a growth-oriented investment approach.
The Sub-advisor looks for fast-growing companies that are in new or rapidly
evolving industries. Factors in identifying these companies may include
above-average growth of earnings or earnings that exceed analysts' expectations.
The Sub-advisor may also look for other characteristics in a company, such as
financial strength, a strong position relative to competitors and a stock price
that is reasonable in light of its growth rate.
The Sub-advisor follows a disciplined selling strategy, and may sell a stock
when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.
To pursue its objective, the AST Neuberger Berman Mid-Cap Value Portfolio
primarily invests in the common stocks of mid-cap companies. Some of the
Portfolio's assets may be invested in the securities of large-cap companies as
well as in small-cap companies. The Portfolio seeks to reduce risk by
diversifying among many companies and industries.
Under the Portfolio's value-oriented investment approach, the Sub-advisor looks
for well-managed companies whose stock prices are undervalued and that may rise
in price when other investors realize their worth. Factors that the Sub-advisor
may use to identify these companies include strong fundamentals, such as a low
price-to-earnings ratio, consistent cash flow, and a sound track record through
all phases of the market cycle. The Sub-advisor may also look for other
characteristics in a company, such as a strong position relative to competitors,
a high level of stock ownership among management, or a recent sharp decline in
stock price that appears to be the result of a short-term market overreaction to
negative news.
The Sub-advisor generally considers selling a stock when it reaches a target
price, when it fails to perform as expected, or when other opportunities appear
more attractive.
The AST T. Rowe Price Natural Resources Portfolio normally invests at least 65%
of its total assets in the common stocks of natural resource companies whose
earnings and tangible assets could benefit from accelerating inflation. The
Portfolio also may invest in growth companies with strong potential for earnings
growth. When selecting stocks, we look for companies that have the ability to
expand production, to maintain superior exploration programs and production
facilities, and the potential to accumulate new resources. Natural resource
companies in which the Portfolio invests generally own or develop energy
sources, precious metals, nonferrous metals, forest products, real estate,
diversified resources and other basic commodities that can be produced and
marketed profitably when both labor costs and prices are rising.
The Portfolio may sell securities for a variety of reasons, such as to secure
gains, limit losses or re-deploy assets into more promising opportunities.
The AST Oppenheimer Large-Cap Growth Portfolio seeks its objective by
emphasizing investments in equity securities issued by established
large-capitalization "growth companies." At least 65% of the Portfolio's assets
normally will be invested in companies that have market capitalizations greater
than $3 billion, and the Portfolio will normally maintain a median market
capitalization greater than $5 billion. For purposes of the Portfolio, equity
securities include common stocks, preferred stocks and convertible securities.
In selecting securities for the Portfolio, the Sub-advisor looks for
high-growth companies that the Sub-advisor believes are able to maintain high
levels of growth. In seeking broad diversification of the Portfolio among
industries and market sectors, the Sub-advisor looks for the characteristics
listed below, although the characteristics used may change over time and may
vary in particular cases. Currently, the Sub-advisor looks for:
o Companies that exhibit above average growth in revenues,
o Companies that exhibit above average growth in earnings, and
o Sustainability of the factors driving revenue and earnings growth.
The AST MFS Growth Portfolio invests, under normal market conditions, at least
80% of its total assets in common stocks and related securities, such as
preferred stocks, convertible securities and depositary receipts, of companies
that the Sub-advisor believes offer better than average prospects for long-term
growth. The Sub-advisor uses a "bottom up," as opposed to "top down," investment
style in managing the Portfolio. This means that securities are selected based
upon fundamental analysis of individual companies by the Sub-advisor.
In managing the Portfolio, the Sub-advisor seeks to purchase securities
of companies that it considers well-run and poised for growth. The Sub-advisor
looks particularly for companies with the following qualities:
o a strong franchise, strong cash flows and a recurring revenue stream
o a strong industry position, where there is potential for high profit
margins or substantial barriers to new entry into the industry
o a strong management with a clearly defined strategy
o new products or services.
The Portfolio may invest up to 30% of its net assets in foreign securities.
The AST Marsico Capital Growth Portfolio will pursue its objective by investing
primarily in common stocks. The Sub-advisor expects that the majority of the
Portfolio's assets will be invested in the common stocks of larger, more
established companies.
In selecting investments for the Portfolio, the Sub-advisor uses an approach
that combines "top down" economic analysis with "bottom up" stock selection. The
"top-down" approach takes into consideration such macro-economic factors as
interest rates, inflation, the regulatory environment, and the global
competitive landscape. In addition, the Sub-advisor examines such factors as the
most attractive global investment opportunities, industry consolidation, and the
sustainability of economic trends. As a result of this "top down" analysis, the
Sub-advisor identifies sectors, industries and companies that should benefit
from the trends the Sub-advisor has observed.
The Sub-advisor then looks for individual companies with earnings growth
potential that may not be recognized by the market at large. In determining
whether a particular company is appropriate for investment by the Portfolio, the
Sub-advisor focuses on a number of different attributes, including the company's
specific market expertise or dominance, its franchise durability and pricing
power, solid fundamentals (e.g., a strong balance sheet, improving returns on
equity, and the ability to generate free cash flow), strong management, and
reasonable valuations in the context of projected growth rates.
The AST JanCap Growth Portfolio will pursue its objective by investing primarily
in common stocks. Common stock investments will be in 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 generally takes a "bottom up" approach to choosing
investments for 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.
The AST Bankers Trust Managed Index 500 Portfolio seeks 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. The S&P 500 is an index of 500 common stocks, most of which trade on
the New York Stock Exchange Inc. (the "NYSE").
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 perform better or worse than the S&P 500. Based on these
criteria, the Sub-advisor determines whether the Portfolio should over-weight,
under-weight or hold a neutral position in the stock relative to the proportion
of the S&P 500 that the stock represents. The majority of the issues held by the
Portfolio will have neutral weightings, but approximately 100 will be over- or
under-weighted 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.
As part of a strategy used to attempt to outperform the S&P 500, the Portfolio
may also invest up to 15% of its total assets in equity securities of companies
not included in the S&P 500.
Principal Risks:
o All of the capital growth portfolios are equity funds, and the primary risk
of each is that the value of the stocks they hold will decline. Stocks can
decline for many reasons, including reasons related to the particular
company, the industry of which it is a part, or the securities markets
generally. These declines can be substantial.
o The risk to which the capital growth portfolios are subject depends in part
on the size of the companies in which the particular portfolio invests.
Securities of smaller companies tend to be subject to more abrupt and
erratic price movements than securities of larger companies, in part
because they may have limited product lines, markets, or financial
resources. Market capitalization, which is the total market value of a
company's outstanding stock, is often used to classify companies based on
size. Therefore, the AST Janus Small-Cap Growth Portfolio, the AST Kemper
Small-Cap Growth Portfolio, the AST Lord Abbett Small Cap Value Portfolio,
and the AST T. Rowe Price Small Company Value Portfolio can be expected to
be subject to the highest degree of risk relative to the other capital
growth funds. The AST Neuberger Berman Mid-Cap Growth Portfolio and the AST
Neuberger Berman Mid-Cap Value Portfolio can be expected to be subject to
somewhat less risk, and the AST Oppenheimer Large-Cap Growth Portfolio, the
AST MFS Growth Portfolio, the AST Marsico Capital Growth Portfolio, the AST
JanCap Growth Portfolio, and the AST Bankers Trust Managed Index 500
Portfolio to somewhat less risk than the mid-cap funds. The AST T. Rowe
Price Natural Resources Portfolio invests in companies of all sizes in
order to take advantage of the opportunities in the natural resources
sector, but generally invests mostly in large and medium-sized companies.
o The AST Janus Small-Cap Growth Portfolio, the AST Kemper Small-Cap Growth
Portfolio, the AST Neuberger Berman Mid-Cap Growth Portfolio, the AST
Oppenheimer Large-Cap Growth Portfolio, the AST MFS Growth Portfolio, the
AST Marsico Capital Growth Portfolio and the AST JanCap Growth Portfolio
generally take a growth approach to investing, while the AST Lord Abbett
Small Cap Value Portfolio, the AST T. Rowe Price Small Company Value
Portfolio and the AST Neuberger Berman Mid-Cap Value Portfolio generally
take a value approach. Value stocks are believed to be selling at prices
lower than what they are actually worth, while growth stocks are those of
companies that are expected to grow at above-average rates. A portfolio
investing primarily in growth stocks will tend to be subject to more risk
than a value fund, although this will not always be the case.
o The AST T. Rowe Price Natural Resources Portfolio is subject to an
additional risk factor because it is less diversified than most equity
funds and could therefore experience sharp price declines when conditions
are unfavorable in the natural resources sector. The rate of earnings
growth of natural resource companies may be irregular because these
companies are strongly affected by natural forces, global economic cycles
and international politics.
<TABLE>
<CAPTION>
Growth and Income Portfolios:
Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
Cohen & Steers Realty Maximize total return The Portfolio invests primarily in equity securities of real
estate companies.
American Century Income & Capital growth and, The Portfolio invests primarily in stocks of large U.S.
Growth secondarily, current income companies selected through quantitative investment techniques.
Lord Abbett Growth and Long term capital growth The Portfolio invests primarily in common stocks that are
Income and income believed to be selling at reasonable prices in relation to
value.
MFS Growth with Income Reasonable current income The Portfolio invests primarily in common stocks and related
and long-term capital securities.
growth and income.
INVESCO Equity Income High current income and, The Portfolio invests primarily in dividend-paying common
secondarily, capital growth stocks that, over a period of years, may also provide capital
appreciation, and to a lesser extent in fixed income securities.
AIM Balanced Capital growth and current The Portfolio normally invests 30-70% of its total assets in
income equity securities and 30-70% in debt securities.
American Century Strategic Capital growth and current The Portfolio normally invests approximately 60% of its
Balanced income assets in equity securities and the remainder in bonds and
other fixed income securities.
T. Rowe Price Asset A high level of total The Portfolio normally invests 50-70% its total assets in
Allocation return equity securities and 30-50% in fixed income securities.
</TABLE>
Principal Investment Strategies:
The AST Cohen & Steers Realty Portfolio pursues its investment objective of
maximizing total return by seeking, with approximately equal emphasis, capital
growth and current income. 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 common stocks, rights or
warrants to purchase common stocks, securities convertible into common stocks
where the conversion feature represents, in the Sub-advisor's view, a
significant element of the securities' value, and 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 real estate or that has at least 50% of its
assets in real estate. The Portfolio may invest up to 10% of its total assets in
securities of foreign real estate companies. Real estate companies may include
real estate investment trusts ("REITs"). REITs pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests.
The AST American Century Income & Growth Portfolio's investment strategy
utilizes quantitative management techniques in a two-step process that draws
heavily on computer technology. In the first step, the Sub-advisor ranks stocks,
primarily the 1,500 largest publicly traded U.S. companies (measured by market
capitalization), from most attractive to least attractive. These rankings are
determined by using a computer model that combines measures of a stock's value
and measures of its growth potential. To measure value, the Sub-advisor uses
ratios of stock price to book value and stock price to cash flow, among others.
To measure growth, the Sub-advisor uses, among others, the rate of growth in a
company's earnings and changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called portfolio
optimization. In portfolio optimization, the Sub-advisor uses a computer to
build a portfolio of stocks from the ranking described earlier that it thinks
will provide the best balance between risk and expected return. The goal is to
create an equity portfolio that provides better returns than the S&P 500 Index
without taking on significant additional risk. The Sub-advisor attempts to
create a dividend yield for the Portfolio that will be greater than that of the
S&P 500.
The AST Lord Abbett Growth and Income Portfolio normally will invest in common
stocks (and securities convertible into common stocks). Typically, in choosing
stocks, the Sub-advisor looks for companies using a three-step process:
o Quantitative research is performed on a universe of large, seasoned, U.S.
and multinational companies to identify which stocks the Sub-advisor
believes represent the best bargains;
o Fundamental research is conducted to assess a company's operating
environment, resources and strategic plans and to determine its prospects
for exceeding the earnings expectations reflected in its stock price.
o Business cycle analysis is used to assess the economic and interest-rate
sensitivity of the Portfolio, helping the Sub-advisor to assess how adding
or deleting stocks changes the Portfolio's overall sensitivity to economic
activity and interest rates.
The Sub-advisor will take a value-oriented approach, in that it will
try to keep the Portfolio's assets invested in securities that are selling at
reasonable prices in relation to their value. In doing so, the Portfolio may
forgo some opportunities for gains when, in the judgment of the Sub-advisor,
they are too risky.
While there is the risk that an investment will never reach what the
Sub-advisor believes is its full value, or may go down in value, the Portfolio's
risk and share price fluctuation (and potential for gain) may be less than many
other stock funds because of the Portfolio's emphasis on large, seasoned company
value stocks. The prices of the common stocks that the Portfolio invests in will
fluctuate.
The AST MFS Growth with Income Portfolio invests, under normal market
conditions, at least 65% of its total assets in common stocks and related
securities, such as preferred stocks, convertible securities and depositary
receipts. The stocks in which the Portfolio invests generally will pay
dividends. While the Portfolio may invest in companies of any size, the
Portfolio generally focuses on companies with larger market capitalizations that
the Sub-advisor believes have sustainable growth prospects and attractive
valuations based on current and expected earnings or cash flow. The Sub-advisor
uses a "bottom up," as opposed to "top down," investment style in managing the
Portfolio. This means that securities are selected based upon fundamental
analysis of individual companies by the Sub-advisor.
The Portfolio may invest up to 20% of its net assets in foreign securities.
The AST INVESCO Equity Income Portfolio seeks to achieve its objective by
investing in securities that will provide a relatively high yield and stable
return and that, over a period of years, may also provide capital appreciation.
The Portfolio normally will invest at least 65% of its assets in dividend-paying
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.
In addition, the Portfolio normally will have some portion of its assets
invested in debt securities, convertible bonds, or preferred stocks.
The AST AIM Balanced Portfolio attempts to meet its objective by investing,
normally, a minimum of 30% and a maximum of 70% of its total assets in equity
securities and a minimum of 30% and a maximum of 70% of its total assets in
non-convertible debt securities. The Portfolio may invest up to 25% of its total
assets in convertible securities. The Portfolio may invest up to 10% of its
total assets in high-yield debt securities rated below investment grade or
deemed to be of comparable quality ("junk bonds"). The Portfolio may also invest
up to 20% of its total assets in foreign securities.
In selecting the percentages of assets to be invested in equity or debt
securities, the Sub-advisor considers such factors as general market and
economic conditions, as well as market, economic and industry trends, yields,
interest rates and changes in fiscal and monetary policies. The Sub-advisor will
primarily purchase equity securities for growth of capital and debt securities
for income purposes. However, the Sub-advisor will focus on companies whose
securities have the potential for both capital appreciation and income
generation. The Sub-advisor considers whether to sell a security when it
believes that the security no longer has that potential.
The Sub-advisor to the AST American Century Strategic Balanced Portfolio intends
to maintain approximately 60% of the Portfolio's assets in equity securities and
the remainder in bonds and other fixed income securities. With the equity
portion of the Portfolio, the Sub-advisor utilizes quantitative management
techniques in a two-step process that draws heavily on computer technology. In
the first step, the Sub-advisor ranks stocks, primarily the 1,500 largest
publicly traded U.S. companies as measured by market capitalization. These
rankings are determined by using a computer model that combines measures of a
stock's value and measures of its growth potential. To measure value, the
Sub-advisor uses ratios of stock price to book value and stock price to cash
flow, among others. To measure growth, the Sub-advisor uses, among others, the
rate of growth in a company's earnings and changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called portfolio
optimization. In portfolio optimization, the Sub-advisor uses a computer to
build a portfolio of stocks from the ranking described earlier that it thinks
will provide the best balance between risk and expected return. The goal is to
create an equity portfolio that provides better returns than the S&P 500 Index
without taking on significant additional risk.
The Sub-advisor intends to maintain approximately 80% of the Portfolio's fixed
income assets in domestic fixed income securities and approximately 20% in
foreign fixed income securities. This percentage will fluctuate and may be
higher or lower depending on the mix the Sub-advisor believes will be most
appropriate for achieving the Portfolio's objectives. The fixed income portion
of the Portfolio is invested in a diversified portfolio of government
securities, corporate fixed income securities, mortgage-backed and asset-backed
securities, and similar securities. The Sub-advisor's strategy is to actively
manage the Portfolio by investing the Portfolio's fixed income assets in sectors
it believes are undervalued (relative to the other sectors) and which represent
better relative long-term investment opportunities.
The Sub-advisor will adjust weighted average portfolio maturity in response to
expected changes in interest rates. Under normal market conditions, the weighted
average maturity of the fixed income portion of the Portfolio will range from 3
to 10 years.
The AST T. Rowe Price Asset Allocation Portfolio normally invests approximately
60% of its total assets in equity securities and 40% in fixed income securities.
This mix may vary over shorter time periods; the equity portion may range
between 50-70% and the fixed income portion between 30-50%.
The Sub-advisor concentrates common stock investments in larger, more
established companies, but the Portfolio may include small and medium-sized
companies with good growth prospects. The Portfolio's exposure to smaller
companies is not expected to be substantial, and will not constitute more than
30% of the equity portion of the Portfolio. Up to 35% of the equity portion may
be invested in foreign (non-U.S. dollar denominated) equity securities. The
fixed income portion of the Portfolio will be allocated among investment grade
securities (50-100% of the fixed income portion); high yield or "junk" bonds (up
to 30%); foreign (non-U.S. dollar denominated) high quality debt securities (up
to 30%); and cash reserves (up to 20%).
Bond investments may include U.S. Treasury and agency issues, corporate debt
securities, mortgage-backed securities (including derivatives such as
collateralized mortgage obligations and stripped mortgage-backed securities) and
asset-backed securities. While the weighted average maturities of each component
of the fixed income portion (i.e., investment grade, high yield, etc.) of the
Portfolio will differ, the weighted average maturity of the fixed income portion
as a whole (except for the cash reserves component) is expected to be in the
range of 7 to 12 years.
The precise mix of equity and fixed income investments will depend on the
Sub-advisor's outlook for the markets. The Portfolio's investments in foreign
equity and debt securities are intended to provide additional diversification,
and the Sub-advisor will normally have at least three different countries
represented in both the foreign equity and foreign debt portions of the
Portfolio.
Securities may be sold for a variety of reasons, such as to effect a change in
asset allocation, to secure gains or limit losses, or to re-deploy assets to
more promising opportunities.
Principal Risks:
o Both equity securities (e.g., stocks) and fixed income securities (e.g.,
bonds) can decline in value, and the primary risk of each of the growth and
income portfolios is that the value of the securities they hold will
decline. The degree of risk to which the growth and income portfolios are
subject is likely to be somewhat less than a portfolio investing
exclusively for capital growth. Nonetheless, the share prices of the growth
and income portfolios can decline substantially.
o The AST Cohen & Steers Realty Portfolio, the AST MFS Growth with Income
Portfolio, the AST American Century Income & Growth Portfolio, and the AST
Lord Abbett Growth and Income Portfolio invest primarily in equity
securities. The AST INVESCO Equity Income Portfolio invests primarily in
equity securities, but will normally invest some of its assets in fixed
income securities. The AST AIM Balanced Portfolio, the AST American Century
Strategic Balanced Portfolio, and the AST T. Rowe Price Asset Allocation
Portfolio generally invest in both equity and fixed income securities. The
values of equity securities tend to fluctuate more widely than the values
of fixed income securities. Therefore, those growth and income portfolios
that invest primarily in equity securities will likely be subject to
somewhat higher risk than those portfolios that invest in both equity and
fixed income securities.
o Each of the Portfolios that makes significant investments in fixed income
securities may invest to some degree in lower-quality fixed income
securities, which are subject to greater risk that the issuer may fail to
make interest and principal payments on the securities when due. Each of
these Portfolios generally invests in intermediate- to long-term fixed
income securities. Fixed income securities with longer maturities are
generally subject to greater risk than fixed income securities with shorter
maturities, in that their values will fluctuate more in response to changes
in market interest rates.
o The AST Cohen & Steers Realty Portfolio is subject to an additional risk
factor because it is less diversified than most equity funds and could
therefore experience sharp price declines when conditions are unfavorable
in the real estate sector. Real estate securities may be subject to risks
similar to those associated with direct ownership of real estate. These
include risks related to economic conditions, heavy cash flow dependency,
overbuilding, extended vacancies of properties, changes in neighborhood
values, and zoning, environmental and housing regulations.
<TABLE>
<CAPTION>
Fixed Income Portfolios:
Portfolio: Investment Goal: Primary Investments:
<S> <C> <C>
T. Rowe Price High current income and The Portfolio invests primarily in high-quality foreign
International Bond capital growth government and corporate bonds.
Federated High Yield High current income The Portfolio invests primarily in lower-quality fixed income
securities.
PIMCO Total Return Bond Maximize total return, The Portfolio invests primarily in higher-quality fixed
consistent with income securities of varying maturities, so that the
preservation of capital Portfolio's expected average duration will be from three to six years.
PIMCO Limited Maturity Bond Maximize total return, The Portfolio invests primarily in higher-quality
fixed consistent with income securities of varying maturities, so that the
preservation of capital Portfolio's expected average duration will be from one to three years.
Money Market Maximize current income The Portfolio invests in high-quality, short-term, U.S.
and maintain high levels dollar-denominated instruments.
of liquidity
</TABLE>
Principal Investment Strategies:
To achieve its objectives, the AST T. Rowe Price International Bond
Portfolio will invest at least 65% of its assets in high-quality, non-U.S.
dollar denominated government and corporate bonds. The Portfolio 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 Sub-advisor believes that the currency risk can be minimized through
hedging.
Although the Portfolio expects to maintain an intermediate-to-long
weighted average maturity, there are no maturity restrictions on the overall
portfolio or on individual securities. While the Portfolio may engage in foreign
currency transactions such as forward foreign currency exchange contracts, the
Portfolio normally does not hedge its foreign currency exposure back to the
dollar. Nor will the Portfolio normally involve more than 50% of its total
assets in hedging Portfolio holdings against other foreign currencies
("cross-hedging"). The Sub-advisor attempts to reduce currency 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 ("junk 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. Up to
20% of the Portfolio's assets may be invested in foreign bonds denominated in
U.S. dollars, including certain emerging market bonds.
The AST Federated High Yield Portfolio will invest at least 65% of its assets in
lower-rated corporate fixed income securities ("junk bonds"). These fixed income
securities may include preferred stocks, convertible securities, bonds,
debentures, notes, equipment lease certificates and equipment trust
certificates. The securities in which the Portfolio invests usually will be
rated below the three highest rating categories of a nationally recognized
rating organization (AAA, AA, or A for Standard & Poor's Corporation ("Standard
& Poor's") and Aaa, Aa or A for Moody's Investors Service, Inc. ("Moody's")) or,
if unrated, are of comparable quality.
There is no lower limit on the rating of securities in which the Portfolio may
invest.
Methods by which the Sub-advisor attempts to reduce the risks involved in
lower-rated securities include:
Credit Research. The Sub-advisor will perform its own credit analysis
in addition to using rating organizations and other sources, and may have
discussions with the issuer's management or other investment analysts regarding
issuers. The Sub-advisor's credit analysis will consider the issuer's financial
soundness, its responsiveness to changing business and market conditions, and
its anticipated cash flow and earnings. In evaluating an issuer, the Sub-advisor
places special emphasis on the estimated current value of the issuer's assets
rather than their historical cost.
Diversification. The Sub-advisor invests in securities of many different
issuers, industries, and economic sectors.
Economic Analysis. The Sub-advisor will analyze current developments and
trends in the economy and in the financial markets.
The AST PIMCO Total Return Bond Portfolio will invest at least 65% of its assets
in the following types of fixed income securities:
(1) securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
(2) corporate debt securities, including convertible securities and
commercial paper;
(3) mortgage and other asset-backed securities;
(4) structured notes, including hybrid or "indexed" securities, and loan
participations;
(5) delayed funding loans and revolving credit securities;
(6) bank certificates of deposit, fixed time deposits and bankers'
acceptances;
(7) repurchase agreements and reverse repurchase agreements;
(8) obligations of foreign governments or their subdivisions, agencies and
instrumentalities; and
(9) obligations of international agencies or supranational entities.
Portfolio holdings will be concentrated in areas of the bond market that the
Sub-advisor believes to be relatively undervalued. In selecting fixed income
securities, the Sub-advisor uses economic forecasting, interest rate
anticipation, credit and call risk analysis, foreign currency exchange rate
forecasting, and other securities 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 management of duration is one of the fundamental tools
used by the Sub-advisor.
The Portfolio will invest in fixed-income securities of varying maturities. The
average portfolio duration of the Portfolio generally will vary within a three-
to six-year time frame based on the Sub-advisor's forecast for interest rates.
The Portfolio can and routinely does invest in certain complex fixed income
securities (including mortgage-backed and asset-backed securities) and engage in
a number of investment practices (including futures, swaps and dollar rolls)
that many other fixed income funds do not utilize. The Portfolio may invest up
to 10% of its assets in fixed income securities that are rated below investment
grade ("junk bonds") (or, if unrated, determined by the Sub-advisor to be of
comparable quality).
The AST PIMCO Limited Maturity Bond Portfolio will invest at least 65% of
its assets in the following types of fixed income securities:
(1) securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities;
(2) corporate debt securities, including convertible securities and
commercial paper;
(3) mortgage and other asset-backed securities;
(4) structured notes, including hybrid or "indexed" securities, and loan
participations;
(5) delayed funding loans and revolving credit securities;
(6) bank certificates of deposit, fixed time deposits and bankers'
acceptances;
(7) repurchase agreements and reverse repurchase agreements;
(8) obligations of foreign governments or their subdivisions, agencies and
instrumentalities; and
(9) obligations of international agencies or supranational entities.
Portfolio holdings will be concentrated in areas of the bond market that the
Sub-advisor believes to be relatively undervalued. In selecting fixed income
securities, the Sub-advisor uses economic forecasting, interest rate
anticipation, credit and call risk analysis, foreign currency exchange rate
forecasting, and other securities 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 management of duration is one of the fundamental tools
used by the Sub-advisor.
The Portfolio will invest in 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 can and routinely does invest in certain complex fixed income
securities (including mortgage-backed and asset-backed securities) and engage in
a number of investment practices (including futures, swaps and dollar rolls)
that many other fixed income funds do not utilize. The Portfolio may invest up
to 10% of its assets in fixed income securities that are rated below investment
grade ("junk bonds") (or, if unrated, determined by the Sub-advisor to be of
comparable quality).
The AST Money Market Portfolio will invest in high-quality, short-term, U.S.
dollar denominated corporate, bank and government obligations. Under the
regulatory requirements applicable to money market funds, the Portfolio must
maintain a weighted average portfolio maturity of not more than 90 days and
invest in securities that have effective maturities of not more than 397 days.
In addition, the Portfolio will limit its investments to those securities that,
in accordance with guidelines adopted by the Directors of the Company, present
minimal credit risks. The Portfolio will not purchase any security (other than a
United States Government security) unless:
(1) if rated by only one nationally recognized statistical rating
organization (such as Moody's and Standard & Poor's), such organization has
rated it with the highest rating assigned to short-term debt securities;
(2) if rated by more than one nationally recognized statistical rating
organization, at least two rating organizations have rated it with the highest
rating assigned to short-term debt securities; or
(3) it is not rated, but is determined to be of comparable quality in
accordance with the guidelines noted above.
Principal Risks:
o The risk of a fund or portfolio investing primarily in fixed income
securities is determined largely by the quality and maturity
characteristics of its portfolio securities. Lower-quality fixed income
securities are subject to greater risk that the company may fail to make
interest and principal payments on the securities when due. Fixed income
securities with longer maturities (or durations) are generally subject to
greater risk than securities with shorter maturities, in that their values
will fluctuate more in response to changes in market interest rates.
o While the AST T. Rowe Price International Bond Portfolio invests primarily
in high-quality fixed income securities, its focus on foreign fixed income
securities and relatively long average maturity will tend to increase its
level of risk. Like foreign equity investments, foreign fixed income
investments involve risks such as fluctuations in currency exchange rates,
unstable political and economic structures, reduced availability of
information, and lack of uniform financial reporting and regulatory
practices such as those that apply to U.S. issuers. The AST T. Rowe Price
International Bond Portfolio can invest to some degree in securities of
issuers in developing countries, and the risks of foreign investing may be
accentuated by these holdings.
o As a fund that invests primarily in lower-quality fixed income securities,
the AST Federated High Yield Portfolio will be subject to a level of risk
that is high relative to other fixed income funds, and which may be
comparable to or higher than some equity funds. Like equity securities,
lower-quality fixed income securities tend to reflect short-term market
developments to a greater extent than higher-quality fixed income
securities. An economic downturn may adversely affect the value of
lower-quality securities, and the trading market for such securities is
generally less liquid than the market for higher-quality securities.
o As portfolios that invest primarily in high-quality fixed income securities
of medium duration, the level of risk to which the AST PIMCO Total Return
Bond Portfolio and AST PIMCO Limited Maturity Bond Portfolio are subject
can be expected to be less than most equity funds. Nonetheless, the fixed
income securities held by these Portfolios can decline in value because of
changes in their quality, in market interest rates, or for other reasons.
Because the average duration of the AST PIMCO Total Return Bond Portfolio
generally will be longer than that of the AST PIMCO Limited Maturity Bond
Portfolio, it is expected that the former Portfolio will be subject to a
greater level of risk. While the complex fixed income securities invested
in and investment practices engaged in by both Portfolios are designed to
increase their return or hedge their investments, these securities and
practices may increase the risk to which the Portfolios are subject.
o The AST Money Market Portfolio seeks to preserve the value of your
investment at $1.00 per share, but it is still possible to lose money by
investing in the Portfolio. An investment in the Portfolio is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. In addition, the income earned by the Portfolio will
fluctuate based on market conditions and other factors.
<PAGE>
Past Performance
The bar chart shows the performance of each Portfolio for each full
calendar year the Portfolio has been in operation. The tables below each bar
chart show each such Portfolio's best and worst quarters during the periods
included in the bar chart, as well as average annual total returns for each
Portfolio since inception. This information may help provide an indication of
each Portfolio's risks by showing changes in performance from year to year and
by comparing the Portfolio's performance with that of a broad-based securities
index. The performance figures do not reflect any charges associated with the
variable insurance contracts through which Portfolio shares are purchased; and
would be lower if they did. All figures assume reinvestment of dividends. Past
performance does not necessarily indicate how a Portfolio will perform in the
future.
AST Founders Passport Portfolio*
_________________________
60.00%
40.00%
16.91% 20.00%
13.93% 10.92%
0.00%
_________________________-20.00%
1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 13.90%, 1st quarter 1998 Down 20.03%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Morgan Stanley Capital
For periods ending International (MSCI) EAFE
12/31/98 Index
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 10.92% 20.00%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since inception 7.86% 8.73%
---------------------- --------------------- ----------------------------
*Prior to October 15, 1996, the AST Founders Passport Portfolio was known
as the Seligman Henderson International Small-Cap Portfolio, and Seligman
Henderson Co. served as Sub-advisor to the Portfolio.
<PAGE>
AST T. Rowe Price International Equity Portfolio
60.00%
14.03% 40.00%
11.09% 14.17% 20.00%
1.36% 0.00%
__________________________________-20.00%
1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 16.94%, 4th quarter 1998 Down 13.58%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- -------------------- -----------------------------
Average annual total Portfolio Index:
returns Morgan Stanley Capital
For periods ending International (MSCI) EAFE
12/31/98 Index
---------------------- -------------------- -----------------------------
---------------------- -------------------- -----------------------------
1 year 14.03% 20.00%
---------------------- -------------------- -----------------------------
---------------------- -------------------- -----------------------------
Since Inception 7.12% 9.16%
---------------------- -------------------- -----------------------------
AST AIM International Equity Portfolio*
__________________________________________________________
60.00%
36.11% 40.00%
18.15% 20.10% 20.00%
7.01% 10.00% 9.65%
-2.97% -8.35% 2.64% 0.00%
_____________________________________________________________-20.00%
1990 1991 1992 1993 1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 23.21%, 4th quarter 1998 Down 19.79%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Morgan Stanley Capital
For periods ending International (MSCI) EAFE
12/31/98 Index
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 20.10% 20.00%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 11.93% 8.75%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 7.12% 9.16%
---------------------- --------------------- ----------------------------
*As of May 4, 1999, A I M Capital Management, Inc. will serve as
Sub-advisor for the AST AIM International Equity Portfolio. Prior to that time,
Putnam Investment Management, Inc. served as Sub-advisor to the Portfolio, which
was known as the AST Putnam International Equity Portfolio.
AST Janus Overseas Growth Portfolio
_________________________
60.00%
40.00%
18.70% 20.00%
16.22%
0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 15.85%, 4th quarter 1998 Down 18.54%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Morgan Stanley Capital
For periods ending International (MSCI) EAFE
12/31/98 Index
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 16.22% 20.00%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since inception 17.45% 10.45%
---------------------- --------------------- ----------------------------
AST American Century International Growth Portfolio
_________________________
60.00%
40.00%
18.68% 20.00%
15.10%
0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 17.90%, 1st quarter 1998 Down 17.66%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Morgan Stanley Capital
For periods ending International (MSCI) EAFE
12/31/98 Index
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 18.68% 20.00%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 16.88% 10.45%
---------------------- --------------------- ----------------------------
AST Janus Small-Cap Growth Portfolio*
____________________________________
60.00%
32.65% 40.00%
20.05% 20.00%
8.40% 6.01% 3.48%
0.00%
____________________________________-20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 31.12%, 4th quarter 1998 Down 23.95%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 3.49% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 13.62% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 13.62% 24.06%
---------------------- --------------------- ----------------------------
*Prior to January 1, 1999, the AST Janus Small-Cap Portfolio was known as
the Founders International Equity Portfolio, and Founders Asset Management LLC
served as Sub-advisor to the Portfolio.
AST Lord Abbett Small Cap Value Portfolio
_________________________
60.00%
40.00%
20.00%
-0.10% 0.00%
___________________________-20.00%
1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 18.22%, 4th quarter 1998 Down 22.12%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year -0.10% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception -0.10% 28.57%
---------------------- --------------------- ----------------------------
AST T. Rowe Price Small Company Value Portfolio
_________________________
60.00%
40.00%
28.80% 20.00%
-10.53% 0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 15.42%, 2nd quarter 1997 Down 19.88%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year -10.53% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 7.35% 30.77%
---------------------- --------------------- ----------------------------
AST Neuberger Berman Mid-Cap Growth Portfolio*
_______________________________
60.00%
40.00%
24.42% 20.65% 20.00%
16.34% 16.68%
0.00%
______________________________-20.00%
1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 28.14%, 4th quarter 1998 Down 20.62%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 20.65% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 18.37% 28.30%
---------------------- --------------------- ----------------------------
*Prior to May 1, 1998, the AST Neuberger Berman Mid-Cap Growth Portfolio
was known as the Berger Capital Growth Portfolio, and Berger Associates, Inc.
served as Sub-advisor to the Portfolio.
AST Neuberger Berman Mid-Cap Value Portfolio*
___________________________________
60.00%
40.00%
26.13% 26.42% 20.00%
11.53%
- -6.95% -2.33% 0.00%
___________________________________ -20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 15.95%, 4th quarter 1998 Down 14.02%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year -2.33% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 10.08% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 10.31% 22.62%
---------------------- --------------------- ----------------------------
*Prior to May 1, 1998, the AST Neuberger Berman Mid-Cap Value Portfolio was
known as the Federated Utility Income Portfolio, and Federated Investment
Counseling served as Sub-advisor to the Portfolio.
AST T. Rowe Price Natural Resources Portfolio
_________________________
60.00%
30.74% 40.00%
20.00%
11.83%
-3.39% 0.00%
_________________________-20.00%
1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 13.45%, 3rd quarter 1997 Down 14.04%, 4th quarter 1997
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year -11.83% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 7.95% 29.29%
---------------------- --------------------- ----------------------------
AST Oppenheimer Large-Cap Growth Portfolio*
60.00%
27.34% 40.00%
20.00%
14.83%
0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 24.19%, 4th quarter 1998 Down 14.56%, 4th quarter 1997
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 27.34% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 19.45% 28.90%
---------------------- --------------------- ----------------------------
*Prior to December 31, 1998, the AST Oppenheimer Large-Cap Growth Portfolio
was known as the Robertson Stephens Value + Growth Portfolio, and Robertson
Stephens & Company served as Sub-advisor to the Portfolio.
AST Marsico Capital Growth Portfolio
60.00%
41.59%
40.00%
20.00%
0.00%
_________________________-20.00%
1998
------------------------------------- -------------------------------------
Best Quarter Worst Quarter
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Up 23.37%, 4th quarter 1998 Down 12.80%, 3rd quarter 1998
------------------------------------- -------------------------------------
----------------------- --------------------- -----------------------------
Average annual total Portfolio Index:
returns for periods ending Standard & Poors 500 Index
12/31/98
---------------------------- --------------------- ------------------------
---------------------------- --------------------- ------------------------
1 year 41.59% 28.57%
---------------------------- --------------------- ------------------------
---------------------------- --------------------- ------------------------
Since Inception 40.69% 31.86%
---------------------------- --------------------- ------------------------
<PAGE>
AST JanCap Growth Portfolio
_________________________________________________
68.26% 60.00%
40.00%
11.87% 37.98% 28.66% 20.00%
28.36%
-4.51% 0.00%
________________________________________________-20.00%
1993 1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 32.62%, 4th quarter 1998 Down 5.95%, 2nd quarter 1994
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 68.26% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 29.63% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 26.80% 21.88%
---------------------- --------------------- ----------------------------
AST Banker Trust Enhanced 500 Portfolio
_________________________
60.00%
40.00%
27.90% 20.00%
0.00%
_________________________-20.00%
1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 21.58%, 4th quarter 1998 Down 10.09%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 27.90% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 27.81% 28.57%
---------------------- --------------------- ----------------------------
AST COHEN & STEERS REALTY PORTFOLIO
_________________________
60.00%
40.00%
20.00%
0.00%
-16.00%
_________________________-20.00%
1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up -0.71%, 4th quarter 1998 Down 10.76%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns NAREIT Equity REIT Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year -16.00% -17.50%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception -15.96% -17.50%
---------------------- --------------------- ----------------------------
AST American Century Income & Growth Portfolio*
60.00%
40.00%
22.30% 12.27% 20.00%
0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 16.72%, 4th quarter 1998 Down 11.30%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 12.27% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 17.18% 30.77%
---------------------- --------------------- ----------------------------
*As of May 4, 1999, American Century Investment Management, Inc. will serve
as Sub-advisor for the AST American Century Income & Growth Portfolio. Prior to
that time, Putnam Investment Management, Inc. served as Sub-advisor to the
Portfolio, which was known as the AST Putnam Value Growth and Income Portfolio.
AST Lord Abbett Growth and Income Portfolio
_________________________________________________
60.00%
12.48% 40.00%
13.69% 28.91% 23.92% 20.00%
18.56%
2.22% 0.00%
________________________________________________-20.00%
1993 1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 16.94%, 4th quarter 1998 Down 12.26%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 12.48% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 16.84% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 15.71% 20.49%
---------------------- --------------------- ----------------------------
AST INVESCO Equity Income Portfolio
_________________________________________________
60.00%
40.00%
30.07% 23.33% 20.00%
17.09% 13.34%
-2.50% 0.00%
________________________________________________-20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 12.32%, 4th quarter 1998 Down 8.68%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 13.34% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 15.74% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 15.74% 24.06%
---------------------- --------------------- ----------------------------
AST AIM Balanced Portfolio*
________________________________________________ 60.00%
40.00%
22.60% 26.42% 20.00%
11.23% 12.86%
0.09% 0.00%
________________________________________________-20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 11.88%, 4th quarter 1998 Down 7.13%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Standard & Poors 500 Index
For periods ending
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 12.86% 28.57%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 12.75% 24.06%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 12.26% 22.62%
---------------------- --------------------- ----------------------------
*As of May 4, 1999, A I M Capital Management, Inc. will serve as
Sub-advisor for the AST AIM Balanced Portfolio. From October 15, 1996 until May
3, 1999, Putnam Investment Management, Inc. served as Sub-advisor to the
Portfolio, which was known as the AST Putnam International Equity Portfolio.
Prior to October 15, 1996, the Portfolio was known as the AST Phoenix Balanced
Asset Portfolio and Phoenix Investment Counsel, Inc. served as Sub-advisor.
AST AMERICAN CENTURY STRATEGIC BALANCED PORTFOLIO
_________________________
60.00%
40.00%
21.29% 20.00%
13.40%
0.00%
_________________________-20.00%
1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 14.12%, 4th quarter 1998 Down 6.56%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Blended Index (60%
For periods ending Standard & Poors 500, 40%
12/31/98 Lehman Brothers Government/
Corporate Index)
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 21.29% 21.35%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 17.28% 22.47%
---------------------- --------------------- ----------------------------
AST T. Rowe Price Asset Allocation Portfolio
_________________________________________________
60.00%
40.00%
23.36% 18.40% 18.36% 20.00%
12.14%
-0.60% 0.00%
________________________________________________-20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 11.92%, 4th quarter 1998 Down 4.58%, 3rd quarter 1998
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Blended Index (60%
For periods ending Standard & Poors 500, 40%
12/31/98 Lehman Brothers Government/
Corporate Index)
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 18.36% 21.35%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 14.24% 17.28%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 14.24% 17.28%
---------------------- --------------------- ----------------------------
AST T. Rowe Price Interational Bond Portfolio*
_________________________________________________
60.00%
14.72% 40.00%
11.10% 20.00%
5.98%
-3.42% 0.00%
________________________________________________-20.00%
1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 6.31%, 4th quarter 1998 Down 5.43%, 1st quarter 1997
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns J.P. Morgan Non-U.S.
For periods ending Government Bond Index
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 14.72% 18.31%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 5.13% 9.06%
---------------------- --------------------- ----------------------------
*Prior to May 1, 1996, the AST T. Rowe Price International Bond Portfolio
was known as the AST Scudder International Bond Portfolio, and Scudder, Stevens
& Clark, Inc. served as Sub-advisor to the Portfolio.
AST Federated High Yield Bond Portfolio
_________________________________________________
60.00%
40.00%
19.57% 20.00%
13.58% 13.58%
-3.10% 2.61% 0.00%
________________________________________________-20.00%
1994 1995 1996 1997 1998
-------------------------------------- ------------------------------------
Best Quarter Worst Quarter
-------------------------------------- ------------------------------------
-------------------------------------- ------------------------------------
Up 5.73%, 1st quarter 1995 Down 4.21%, 3rd quarter 1998
-------------------------------------- ------------------------------------
--------------------- --------------------- -------------------------------
Average annual total Portfolio Index:
returns Merrill Lynch High Yield Index
For periods ending
12/31/98
--------------------- --------------------- -------------------------------
--------------------- --------------------- -------------------------------
1 year 2.61% 3.86%
--------------------- --------------------- -------------------------------
--------------------- --------------------- -------------------------------
5 year 8.94% 9.30%
--------------------- --------------------- -------------------------------
--------------------- --------------------- -------------------------------
Since Inception 8.94% 9.30%
--------------------- --------------------- -------------------------------
AST PIMCO Total Return Bond Portfolio
_________________________________________________
60.00%
40.00%
18.78% 9.87% 9.46% 20.00%
3.42%
-2.40% 0.00%
________________________________________________-20.00%
1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 5.07%, 3rd quarter 1998 Down 2.54%, 1st quarter 1996
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns LB
For periods ending Aggregate Index
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 9.46% 8.69%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
5 year 7.58% 7.26%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 7.58% 7.26%
---------------------- --------------------- ----------------------------
AST PIMCO Limited Maturity Bond Portfolio
________________________________________
60.00%
40.00%
20.00%
7.46% 5.72%
3.90% 0.00%
________________________________________-20.00%
1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 2.95%, 4th quarter 1998 Down 0.52%, 1st quarter 1996
------------------------------------- -----------------------------------
---------------------- --------------------- ----------------------------
Average annual total Portfolio Index:
returns Merrill Lynch 1-3 Year
For periods ending Index
12/31/98
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
1 year 5.72% 7.00%
---------------------- --------------------- ----------------------------
---------------------- --------------------- ----------------------------
Since Inception 5.94% 6.95%
---------------------- --------------------- ----------------------------
AST Money Market Portfolio
_________________________________________________
60.00%
40.00%
20.00%
3.75% 5.05% 5.08% 5.18% 5.14%
2.55% 0.00%
________________________________________________-20.00%
1993 1994 1995 1996 1997 1998
------------------------------------- -----------------------------------
Best Quarter Worst Quarter
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
Up 1.38%, 2nd quarter 1995 Down 0.62%, 2nd quarter 1993
------------------------------------- -----------------------------------
------------------------------------- -----------------------------------
7-day yield (as of 12/31/98) 4.78%
------------------------------------- -----------------------------------
<PAGE>
FEES AND EXPENSES OF THE PORTFOLIOS: The table below describes the fees and
expenses that you may pay if you buy and hold shares of the Portfolios. Unless
otherwise indicated, the expenses shown below are for the year ending December
31, 1998.
SHAREHOLDER TRANSACTION EXPENSES (fees paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases NONE*
Maximum Deferred Sales Charge (Load) NONE*
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE*
Redemption Fees NONE*
Exchange Fee NONE*
* Because shares of the Portfolios may be purchased through variable insurance
products, the prospectus of the relevant product should be carefully reviewed
for information on the charges and expenses of those products. This table does
not reflect any such charges.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Portfolio
assets, in %):
Management Estimated Other Total Annual Fee Waivers Net Annual
Fees Distribution Expenses Portfolio and Expense Fund
and Operating Reimbursement(6) Operating
Service Expenses Expenses
Portfolio: (12b-1)
Fees(5)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AST Founders Passport 1.00 [insert] 0.30 1.30 N/A 1.30
AST T. Rowe Price International 1.00 [insert] 0.25 1.25 N/A 1.25
Equity
AST AIM International Equity 0.87 [insert] 0.26 1.13 N/A 1.13
AST Janus Overseas Growth 1.00 [insert] 0.27 1.27 N/A 1.27
AST American Century International 1.00 [insert] 0.65 1.65 N/A 1.65
Growth
AST Janus Small-Cap Growth 0.90 [insert] 0.22 1.12 N/A 1.12
AST Kemper Small-Cap Growth(1) 0.95 [insert] 0.60 1.55 0.20 1.35
AST Lord Abbett Small Cap Value 0.95 [insert] 0.36 1.31 N/A 1.31
AST T. Rowe Price Small Company 0.90 [insert] 0.21 1.11 N/A 1.11
Value
AST Neuberger Berman Mid-Cap 0.90 [insert] 0.17 1.07 N/A 1.07
Growth(2)
AST Neuberger Berman Mid-Cap 0.90 [insert] 0.15 1.05 N/A 1.05
Value(3)
AST T. Rowe Price Natural 0.90 [insert] 0.26 1.16 N/A 1.16
Resources
AST Oppenheimer Large-Cap Growth(4) 0.90 [insert] 0.22 1.12 N/A 1.12
AST Marsico Capital Growth 0.90 [insert] 0.21 1.11 N/A 1.11
AST JanCap Growth 0.90 [insert] 0.14 1.04 0.02 1.02
AST Bankers Trust Managed Index 500 0.60 [insert] 0.26 0.86 0.06 0.80
AST Cohen & Steers Realty 1.00 [insert] 0.30 1.30 N/A 1.30
AST American Century Income & 0.75 [insert] 0.25 1.00 N/A 1.00
Growth
AST Lord Abbett Growth and Income 0.75 [insert] 0.16 0.91 N/A 0.91
AST INVESCO Equity Income 0.75 [insert] 0.18 0.93 N/A 0.93
AST AIM Balanced 0.74 [insert] 0.26 1.00 N/A 1.00
AST American Century Strategic 0.85 [insert] 0.28 1.13 N/A 1.13
Balanced
AST T. Rowe Price Asset Allocation 0.85 [insert] 0.24 1.09 N/A 1.09
AST T. Rowe Price International 0.80 [insert] 0.31 1.11 N/A 1.11
Bond
AST Federated High Yield 0.75 [insert] 0.20 0.95 N/A 0.95
AST PIMCO Total Return Bond 0.65 [insert] 0.18 0.83 N/A 0.83
AST PIMCO Limited Maturity Bond 0.65 [insert] 0.21 0.86 N/A 0.86
AST Money Market 0.50 [insert] 0.16 0.66 0.06 0.60
</TABLE>
(1) This Portfolio commenced operations in January 1999. "Other expenses" shown
are based on estimated amounts for the fiscal year ending December 31, 1999.
(2) 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.
(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 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.
(5) As discussed below under "Management of the Trust - Fees and Expenses, the
Trustees adopted a Distribution Plan (the "Distribution Plan") under Rule 12b-1
to permit an affiliate of the Trust's Investment Manager to receive brokerage
commissions in connection with purchases and sales of securities held by the
Portfolios, and to use these commissions to promote the sale of shares of the
Portfolio. While the brokerage commission rates and amounts paid by the various
Portfolios are not expected to increase as a result of the Distribution Plan, ,
the staff of the Securities and Exchange Commission recently takes the position
that commission amounts received under the Distribution Plan should be reflected
in the expenses of the Funds. The Distribution Fee estimates are derived from
data regarding each Portfolio's brokerage transactions, and the proportions of
such transactions directed to selling dealers, for the period ended June 30,
1999. However, it is not possible to determine with accuracy actual amounts that
will be received under the Distribution Plan. Such amounts will vary based upon
the level of a Portfolio's brokerage activity, the proportion of such activity
directed under the Distribution Plan, and other factors.
(6) The Investment Manager has agreed to reimburse and/or waive fees for certain
Portfolios. The caption "Total Annual Fund Operating Expenses" reflects the
Portfolios' fees and expenses before such waivers and reimbursements, while the
caption "Net Annual Fund Operating Expenses" reflects the effect of such waivers
and reimbursements.
<PAGE>
EXPENSE EXAMPLES:
This example is intended to help you compare the cost of investing in
the Portfolios with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time
periods indicated. The Example also assumes that your investment has a 5% return
each year, that the Portfolios' total operating expenses remain the same, and
that any expense waivers and reimbursements remain in effect only for the
periods during which they are binding. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
After:
Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
- --------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
AST Founders Passport $132 $412 $713 $1568
AST T. Rowe Price International Equity 127 397 686 1511
AST AIM International Equity 115 359 622 1375
AST Janus Overseas Growth 129 403 697 1534
AST American Century International Growth 168 520 897 1955
AST Janus Small-Cap Growth 114 356 617 1363
AST Kemper Small-Cap Growth 137 470 N/A N/A
AST Lord Abbett Small Cap Value 133 415 718 1579
AST T. Rowe Price Small Company 113 353 612 1352
AST Neuberger Berman Mid-Cap Growth 109 340 590 1306
AST Neuberger Berman Mid-Cap Value 107 334 579 1283
AST T. Rowe Price Natural Resources 118 368 638 1409
AST Oppenheimer Large-Cap Growth 114 356 617 1363
AST Marsico Capital Growth 113 353 612 1352
AST JanCap Growth 104 329 572 1269
AST Bankers Trust Managed Index 500 82 268 471 1055
AST Cohen & Steers Realty 132 412 713 1568
AST American Century Income & Growth 102 318 552 1225
AST Lord Abbett Growth and Income 93 290 504 1120
AST INVESCO Equity Income 95 296 515 1143
AST AIM Balanced 102 318 552 1225
AST American Century Strategic Balanced 115 359 622 1375
AST T. Rowe Price Asset Allocation 111 347 601 1329
AST T. Rowe Price International Bond 113 353 612 1352
AST Federated High Yield 97 303 526 1166
AST PIMCO Total Return Bond 85 265 460 1025
AST PIMCO Limited Maturity Bond 88 274 477 1061
AST Money Market 61 203 357 806
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES:
The investment objective, policies and limitations for each of the
Portfolios are described below. While certain policies apply to all Portfolios,
generally each Portfolio has a different investment objective and investment
focus. As a result, the risks, opportunities and returns of investing in each
Portfolio will differ. The investment objectives and policies of the Portfolios
generally are not fundamental policies and may be changed by the Trustees
without shareholder approval.
There can be no assurance that the investment objective of any
Portfolio will be achieved. Risks relating to certain types of securities and
instruments in which the Portfolios may invest are described in this Prospectus
under "Certain Risk Factors and Investment Methods."
If approved by the Trustees, the Trust may add more Portfolios and may
cease to offer any existing Portfolios in the future.
<PAGE>
AST FOUNDERS PASSPORT PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
To achieve its objective, the Portfolio normally invests primarily in
securities issued by foreign companies that 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.
The Sub-advisor looks for companies whose fundamental strengths indicate
potential for growth in earnings per share. The Sub-advisor generally takes a
"bottom up" approach to building the Portfolio, searching for individual
companies that demonstrate the best potential for significant earnings growth,
rather than choose investments based on broader economic characteristics of
countries or industries.
As discussed below, foreign securities are generally considered to
involve more risk than those of U.S. companies, and securities of smaller
companies are generally considered to be riskier than those of larger companies.
Therefore, because the Portfolio's investment focus is on securities of small
and medium-sized foreign companies, the risk of loss and share price fluctuation
of this Portfolio likely will be high relative to most of the other Portfolios
of the Trust and popular market averages.
Foreign Securities. For purposes of the Portfolio, the term "foreign
securities" refers to securities of issuers, that, in the judgment of the
Sub-advisor, have their principal business activities outside of the United
States, and may include American Depositary Receipts. 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
(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. The foreign securities in which the Portfolio will
invest typically will be traded on the applicable country's principal stock
exchange but may also be traded on regional exchanges or over-the-counter.
Investments in foreign securities involve different risks than U.S.
investments, including fluctuations in currency exchange rates, unstable
political and economic structures, reduced availability of public information,
and lack of uniform financial reporting and regulatory practices such as those
that apply to U.S. issuers. Foreign investments of the Portfolio may include
securities issued by companies located in developing countries. Developing
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
Portfolio is permitted to use forward foreign currency contracts in connection
with the purchase or sale of a specific security or for hedging purposes.
For an additional discussion of the risks involved in foreign
securities, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Small and Medium-Sized Companies. Investments in small and medium-sized
companies involve greater risk than is customarily associated with more
established companies. Generally, small and medium-sized companies are still in
the developing stages of their life cycles and are attempting to achieve rapid
growth in both sales and earnings. While these companies often have growth rates
that exceed those of large companies, 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 a limited market and may be subject to more abrupt or erratic movements
in price.
Other Investments:
In addition to investing in common stocks, the Portfolio may invest in
other types of securities and may engage in certain investment practices. 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 at the time of purchase. Convertible securities and preferred
stocks purchased by the Portfolio may be rated in medium and lower categories by
Moody's or S&P, but will not be rated lower than B. The Portfolio may also
invest in unrated convertible securities and preferred stocks if the Sub-advisor
believes that the financial condition of the issuer or the terms of the
securities limits risk to a level similar to that of securities rated B or
above.
In addition, the Portfolio may enter into stock index, interest rate
and foreign currency futures contracts (or options thereon) for hedging
purposes. The Portfolio may write covered call options on any or all of its
portfolio securities as the Sub-advisor considers appropriate. The Portfolio
also may purchase options on securities and stock indices for hedging purposes.
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 more information on these securities and investment practices and
their risks, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. Up to 100% of the assets of the Portfolio may be
invested temporarily in cash or cash equivalents if the Sub-advisor determines
that it would be appropriate for purposes of increasing liquidity or preserving
capital in light of market or economic conditions. Temporary investments may
include U.S. government obligations, commercial paper, bank obligations, and
repurchase agreements. While the Portfolio is in a defensive position, the
opportunity to achieve its investment objective of capital growth will be
limited.
<PAGE>
AST T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek total
return 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.
Principal Investment Policies and Risks:
The Sub-advisor expects to invest substantially all of the Portfolio's
assets (with a minimum of 65%) in established foreign companies. Geographic
diversification will be wide, including both developed and developing countries,
and there will normally be at least three different countries represented in the
Portfolio. Stocks can be purchased without regard to a company's market
capitalization, but the Sub-advisor's focus typically will be on large and, to a
lesser extent, medium-sized companies. Investment in foreign companies may be
made through American Depositary Receipts (ADRs) and the securities of foreign
investment funds or trusts (including passive foreign investment companies).
The Portfolio will invest in stocks that have the potential for growth
of capital or income or both. Stocks are selected by using a "bottom-up"
approach (an approach based on the Sub-advisor's fundamental research on
particular companies) in an effort to identify companies capable of achieving
and sustaining above-average long-term earnings growth. The Sub-advisor seeks to
purchase stocks at reasonable prices in relation to anticipated earnings, cash
flow or book value. Valuation factors often influence the Sub-advisor's
allocations among large-, mid-, and small-cap companies.
While bottom-up stock selection is the focus of its decision making,
the Sub-advisor also invests with an awareness of the global economic backdrop
and its outlook for individual companies. Country allocation is driven largely
by stock selection, though the Sub-advisor may limit investments in markets that
appear to have poor overall prospects.
In selecting stocks, the Sub-advisor generally favors companies with
one or more of the following characteristics:
o leading market position;
o attractive business niche;
o strong franchise or natural monopoly;
o technological leadership or proprietary advantages;
o seasoned management;
o earnings growth and cash flow sufficient to support growing dividends; and o
healthy balance sheet with relatively low debt.
As with all stock funds, the Portfolio's share price can fall because
of weakness in one or more securities markets, particular industries or specific
holdings. As a stock fund investing primarily in foreign securities, the
Portfolio may be subject to greater risk of loss and price fluctuation than
domestic funds. The risks of foreign investing, which are described in more
detail below under "Certain Risk Factors and Investment Methods," include
varying stages of economic and political development of foreign countries,
differing regulatory and accounting standards in non-U.S. markets, and higher
transaction costs. In addition, the Portfolio's investments in foreign
securities will be subject to the risks of currency fluctuations, in which a
decline in the value of a foreign currency versus the U.S. dollar can reduce the
dollar value of securities denominated in that currency. While the Portfolio may
engage in forward foreign currency exchange contracts and futures and options on
foreign currencies, the Portfolio does not engage in extensive currency hedging
under normal conditions. To the extent that the Portfolio has investments in
developing countries, the risks of foreign investing will be accentuated.
Other Investments:
In addition to common stocks, the Portfolio may also purchase a variety
of other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as investment grade corporate and governmental
debt securities, when considered consistent with the Portfolio's investment
objectives and program. The Portfolio may enter into stock index or currency
futures contracts (or options thereon) for hedging purposes or to provide an
efficient means of regulating the Portfolio's exposure to the equity markets.
The Portfolio may write covered call options and purchase put and call options
on foreign currencies, securities, and stock indices. As part of its investment
program and to maintain greater flexibility, the Portfolio may invest up to 10%
of its total assets in hybrid instruments, which combine the characteristics of
futures, options and securities. For additional information about these
investments and their risks, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Temporary Investments. 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.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective will be limited. The Portfolio's cash reserves may be
invested in high-quality domestic and foreign money market instruments. In
addition to enabling the Portfolio to take defensive positions, cash reserves
also provide flexibility in meeting redemptions and paying expenses.
<PAGE>
AST AIM INTERNATIONAL EQUITY PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Objectives and Risks:
The Portfolio seeks to meet its investment objective by investing,
normally, at least 70% of its assets in marketable equity securities of foreign
companies that are listed on a recognized foreign securities exchange or traded
in a foreign over-the-counter market. The Portfolio will normally invest in a
diversified portfolio that includes companies located in at least four countries
outside the United States, emphasizing investment in companies in the developed
countries of Western Europe and the Pacific Basin. The Sub-advisor does not
intend to invest more than 20% of the Portfolio's total assets in companies
located in developing countries (i.e., those that are in the initial stages of
their industrial cycles).
The Sub-advisor focuses on companies that have experienced
above-average, long-term growth in earnings and have strong prospects for future
growth. In selecting countries in which the Portfolio will invest, the
Sub-advisor also considers such factors as the prospect for relative economic
growth among countries or regions, economic or political conditions, currency
exchange fluctuations, tax considerations and the liquidity of a particular
security. The Sub-advisor considers whether to sell a particular security when
any of those factors materially changes.
As with any equity fund, the fundamental risk associated with the
Portfolio is the risk that the value of the securities it holds might decrease.
The prices of equity securities change in response to many factors, including
the historical and prospective earnings of the issuer, the value of its assets,
general economic conditions, interest rates, investor perceptions and market
liquidity.
As a fund that invests primarily in the securities of foreign issuers,
the risk and degree of share price fluctuation of the Portfolio may be greater
than a fund investing primarily in domestic securities. The risks of investing
in foreign securities, which are described in more detail below under "Certain
Risk Factors and Investment Methods," include political and economic conditions
and instability in foreign countries, less available information about foreign
companies, lack of strict financial and accounting controls and standards, less
liquid and more volatile securities markets, and fluctuations in currency
exchange rates. While the Portfolio may engage in transactions intended to hedge
its exposure to fluctuations in foreign currencies, it does not normally do so.
To the extent the Portfolio invests in securities of issuers in developing
countries, the Portfolio may be subject to even greater levels of risk and share
price fluctuation. Transaction costs are often higher in developing countries
and there may be delays in settlement of transactions.
Other Investments:
The Portfolio may invest up to 20% of its total assets in debt or
preferred equity securities exchangeable for or convertible into marketable
equity securities of foreign companies. In addition, the Portfolio may regularly
invest up to 20% of its total assets in high-grade short-term debt securities,
including U.S. Government obligations, investment grade corporate bonds or
taxable municipal securities, whether denominated in U.S. dollars or foreign
currencies. The Portfolio also may purchase and write (sell) covered call and
put options on securities and stock indices. The Portfolio may also purchase and
sell stock and interest rate futures contracts and options on these futures
contracts. The purpose of these transactions is to hedge against changes in the
market value of the Portfolio's portfolio securities caused by changing interest
rates and market conditions, and to close out or offset existing positions in
options or futures contracts. The Portfolio may from time to time make short
sales "against the box."
Additional information about convertible securities, options, futures
contracts and other investments that the Portfolio may make is included in this
Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. In addition to regularly investing up to 20% of
its total assets in short-term debt securities as noted above, the Portfolio may
hold all or a significant portion of its assets in cash, money market
instruments, bonds or other debt securities in anticipation of or in response to
adverse market conditions or for cash management purposes. While the Portfolio
is in such a defensive position, the opportunity to achieve its investment
objective of capital growth may be limited.
<PAGE>
AST JANUS OVERSEAS GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital.
Principal Investment Policies and Risks:
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 stocks selected for their growth
potential. The Sub-advisor generally takes a "bottom up" approach to choosing
investments for 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 where the companies are organized or where
they primarily conduct business. 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 similar selection
procedure. Current income is not a significant factor in choosing investments,
and any income realized by the Portfolio will be incidental to its objective.
As with any common stock fund, the fundamental risk associated with the
Portfolio 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. As a fund
that invests primarily in the securities of foreign issuers, the risk associated
with the Portfolio may be greater than a fund investing primarily in domestic
securities. For a further discussion of the risks involved in investing in
foreign securities, see this Prospectus under "Certain Risk Factors and
Investment Methods." In addition, the Portfolio may invest to some degree in
smaller or newer issuers, which are more likely to realize substantial growth as
well as suffer significant losses than larger or more established issuers.
The Portfolio generally intends to purchase securities for long-term
investment rather than short-term gains. However, short-term transactions may
occur as the result of liquidity needs, securities having reached a desired
price or yield, 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 the investment was made. 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.
Special Situations. 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
increase in value due to a specific development with respect to that issuer.
Developments creating a special situation might include 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.
Other Investments:
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 is subject to the following
percentage limitations on investing in certain types of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
In addition, the Portfolio may invest in the following types of securities and
engage in the following investment techniques:
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 income. 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.
Index/structured Securities. 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 the types of securities and instruments other
than common stocks in which the Portfolio may invest and their risks, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. 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. The Portfolio's cash and similar investments
may include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the
Portfolio is in a defensive position, the opportunity to achieve its investment
objective of long-term growth of capital will be limited.
<PAGE>
AST AMERICAN CENTURY INTERNATIONAL GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
The Portfolio will seek to achieve its investment objective by
investing primarily in equity securities of international companies that the
Sub-advisor believes will increase in value over time. The Sub-advisor uses a
growth investment strategy it developed that looks for companies with earnings
and revenue growth. Ideally, the Sub-advisor looks for companies whose earnings
and revenues are not only growing, but are growing at an accelerating pace.
Accelerating growth is shown, for example, by growth that is faster this quarter
than last or faster this year than the year before. For purposes of the
Portfolio, equity securities include common stocks, preferred stocks and
convertible securities.
The Sub-advisor tracks financial information for thousands of companies
to research and select the stocks it believes will be able to sustain
accelerating growth. This strategy is based on the premise that, over the long
term, the stocks of companies with accelerating earnings and revenues have a
greater-than-average chance to increase in value.
The Sub-advisor recognizes that, in addition to locating strong
companies with accelerating earnings, the allocation of assets among different
countries and regions also is an important factor in managing an international
portfolio. For this reason, the Sub-advisor will 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.
Under normal conditions, the Portfolio will invest at least 65% of its assets in
equity securities of issuers from at least three countries outside of the United
States. In order to maintain investment flexibility, the Portfolio has not
otherwise established geographic requirements for asset distribution.
While the Portfolio's focus will be on issuers in developed markets,
the Sub-advisor expects to invest to some degree in issuers in developing
countries. The Portfolio may make foreign investments either directly in foreign
securities, or indirectly by purchasing depositary receipts. Securities
purchased in foreign markets may either be traded on foreign securities
exchanges or in the over-the-counter markets.
As with all stocks, the value of the stocks held by the Portfolio can
decrease as well as increase. As a fund investing primarily in equity securities
of foreign issuers, the Portfolio may be subject to a level of risk and share
price fluctuation higher than most funds that invest primarily in domestic
equities. Foreign companies may be subject to greater economic risks than
domestic companies, and foreign securities are subject to certain risks relating
to political, regulatory and market structures and events that domestic
securities are not subject to. To the extent the Portfolio invests in securities
of issuers in developing counties, the Portfolio may be subject to even greater
levels of risk and share price fluctuation.
Other Investments:
Securities of U.S. issuers may be included in the Portfolio from time
to time. The Portfolio also may invest in 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. The Portfolio may make short sales "against the box."
Forward Currency Exchange Contracts. As a fund investing primarily in
foreign securities, the value of the Portfolio will be affected by changes in
the exchange rates between foreign currencies and the U.S. dollar. To protect
against adverse movements in exchange rates, the Portfolio may, for hedging
purposes only, enter into forward foreign currency exchange contracts. The
Portfolio may enter into a forward contract to "lock-in" an exchange rate for a
specific purchase or sale of a security. Less frequently, the Portfolio may
enter into a forward contract to seek to protect its holdings in a particular
currency from a decline in that currency. 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
contracts will be successful.
Indirect Foreign Investments. The Portfolio may invest up to 10% of its
assets in certain foreign countries indirectly through investment funds and
registered investment companies that invest in those countries. If the Portfolio
invests in investment companies, it will bear its proportionate share of the
costs incurred by such companies, including any investment advisory fees.
Additional information about the securities that the Portfolio may
invest in and their risks is included below under "Certain Risk Factors and
Investment Methods."
Temporary Investments. 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. While the Portfolio is in a
defensive position, the ability to achieve its investment objective of capital
growth may be limited.
<PAGE>
AST MFS GLOBAL EQUITY PORTFOLIO
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
The Portfolio invests, under normal market conditions, at least 65% of
its total assets in common stocks and related securities, such as preferred
stock, convertible securities and depositary receipts, of U.S. and foreign
issuers (including issuers in developing countries). The Portfolio spreads its
investments across these markets, and may invest up to 50% of its net assets in
U.S. and Canadian issuers and up to 100% of its net assets in foreign
securities.
The Portfolio focuses on companies that the Sub-advisor believes have
favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. The Portfolio generally seeks to purchase
securities of companies with relatively large market capitalizations relative to
the market in which they are traded. The Portfolio's investments may include
securities traded in the over-the-counter markets, rather than on securities
exchanges.
The Sub-advisor uses a "bottom up," as opposed to "top down,"
investment style in managing the Portfolio. This means that securities are
selected based upon fundamental analysis of individual companies by the
Sub-advisor.
As a fund that invests primarily in common stocks, the value of the
securities held by the Portfolio may decline, either because of changing
economic, political or market conditions, or because of the economic condition
of the company that issued the security. The Portfolio's investments in foreign
stocks may cause the risk and degree of share price fluctuation of the Portfolio
to be greater than a fund investing primarily in domestic securities. The risks
of investing in foreign securities, which are described in more detail below
under "Certain Risk Factors and Investment Methods," include risks relating to
political, social and economic conditions abroad, risks resulting from differing
regulatory standards in non-U.S. markets, and fluctuations in currency exchange
rates. To the extent the Portfolio invests in the securities of issuers in
developing countries, the risks relating to investing in foreign securities
likely will be accentuated. The Portfolio may also be subject to increased risk
if it makes significant investments in securities traded over-the-counter,
because such securities are frequently those of smaller companies that generally
trade less frequently and are more volatile than the securities of larger
companies.
Other Investments:
Although the Portfolio will invest primarily in common stocks and
related securities, the Portfolio may purchase and sell futures contracts and
related options on securities indices, foreign currencies and interest rates for
hedging and non-hedging purposes. The Portfolio may also enter into forward
contracts for the purchase or sale of foreign currencies for hedging and
non-hedging purposes. The Portfolio may purchase and write (sell) options on
securities, stock indices and foreign currencies. The Portfolio may also
purchase warrants.
For more information on some of the types of securities other than
common stocks in which the Portfolio may invest, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may depart from its principal
investment strategy by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. When investing for defensive
purposes, the Portfolio may hold cash or invest in cash equivalents, such as
short-term U.S. government securities, commercial paper and bank instruments.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective will be limited.
<PAGE>
AST JANUS SMALL-CAP GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is capital
growth.
Principal Investment Policies and Risks:
The Portfolio pursues its objective by normally investing at least 65%
of its total assets in the common stocks of small-sized companies. For purposes
of the Portfolio, small-sized companies are those that have market
capitalizations of less than $1.5 billion or annual gross revenues of less than
$500 million. To a lesser extent, the Portfolio may also invest in stocks of
larger companies with potential for capital growth.
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 similar selection
procedure.
Current income is not a significant factor in choosing investments.
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. As a Portfolio that invests primarily in smaller or newer issuers,
the Portfolio may be subject to greater risk of loss and share price fluctuation
than funds investing primarily in larger or more established issuers. Smaller
companies are more likely to realize substantial growth as well as suffer
significant losses than larger issuers. Smaller 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 products or
services for which there are not yet, and may never be, established markets. In
addition, such companies may be subject to intense competition from larger
competitors, and may have more limited trading markets than the markets for
securities of larger issuers.
While the Sub-advisor tries to reduce the risk of the Portfolio by
diversifying its assets among issuers (so that the effect of any single holding
is reduced), and by not concentrating its assets in any particular industry,
there is no assurance that these effort will be successful in reducing the risks
to which the Portfolio is subject.
The Portfolio generally intends to purchase securities for long-term
investment rather than short-term gains. However, short-term transactions may
occur as the result of liquidity needs, securities having reached a desired
price or yield, 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 the investment was made. 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.
Special Situations. 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
increase in value due to a specific development with respect to that issuer.
Developments creating a special situation might include 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.
Other Investments:
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 is subject to the following
percentage limitations on investing in certain types of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
The Portfolio may make short sales "against the box." In addition, the
Portfolio may invest in the following types of securities and engage in the
following investment techniques:
Index/structured Securities. 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.
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, or may invest through depositary
receipts or passive foreign investment companies. Generally, the same criteria
are used to select foreign securities as domestic securities. The Sub-advisor
seeks companies that meet these criteria regardless of country of organization
or principal business activity. However, certain factors such as expected
inflation and currency exchange rates, government policies affecting businesses,
and a country's prospects for economic growth may warrant consideration in
selecting foreign securities.
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, currency exchange rates or interest rates. To a
limited extent, the Portfolio may also use derivative instruments for
non-hedging purposes such as seeking to increase income.
For more information on the types of securities other than common
stocks in which the Portfolio may invest, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Temporary Investments. 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. The Portfolio's cash and similar investments
may include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the
Portfolio is in a defensive position, the opportunity to achieve its investment
objective of capital growth will be limited.
<PAGE>
AST KEMPER SMALL-CAP GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
maximum growth of investors' capital from a portfolio primarily of growth stocks
of smaller companies.
Principal Investment Policies and Risks:
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. Equity securities include
common stocks and securities convertible into or exchangeable for common stocks,
including warrants and rights.
The Portfolio intends to invest primarily in stocks of companies whose
earnings per share are expected by the Sub-advisor to grow faster than the
market average ("growth stocks"). 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 for above average earnings of the stocks in which the Portfolio
invests more than justifies their price.
In managing the Portfolio, the Sub-advisor emphasizes stock selection
and fundamental research. The Sub-advisor considers a number of 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 are patterns of increasing
sales growth, 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 may grow rapidly.
The Portfolio seeks attractive areas for investment that arise from
factors such 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:
o companies engaged in high technology fields such as electronics, medical
technology and computer software and specialty retailing;
o companies whose earnings outlooks have improved as the result of changes in
the economy, acquisitions, mergers, new management, changes in corporate
strategy or product innovation;
o companies supplying new or rapidly growing services to consumers and
businesses in such fields as automation, data processing, communications,
and marketing and finance; and
o companies that have innovative concepts or ideas.
In the selection of investments, long-term capital appreciation will
take precedence over short range market fluctuations. However, the Portfolio may
occasionally make investments for short-term capital appreciation. Current
income will not be a significant factor in selecting investments.
Like all common stocks, the market values of the common stocks held by
the Portfolio can fluctuate significantly, reflecting the business performance
of the issuing company, investor perception or general economic or financial
market movements. Because of the Portfolio's focus on the stocks of smaller
growth companies, investment in the Portfolio may involve substantially greater
than average share price fluctuation and investment risk. A fund focusing on
growth stocks will generally involve greater risk and share price fluctuation
than a fund investing primarily in value stocks.
In addition, investments in securities of smaller companies are
generally considered to offer greater opportunity for appreciation and to
involve greater risk of depreciation than securities of larger companies.
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. Because the securities of small-cap companies are not as broadly
traded as those of larger companies, they are often subject to wider and more
abrupt fluctuations in market price. Additional reasons for the greater price
fluctuations of these securities include the less certain growth prospects of
smaller firms and the greater sensitivity of small companies to changing
economic conditions.
<PAGE>
Other Investments:
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. Other
types of securities in which the Portfolio may invest include:
Foreign Securities. The Portfolio may invest in securities of foreign
issuers in the form of depositary receipts. 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.
Depositary receipts 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 depositary receipts 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 many depositary receipts.
Options, Financial Futures and Other Derivatives. 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. The Portfolio may engage in financial futures
transactions on commodities exchanges or boards of trade in an attempt to hedge
against market risks.
In addition to options and financial futures, the Portfolio may invest
in a broad array of other "derivative" instruments 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. The types of derivatives and techniques used by the Portfolio may
change over time as new derivatives and strategies are developed or as
regulatory changes occur.
Additional information about the other investments that the Portfolio
may make and their risks is included below under "Certain Risk Factors and
Investment Methods."
Temporary Investments. When a defensive position is deemed advisable
because of prevailing market conditions, the Portfolio may invest without limit
in high grade debt securities, commercial paper, U.S. Government securities or
cash or cash equivalents, including repurchase agreements. While the Portfolio
is in a defensive position, the opportunity to achieve its investment objective
of maximum capital growth will be limited.
<PAGE>
AST LORD ABBETT SMALL CAP VALUE PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
long-term capital growth.
Principal Investment Policies and Risks:
The Portfolio will seek its objective through investments primarily in
equity securities that are believed to be undervalued in the marketplace.
Typically, in choosing stocks, the Sub-advisor looks for companies the following
process:
o Quantitative research is performed to evaluate various criteria, including
the price of shares in relation to book value, sales, asset value,
earnings, dividends and cash flow;
o Fundamental research is conducted to assess the dynamics of each company
within its industry and within the company. The Sub-advisor evaluates the
company's business strategies by assessing management's ability to execute
the strategies, and evaluating the adequacy of its financial resources.
Usually, 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 assets in foreign
securities.
The stocks in which the Portfolio generally invests are those which, in
the Sub-advisor's judgment, are selling below their 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 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 if they are expected to help
it attain its objective. Dividend and investment income is of incidental
importance.
Although the Portfolio typically will hold a large number of securities
and follow a relatively conservative value-driven investment strategy, the
Portfolio does entail above-average investment risk and share price fluctuation
compared to the overall U.S. stock market. The small capitalization companies in
which the Portfolio 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, markets and financial
resources, and these and other factors may make them more susceptible to
setbacks or economic downturns. Smaller companies 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.
Other Investments:
The Portfolio may engage in various portfolio strategies to reduce
certain risks of its investments and to enhance income, but not for speculation.
The Portfolio may purchase and write (sell) put and covered call options on
equity securities or stock indices that are traded on national securities
exchanges. The Portfolio may purchase and sell stock index futures for certain
hedging and risk management purposes. 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.
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. The Portfolio may enter into forward foreign
currency exchange contracts in connection with its investments in foreign
securities. 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. The Portfolio may write a call option on a foreign currency only in
conjunction with a purchase of a put option on that currency.
The Portfolio also may invest in preferred stocks and bonds that either
have attached warrants or are convertible into common stocks.
Additional information about these investments and investment
techniques and their risks is included below under "Certain Risk Factors and
Investment Methods."
Temporary Investments. For temporary defensive purposes or pending other
investments, the Portfolio may invest in high-quality, short-term debt
obligations of banks, corporations or the U.S. Government. While the Portfolio
is in a defensive position, its ability to achieve its investment objective of
long-term capital growth will be limited.
<PAGE>
AST T. ROWE PRICE SMALL COMPANY VALUE PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to
provide long-term capital growth by investing primarily in small-capitalization
stocks that appear to be undervalued.
Principal Investment Policies and Risks:
The Portfolio will normally invest at least 65% of its total assets in
stocks and equity-related securities of small companies ($1 billion or less in
market capitalization). 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 Sub-advisor's research team seeks to identify
companies that appear to be undervalued by various measures, and may be
temporarily out of favor, but have good prospects for capital appreciation. In
selecting investments, the Sub-advisor generally looks to the following:
(1) Above-average dividend yield (the stock's annual dividend divided by
the stock price) relative to a company's peers or its own historic
norm.
(2) Low price/earnings, price/book value or price/cash flow ratios
relative to the S&P 500 Index, the company's peers, or its own
historic norm.
(3) Low stock price relative to a company's underlying asset values.
(4) A plan to improve the business through restructuring.
(5) A sound balance sheet and other positive financial characteristics.
The Portfolio may sell securities for a variety of reasons, such as to
secure gains, limit losses or re-deploy assets into more promising
opportunities. The Portfolio will not sell a stock just because the company has
grown to a market capitalization of more than $1 billion, and it may on occasion
purchase companies with a market cap more than $1 billion.
As with all stock funds, the Portfolio's share price can fall because
of weakness in the securities market as a whole, in particular industries or in
specific holdings. Investing in small companies involves greater risk of loss
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 stocks. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience. While a
value approach to investing is generally considered to involve less risk than a
growth approach, investing in value stocks carries the risks that the market
will not recognize the stock's intrinsic value for a long time, or that a stock
judged to be undervalued may actually be appropriately priced.
Other Investments:
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, preferred stocks,
convertible securities, warrants and bonds when considered consistent with the
Portfolio's investment objective and policies. The Portfolio may purchase
preferred stock for capital appreciation where the issuer has omitted, or is in
danger of omitting, payment of the dividend on the stock. Debt securities would
be purchased in companies that meet the investment criteria for the Portfolio.
The Portfolio may invest up to 20% of its total assets in foreign
securities, including American Depositary Receipts and securities of companies
in developing countries, and may enter into forward foreign currency exchange
contracts. (The Portfolio may invest in foreign cash items as described below in
excess of this 20% limit.) The Portfolio may enter into stock index or currency
futures contracts (or options thereon) for hedging purposes or to provide an
efficient means of regulating the Portfolio's exposure to the equity markets.
The Portfolio may also write (sell) call and put options and purchase put and
call options on securities, financial indices, and currencies. The Portfolio may
invest up to 10% of its total assets in hybrid instruments, which combine the
characteristics of futures, options and securities. For additional information
about these investments and their risks, see this Prospectus under "Certain Risk
Factors and Investment Methods."
<PAGE>
Temporary Investments. The Portfolio may establish and maintain cash
reserves without limitation for temporary defensive purposes. The Portfolio's
reserves may be invested in high-quality domestic and foreign money market
instruments, including repurchase agreements. Cash reserves also provide
flexibility in meeting redemptions and paying expenses. While the Portfolio is
in a defensive position, the opportunity to achieve its investment objective of
long-term capital growth may be limited.
<PAGE>
AST NEUBERGER BERMAN MID-CAP GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
To pursue its objective, the Portfolio primarily invests in the common
stocks of mid-cap companies. Companies with equity market capitalizations from
$300 million to $10 billion at the time of investment are considered mid-cap
companies for purposes of the Portfolio. The Trust may revise this definition
based on market conditions. Some of the Portfolio's assets may be invested in
the securities of large-cap companies as well as in small-cap companies. The
Portfolio seeks to reduce risk by diversifying among many companies and
industries. The Portfolio does not seek to invest in securities that pay
dividends or interest, and any such income is incidental.
The Portfolio is normally managed using a growth-oriented investment
approach. For growth investors, the aim is to invest in companies that are
already successful but could be even more so. The Sub-advisor looks for
fast-growing companies that are in new or rapidly evolving industries. Factors
in identifying these companies may include above-average growth of earnings or
earnings that exceed analysts' expectations. The Sub-advisor may also look for
other characteristics in a company, such as financial strength, a strong
position relative to competitors and a stock price that is reasonable in light
of its growth rate.
The Sub-advisor follows a disciplined selling strategy, and may sell a
stock when it reaches a target price, fails to perform as expected, or appears
substantially less desirable than another stock.
As a fund that invests primarily in mid-cap companies, the Portfolio's
risk and share price fluctuation can be expected to be more than that of many
funds investing primarily in large-cap companies, but less than that of many
funds investing primarily in small-cap companies. Mid-cap stocks may fluctuate
more widely in price than the market as a whole, may underperform other types of
stocks when the market or the economy is not robust, or fall in price or be
difficult to sell during market downturns. In addition, the Portfolio's growth
investment program will generally involve greater risk and price fluctuation
than funds that invest in more undervalued securities. Because the prices of
growth stocks tend to be based largely on future expectations, these stocks
historically have been more sensitive than value stocks to bad economic news and
negative earnings surprises.
Other Investments:
Although equity securities are normally the Portfolio's primary
investments, it may invest in preferred stocks and convertible securities, as
well as the types of securities described below. Additional information about
these investments and the special risk factors that apply to them is included in
this Prospectus under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest up to 35% of its
total assets, measured at the time of investment, in investment grade fixed
income or debt securities. If the quality of any fixed income securities held by
the Portfolio deteriorates so that they are no longer investment grade, the
Portfolio will sell such securities in an orderly manner so that its holdings of
such securities do not exceed 5% of its net assets.
Foreign Securities. The Portfolio may invest up to 10% of the value of
its total assets, measured at the time of investment, in equity and debt
securities that are denominated in foreign currencies. There is no limitation on
the percentage of the Portfolio's assets that may be invested in securities of
foreign companies that are denominated in U.S. dollars. In addition, the
Portfolio may enter into foreign currency transactions, including forward
foreign currency contracts and options on foreign currencies, to manage currency
risks, to facilitate transactions in foreign securities, and to repatriate
dividend or interest income received in foreign currencies.
Covered Call Options. 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, and may
purchase call options in related closing transactions.
Temporary Investments. When the Portfolio anticipates unusual market or
other conditions, it may temporarily depart from its objective of capital growth
and invest substantially in high-quality short-term investments. This could help
the Portfolio avoid losses but may mean lost opportunities.
<PAGE>
AST NEUBERGER BERMAN MID-CAP VALUE PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
To pursue its objective, the Portfolio primarily invests in the common
stocks of mid-cap companies. Some of the Portfolio's assets may be invested in
the securities of large-cap companies as well as in small-cap companies. The
Portfolio seeks to reduce risk by diversifying among many companies and
industries.
Under the Portfolio's value-oriented investment approach, the
Sub-advisor looks for well-managed companies whose stock prices are undervalued
and that may rise in price before other investors realize their worth. Fund
managers may identify value stocks in several ways, including based on earnings,
book value or other financial measures. Factors that the Sub-advisor may use to
identify these companies include strong fundamentals, including a low
price-to-earnings ratio, consistent cash flow, and a sound track record through
all phases of the market cycle.
The Sub-advisor may also look for other characteristics in a company,
such as a strong position relative to competitors, a high level of stock
ownership among management, or a recent sharp decline in stock price that
appears to be the result of a short-term market overreaction to negative news.
The Sub-advisor generally considers selling a stock when it reaches a
target price, when it fails to perform as expected, or when other opportunities
appear more attractive.
As a fund that invests primarily in mid-cap companies, the Portfolio's
risk and share price fluctuation can be expected to be more than that of many
funds investing primarily in large-cap companies, but less than that of many
funds investing primarily in small-cap companies. Mid-cap stocks may fluctuate
more widely in price than the market as a whole, may underperform other types of
stocks when the market or the economy is not robust, or fall in price or be
difficult to sell during market downturns. While value investing historically
has involved less risk than investing in growth companies, the stocks purchased
by the Portfolio will remain undervalued during a short or extended period of
time. This may happen because value stocks as a category lose favor with
investors compared to growth stocks, or because the Sub-advisor failed to
anticipate which stocks or industries would benefit from changing market or
economic conditions.
Other Investments:
Although equity securities are normally the Portfolio's primary
investment, it may invest in preferred stocks and convertible securities, as
well as the types of securities described below. Additional information about
these investments and the special risk factors that apply to them is included in
this Prospectus under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest up to 35% of its
total assets, measured at the time of investment, in fixed income or debt
securities. The Portfolio may invest up to 15% of its total assets, measured at
the time of investment, in debt securities that are rated below investment grade
or comparable unrated securities. There is no minimum rating on the fixed income
securities in which the Portfolio may invest.
Foreign Securities. The Portfolio may invest up to 10% of the value of
its total assets, measured at the time of investment, in equity and debt
securities that are denominated in foreign currencies. There is no limitation on
the percentage of the Portfolio's assets that may be invested in securities of
foreign companies that are denominated in U.S. dollars. In addition, the
Portfolio may enter into foreign currency transactions, including forward
foreign currency contracts and options on foreign currencies, to manage currency
risks, to facilitate transactions in foreign securities, and to repatriate
dividend or interest income received in foreign currencies.
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, and may purchase call
options in related closing transactions. The value of securities against which
options will be written will not exceed 10% of the Portfolio's net assets.
Temporary Investments. When the Portfolio anticipates unusual market or
other conditions, it may temporarily depart from its objective of capital growth
and invest substantially in high-quality short-term investments. This could help
the Portfolio avoid losses but may mean lost opportunities.
<PAGE>
AST T. ROWE PRICE NATURAL RESOURCES PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
long-term capital growth primarily through the common stocks of companies that
own or develop natural resources (such as energy products, precious metals, and
forest products) and other basic commodities.
Principal Investment Policies and Risks:
The Portfolio normally invests primarily (at least 65% of its total
assets) in the common stocks of natural resource companies whose earnings and
tangible assets could benefit from accelerating inflation. The Portfolio also
may invest in growth companies with strong potential for earnings growth. When
selecting stocks, the Sub-advisor looks for companies that have the ability to
expand production, to maintain superior exploration programs and production
facilities, and the potential to accumulate new resources. Natural resource
companies in which the Portfolio invests generally own or develop energy
sources, precious metals, nonferrous metals, forest products, real estate,
diversified resources and other basic commodities that can be produced and
marketed profitably when both labor costs and prices are rising.
The Portfolio may sell securities for a variety of reasons, such as to
secure gains, limit losses or re-deploy assets into more promising
opportunities.
As with all stock funds, the Portfolio's share price can fall because
of weakness in one or more securities markets, particular industries or specific
holdings. In addition, the Portfolio is less diversified than most stock funds
and could therefore experience sharp price declines when conditions are
unfavorable in the natural resources sector. For instance, while the Portfolio
attempts to invest in companies that may benefit from accelerating inflation,
inflation has slowed considerably in recent years. The rate of earnings growth
of natural resource companies may be irregular because these companies are
strongly affected by natural forces, global economic cycles and international
politics. For example, stock prices of energy companies can fall sharply when
oil prices fall. Real estate companies are influenced by interest rates and
other factors.
Other Investments:
Although the Portfolio will invest primarily in U.S. common stocks, it
may also purchase other types of securities, for example, preferred stocks,
convertible securities and warrants, when considered consistent with the
Portfolio's investment objective and policies. The Portfolio may purchase
preferred stock for capital appreciation where the issuer has omitted, or is in
danger of omitting, payment of the dividend on the stock. The Portfolio may
invest in debt securities, including up to 10% of its total assets in debt
securities rated below investment grade. The Portfolio may invest in
mortgage-backed securities, including stripped mortgage-backed securities. The
Portfolio may invest up to 10% of its total assets in hybrid instruments, which
combine the characteristics of futures, options and securities.
Foreign Securities. The Portfolio may invest up to 50% of its total
assets in foreign securities, including American Depositary Receipts and
securities of companies in developing countries, which offer increasing
opportunities for natural resource-related growth. The Portfolio may enter into
forward foreign currency exchange contracts in connection with its foreign
investments. The Portfolio's investments in foreign securities, or even in U.S.
companies with significant overseas investments, may decline in value because of
declining foreign currencies or adverse political and economic events overseas,
although currency risk may be somewhat reduced because many commodities markets
are dollar based.
Futures and Options. The Portfolio may enter into stock index or
currency futures contracts (or options thereon) for hedging purposes or to
provide an efficient means of regulating the Portfolio's exposure to the equity
markets. The Portfolio may write covered call options and purchase put and call
options on foreign currencies, securities, and stock indices.
For additional information about these investments and their risks, see
this Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may establish and maintain cash
reserves without limitation for temporary defensive purposes. The Portfolio's
reserves may be invested in high-quality domestic and foreign money market
instruments, including repurchase agreements. Cash reserves also provide
flexibility in meeting redemptions and paying expenses. While the Portfolio is
in a defensive position, the opportunity to achieve its investment objective of
long-term capital growth may be limited.
<PAGE>
AST OPPENHEIMER LARGE-CAP GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Principal Investment Policies and Risks:
The Portfolio seeks its objective by emphasizing investments in equity
securities issued by established large-capitalization "growth companies." At
least 65% of the Portfolio's assets normally will be invested in companies that
have market capitalizations greater than $3 billion, and the Portfolio will
normally maintain a median market capitalization greater than $5 billion. For
purposes of the Portfolio, equity securities include common stocks, preferred
stocks and convertible securities.
In selecting securities for the Portfolio, the Sub-advisor looks for
high-growth companies that the Sub-advisor believes are able to maintain high
levels of growth. In seeking broad diversification of the Portfolio among
industries and market sectors, the Sub-advisor looks for the characteristics
listed below, although the characteristics used may change over time and may
vary in particular cases. Currently, the Sub-advisor looks for:
o Companies that exhibit above average growth in revenues, o Companies that
exhibit above average growth in earnings, and o Sustainability of the factors
driving revenue and earnings growth.
Because the Portfolio invests a substantial portion (or all) of its
assets in stocks, the Portfolio is subject to the risks associated with stock
investments, and the Portfolio's share price therefore may fluctuate
substantially. The prices of growth company stocks may fluctuate more than other
stocks, although the Portfolio's focus on large, more-established growth
companies may help reduce some of that risk. The Portfolio's share price will be
affected by changes in the stock markets generally, and factors specific to a
company or an industry will affect the prices of particular stocks held by the
Portfolio (for example, poor earnings, loss of major customers, availability of
basic resources or supplies, major litigation against an issuer, or changes in
government regulations affecting an industry). Because of the types of
securities it invests in, the Portfolio is designed for those who are investing
for the long term. 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 such as futures contracts, there
is no assurance that these efforts to reduce risk will be successful.
Other Investments:
While the Sub-advisor will invest the Portfolio's assets
primarily in domestic equity securities, it also may invest in other types of
securities and employ special investment techniques. The Portfolio may purchase
securities of foreign companies or governments, including those in developing
countries. The Portfolio may buy and sell futures contracts, forward foreign
currency contracts and put and call options on securities, currencies, futures
contracts and broadly-based securities indices. The Portfolio may use these
instruments to hedge the Portfolio against price fluctuations or to increase its
exposure to the market, but not for speculative purposes. The Portfolio
currently does not use these instruments extensively. In addition to options,
futures contracts and forward contracts, the Portfolio may invest in specially
designed derivative instruments for hedging purposes or to enhance total return.
For additional information about these investments and their
risks, see this Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may invest a portion of
its assets in cash, cash equivalents and U.S. Government securities for
liquidity purposes, but will not invest a significant portion of its assets in
these instruments for temporary defensive purposes.
<PAGE>
AST MFS GROWTH PORTFOLIO
Investment Objective: The investment objective of the Portfolio is to
provide long-term growth of capital and future, rather than current, income.
Principal Investment Policies and Risks:
The Portfolio invests, under normal market conditions, at least 80% of
its total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts, of companies that the
Sub-advisor believes offer better than average prospects for long-term growth.
The Sub-advisor uses a "bottom up," as opposed to "top down,"
investment style in managing the Portfolio. This means that securities are
selected based upon fundamental analysis of individual companies by the
Sub-advisor.
In managing the Portfolio, the Sub-advisor seeks to purchase securities
of companies that it considers well-run and poised for growth. The Sub-advisor
looks particularly for companies with the following qualities:
o a strong franchise, strong cash flows and a recurring revenue stream
o a strong industry position, where there is potential for high profit
margins or substantial barriers to new entry into the industry
o a strong management with a clearly defined strategy
o new products or services.
The Portfolio may invest up to 30% of its net assets in foreign
securities.
As with any fund investing primarily in common stocks, the value of the
securities held by the Portfolio may decline in value, either because of
changing economic, political or market conditions or because of the economic
condition of the company that issued the security. These declines may be
substantial. In addition, the prices of the growth company stocks in which the
Portfolio invests may fluctuate to a greater extent than other equity securities
due to changing market conditions or disappointing earnings results. The
Portfolio may invest in foreign companies, including companies located in
developing countries, and it therefore will be subject to risks relating to
political, social and economic conditions abroad, risks resulting from differing
regulatory standards in non-U.S. markets, and fluctuations in currency exchange
rates.
Other Investments:
Although the Portfolio will invest primarily in common stocks and
related securities, the Portfolio may also invest in variable and floating rate
debt securities. The Portfolio may purchase and sell futures contracts and
related options on securities indices, foreign currencies and interest rates for
hedging and non-hedging purposes. The Portfolio may also enter into forward
contracts for the purchase or sale of foreign currencies for hedging and
non-hedging purposes. The Portfolio may purchase and write (sell) options on
securities, stock indices and foreign currencies.
For more information on some of the types of securities other than
common stocks in which the Portfolio may invest, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may depart from its principal
investment strategy by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. When investing for defensive
purposes, the Portfolio may hold cash or invest in cash equivalents, such as
short-term U.S. government securities, commercial paper and bank instruments.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective will be limited.
<PAGE>
AST MARSICO CAPTIAL GROWTH PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. Income is not an investment objective and any income realized on
the Portfolio's investments, therefore, will be incidental to the Portfolio's
objective.
Principal Investment Policies and Risks:
The Portfolio will pursue its objective by investing primarily in
common stocks. The Sub-advisor expects that the majority of the Portfolio's
assets will be invested in the common stocks of larger, more established
companies.
In selecting investments for the Portfolio, the Sub-advisor uses an
approach that combines "top down" economic analysis with "bottom up" stock
selection. The "top down" approach takes into consideration such macro-economic
factors as interest rates, inflation, the regulatory environment, and the global
competitive landscape. In addition, the Sub-advisor examines such factors as the
most attractive global investment opportunities, industry consolidation, and the
sustainability of economic trends. As a result of this "top down" analysis, the
Sub-advisor identifies sectors, industries and companies that should benefit
from the trends the Sub-advisor has observed.
The Sub-advisor then looks for individual companies with earnings
growth potential that may not be recognized by the market at large. In
determining whether a particular company is appropriate for investment by the
Portfolio, the Sub-advisor focuses on a number of different attributes,
including the company's specific market expertise or dominance, its franchise
durability and pricing power, solid fundamentals (e.g., a strong balance sheet,
improving returns on equity, and the ability to generate free cash flow), strong
management, and reasonable valuations in the context of projected growth rates.
This is called "bottom up" stock selection.
The primary risk associated with investment in the Portfolio will be
the risk that the equity securities held by the Portfolio will decline in value.
The risk of the Portfolio is expected to be commensurate with that of other
funds using a growth strategy to invest in the stocks of large and medium-sized
companies.
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 desired price, or by reason of
developments not foreseen at the time of the investment was made.
Special Situations. 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
increase 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.
Other Investments:
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. The Portfolio
may invest up to 10% of its total assets in debt securities, which may include
corporate bonds and debentures and government securities.
The Portfolio may also purchase securities of foreign issuers,
including foreign equity and debt securities and depositary receipts. Foreign
securities are selected primarily on a stock-by-stock basis without regard to
any defined allocation among countries or geographic regions. 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.
Index/structured Securities. The Portfolio may invest without limit in
index/structured securities, which are 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 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 (sell) options on securities, financial indices, and foreign
currencies, and may invest in futures contracts on securities, financial
indices, and foreign currencies, 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.
For an additional discussion of many of these types of securities and
their risks, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. 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 believes that appropriate
investment opportunities for capital growth with desirable risk/reward
characteristics are unavailable. Cash and similar investments (whether made for
defensive purposes or to receive a return on idle cash) will include high-grade
commercial paper, certificates of deposit and repurchase agreements. While the
Portfolio is in a defensive position, the opportunity to achieve its investment
objective of capital growth will be limited.
<PAGE>
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.
Principal Investment Policies and Risks:
The Portfolio will pursue its objective by investing primarily in
common stocks. Common stock investments will be in 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 generally takes a "bottom up" approach to choosing
investments for 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.
Because the Portfolio invests a substantial portion (or all) of its
assets in stocks, the Portfolio is subject to the risks associated with stock
investments, and the Portfolio's share price therefore may fluctuate
substantially. This is true despite the Portfolio's focus on the stocks of
larger more-established companies. The Portfolio's share price will be affected
by changes in the stock markets generally, and factors specific to a company or
an industry will affect the prices of particular stocks held by the Portfolio
(for example, poor earnings, loss of major customers, major litigation against
an issuer, or changes in government regulations affecting an industry). Because
of the types of securities it invests in, the Portfolio is designed for those
who are investing for the long term.
The Portfolio generally intends to purchase securities for long-term
investment rather than short-term gains. However, short-term transactions may
occur as the result of liquidity needs, securities having reached a desired
price or yield, 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 the investment was made.
Special Situations. 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.
Other Investments:
Although the Sub-advisor expects to invest primarily in equity
securities, 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. The Portfolio
is subject to the following percentage limitations on investing in certain types
of debt securities:
-- 35% of its assets in lower-rated fixed income securities ("junk" bonds).
-- 25% of its assets in mortgage- and asset-backed securities.
-- 10% of its assets in zero coupon, pay-in-kind and step coupon
securities (securities that do not, or may not under certain circumstances, make
regular interest payments).
In addition, the Portfolio may invest in the following types of securities and
engage in the following investment techniques:
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and depositary
receipts. Foreign securities are selected primarily on a stock-by-stock basis
without regard to any defined allocation among countries or geographic regions.
No more than 25% of the Portfolio's assets may be invested in foreign securities
denominated in foreign currencies and not publicly traded in the United States.
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 income. The Portfolio may also
use a variety of currency hedging techniques, including forward foreign currency
exchange contracts, to manage exchange rate risk with respect to investments
exposed to foreign currency fluctuations.
For more information on the types of securities other than common
stocks in which the Portfolio may invest, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Temporary Investments. 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. Cash and similar investments
(whether made for defensive purposes or to receive a return on idle cash) will
include high-grade commercial paper, certificates of deposit, repurchase
agreements and money market funds managed by the Sub-advisor. While the
Portfolio is in a defensive position, the opportunity to achieve its investment
objective of capital growth will be limited.
<PAGE>
AST BANKERS TRUST MANAGED INDEX 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.
Principal Investment Policies and Risks:
The Portfolio will invest in the common stocks 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 perform better or worse than the S&P 500. Based on these
criteria, the Sub-advisor determines whether the Portfolio should over-weight,
under-weight or hold a neutral position in the stock relative to the proportion
of the S&P 500 that the stock represents. The majority of the issues held by the
Portfolio will have neutral weightings, but approximately 100 will be over- or
under-weighted relative to the index. In addition, the Sub-advisor may determine
based on the quantitative criteria that (1) certain S&P 500 stocks should not be
held by the Portfolio in any amount, and (2) certain equity securities that are
not included in the S&P 500 should be held by the Portfolio.
As a mutual fund investing primarily in common stocks, the Portfolio is
subject to the risk 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
Sub-advisor believes that the various quantitative criteria used to determine
which stocks to over- or under-weight will balance each other so that the
overall risk of the Portfolio is not likely to differ materially from the risk
of the S&P 500 itself. While the Portfolio attempts to outperform the S&P 500,
the Portfolio may underperform the index over short or extended periods.
Unlike other stock funds, the Portfolio is not, except to a limited
extent, "actively" managed based on the Sub-Advisor's economic, financial or
market analysis or its investment judgment. Instead, the Portfolio primarily
utilizes a "quantitative" investment approach to invest among a limited number
of stocks (i.e., those 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. Stocks in the S&P 500 are weighted
according to their market capitalization (the number of shares outstanding
multiplied by the stock's current price). The composition of the S&P 500 is
determined by S&P based on such factors as market capitalization, trading
activity, and whether the stock is representative of stocks in a particular
industry group. The composition of the S&P 500 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.
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 occur and result in a cash payment for the
securities. When investing in these companies, the Portfolio may enter into
securities index futures contracts and/or related options as described below in
order to maintain its exposure to the equity markets. While this strategy is
intended to generate additional gains without materially increasing risk, there
is 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.
Other Investments:
Derivatives. The Portfolio may invest in various instruments that are
or may be considered derivatives, including securities index futures contracts
and related options, warrants and convertible securities. These instruments may
be used for several reasons: to simulate full investment in the S&P 500 while
retaining cash for fund management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns when the futures
contract, option, warrant or convertible security is priced more attractively
than the underlying equity security or the S&P 500. The Portfolio will not use
derivatives for speculative purposes or to leverage its assets. The Portfolio
will limit its use of securities index futures contracts and related options so
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%.
Additional information about these derivative instruments and their
risks is included in this Prospectus under "Certain Risk Factors and Investment
Methods."
Temporary Investments. 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. These securities include obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or by any of the states,
repurchase agreements, commercial paper, and certain bank obligations. The
Portfolio will not invest in these securities as part of a temporary defensive
strategy to protect against potential market declines.
<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.
Principal Investment Policies and Risks:
The Portfolio pursues its investment objective of maximizing total return by
seeking, with approximately equal emphasis, capital growth and current income.
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:
o common stocks (including shares in real estate investment trusts),
o rights or warrants to purchase common stocks,
o securities convertible into common stocks where the conversion feature
represents, in the Sub-advisor's view, a significant element of the
securities' value, and
o 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 real estate or that has at least
50% of its assets in real estate. The Portfolio may invest up to 10% of its
total assets in securities of foreign real estate companies.
Real estate companies may include real estate investment trusts
("REITs"). REITs pool investors' funds for investment primarily in income
producing real estate or real estate related loans or interests. 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. 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.
As a fund that invests primarily in equity securities, the Portfolio
will be subject to many of the same risks as other equity funds. The Portfolio
also will be subject to certain risks related specifically to real estate
securities, and may be subject to greater risk and share price fluctuation than
other equity funds because of the concentration of its investments in a single
industry.
While the Portfolio will not invest in real estate directly, securities
of real estate companies may be subject to risks similar to those associated
with the direct ownership of real estate. These include risks related to general
and local economic conditions, dependence on management skill, heavy cash flow
dependency, possible lack of available mortgage funds, overbuilding, extended
vacancies of properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from environmental
problems, casualty or condemnation losses, limitations on rents, and changes in
neighborhood values, the appeal of properties to tenants and interest rates.
In general, 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. In the event of a default by a borrower or
lessee, a REIT may experience delays and may incur substantial costs in
enforcing its rights as a mortgagee or lessor.
Non-Diversified Status. 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 meet certain diversification standards under the Internal Revenue
Code that must be met to relieve the Portfolio of liability for Federal income
tax if its earnings are distributed to shareholders. As a non-diversified fund,
a price decline in any one of the Portfolio's holdings may have a greater effect
on the Portfolio's value than on the value of a fund that is more broadly
diversified.
Other Investments:
The Portfolio may write (sell) put and covered call options and
purchase put and call options on securities or stock indices that are listed on
a national securities or commodities exchange. The Portfolio may buy and sell
financial futures contracts, stock and bond index futures contracts, foreign
currency futures contracts and options on the foregoing. The Portfolio may enter
into forward foreign currency exchange contracts in connection with its
investments in foreign securities. The Portfolio may also enter into short
sales, which are transactions in which the Portfolio sells a security it does
not own at the time of the sale in anticipation that the market price of the
security will decline. The Sub-advisor expects that the Portfolio will use these
techniques on a relatively infrequent basis.
Additional information about these techniques and their risks is
included below under "Certain Risk Factors and Investment Methods."
Temporary Investments. When the Sub-advisor believes that market or
general economic conditions justify a temporary defensive position, the
Portfolio will invest all or a 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. While the Portfolio is in a defensive position, the
opportunity to achieve its investment objective of maximum total return will be
limited. The Portfolio may also invest funds awaiting investment or funds held
to satisfy redemption requests or to pay dividends and other distributions to
shareholders in short-term money market instruments.
<PAGE>
AST AMERICAN CENTURY INCOME & GROWTH PORTFOLIO:
Investment Objective: The primary investment objective of the Portfolio is
to seek capital growth. Current income is a secondary investment objective.
Principal Investment Policies and Risks:
The Portfolio's investment strategy utilizes quantitative management
techniques in a two-step process that draws heavily on computer technology. In
the first step, the Sub-advisor ranks stocks, primarily the 1,500 largest
publicly traded U.S. companies (measured by market capitalization), from most
attractive to least attractive. These rankings are determined by using a
computer model that combines measures of a stock's value and measures of its
growth potential. To measure value, the Sub-advisor uses ratios of stock price
to book value and stock price to cash flow, among others. To measure growth, the
Sub-advisor uses, among others, the rate of growth in a company's earnings and
changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called portfolio
optimization. In portfolio optimization, the Sub-advisor uses a computer to
build a portfolio of stocks from the ranking described earlier that it thinks
will provide the best balance between risk and expected return. The goal is to
create an equity portfolio that provides better returns than the S&P 500 Index
without taking on significant additional risk. The Sub-advisor attempts to
create a dividend yield for the Portfolio that will be greater than that of the
S&P 500.
The Sub-advisor does not attempt to time the market. Instead, it
intends to keep the Portfolio essentially fully invested in stocks regardless of
the movement of stock prices generally.
Like any fund investing primarily in common stocks, the Portfolio is
subject to the risk that the value of the stocks it invests in will decline.
These declines could be substantial.
Because the Portfolio is managed to an index (the S&P 500), its
performance will be closely tied to the performance of the index. If the S&P 500
goes down, it is likely that the Portfolio's share price will also go down. The
Portfolio's investments in income-producing stocks may reduce to some degree the
Portfolio's level of risk and share price fluctuation (and its potential for
gain) relative to the S&P 500. However, if the stocks that make up the S&P 500
do not have a high dividend yield at a given time, then the Portfolio's dividend
yield also will not be high.
Other Investments:
When the Sub-advisor believes that it is prudent, the Portfolio may
invest in securities other than stocks, such as convertible securities, foreign
securities, short-term instruments and non-leveraged stock index futures
contracts. Stock index futures contracts can help the Portfolio's cash assets
remain liquid while performing more like stocks. The Portfolio also may short
sales "against the box." Additional information on these types of investments is
included in this Prospectus under "Certain Risk Factors and Investment Methods."
<PAGE>
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.
Principal Investment Policies and Risks:
The Portfolio normally will invest in common stocks (and securities
convertible into common stocks). Typically, in choosing stocks, the Sub-advisor
looks for companies using a three-step process:
o Quantitative research is performed on a universe of large, seasoned, U.S.
and multinational companies to identify which stocks the Sub-advisor
believes represent the best bargains;
o Fundamental research is conducted to assess a company's operating
environment, resources and strategic plans and to determine its prospects
for exceeding the earnings expectations reflected in its stock price.
o Business cycle analysis is used to assess the economic and interest-rate
sensitivity of the Portfolio, helping the Sub-advisor to assess how adding
or deleting stocks changes the Portfolio's overall sensitivity to economic
activity and interest rates.
The Sub-advisor will take a value-oriented approach, in that it will
try to keep the Portfolio's assets invested in securities that are selling at
reasonable prices in relation to their value. In doing so, the Portfolio may
forgo some opportunities for gains when, in the judgment of the Sub-advisor,
they are too risky.
The prices of the common stocks that the Portfolio invests in will
fluctuate. Therefore, the Portfolio's share price will also fluctuate, and may
decline substantially. While there is the risk that an investment will never
reach what the Sub-advisor believes is its full value, or may go down in value,
the Portfolio's risk and share price fluctuation (and potential for gain) may be
less than many other stock funds because of the Portfolio's emphasis on large,
seasoned company value stocks.
Other Investments:
Consistent with the Portfolio's investment objective, the Portfolio, in
addition to investing in common stocks and convertible securities, may write
covered call options with respect to securities in the Portfolio. 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
net assets at the time an option is written. The Portfolio may also invest up to
10% of its net assets (at the time of investment) in foreign securities, and
invest in straight bonds and other debt securities.
Temporary Investments. The Portfolio may invest in short-term debt and
other high quality fixed-income securities to create reserve purchasing power
and also for temporary defensive purposes. While the Portfolio is in a defensive
position, the opportunity to achieve its investment objective may be limited.
<PAGE>
AST MFS GROWTH WITH INCOME PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
to provide reasonable current income and long-term capital growth and income.
Principal Investment Policies and Risks:
The Portfolio invests, under normal market conditions, at least 65% of
its total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts. The stocks in which the
Portfolio invests generally will pay dividends. While the Portfolio may invest
in companies of any size, the Portfolio generally focuses on companies with
larger market capitalizations that the Sub-advisor believes have sustainable
growth prospects and attractive valuations based on current and expected
earnings or cash flow.
The Sub-advisor uses a "bottom up," as opposed to "top down,"
investment style in managing the Portfolio. This means that securities are
selected based upon fundamental analysis of individual companies by the
Sub-advisor.
The Portfolio may invest up to 20% of its net assets in foreign
securities.
As with any fund investing primarily in common stocks, the value of the
securities held by the Portfolio may decline in value, either because of
changing economic, political or market conditions or because of the economic
condition of the company that issued the security. These declines may be
substantial. In light of the Portfolio's focus on income-producing large-cap
stocks, the risk and share price fluctuations of the Portfolio (and its
potential for gain) may be less than many other stock funds. The Portfolio may
invest in foreign companies, including companies located in developing
countries, and it therefore will be subject to risks relating to political,
social and economic conditions abroad, risks resulting from differing regulatory
standards in non-U.S.
markets, and fluctuations in currency exchange rates.
Other Investments:
Although the Portfolio will invest primarily in common stocks and
related securities, the Portfolio may also invest in debt securities, including
variable and floating rate securities and zero coupon, deferred interest and
pay-in-kind bonds. The Portfolio may also purchase warrants and make short sales
"against the box."
Futures, Options and Forward Contracts. The Portfolio may purchase and
sell futures contracts and related options on securities indices, foreign
currencies and interest rates for hedging and non-hedging purposes. The
Portfolio may also enter into forward contracts for the purchase or sale of
foreign currencies for hedging and non-hedging purposes. The Portfolio may
purchase and write (sell) options on securities, stock indices and foreign
currencies.
For more information on some of the types of securities other than
common stocks in which the Portfolio may invest, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may depart from its principal
investment strategy by temporarily investing for defensive purposes when adverse
market, economic or political conditions exist. When investing for defensive
purposes, the Portfolio may hold cash or invest in cash equivalents, such as
short-term U.S. government securities, commercial paper and bank instruments.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective will be limited.
<PAGE>
AST INVESCO EQIUTY INCOME PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek high
current income while following sound investment practices. Capital growth
potential is an additional, but secondary, consideration in the selection of
portfolio securities.
Principal Investment Policies and Risks:
The Portfolio seeks to achieve its objective by investing in securities
that will provide a relatively high yield and stable return and that, over a
period of years, may also provide capital appreciation. The Portfolio normally
will invest at least 65% of its assets in dividend-paying 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. In addition,
the Portfolio normally will have some portion of its assets invested in debt
securities, convertible bonds, or preferred stocks. The Portfolio may invest up
to 25% of its total assets in foreign securities, including securities of
issuers in countries considered to be developing. These foreign investments may
serve to increase the overall risks of the Portfolio.
The Portfolio's investments in common stocks may, of course, decline in
value, which will result in declines in the Portfolio's share price. Such
declines could be substantial. To minimize the risk this presents, the
Sub-advisor only invests in common stocks and equity securities of domestic and
foreign issuers that 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. In light of the Portfolio's focus on
income producing stocks, its risk and share price fluctuation (and potential for
gain) may be less than many other stock funds.
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 or Moody's
Investors Services, Inc., or equivalent unrated debt securities ("junk bonds").
In order to decrease its risk in investing in debt securities, the
Portfolio will invest no more than 15% of its assets in junk bonds, 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. 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 under "Certain
Risk Factors and Investment Methods."
Temporary Investments:
In periods of uncertain market and economic conditions, the Portfolio
may assume a defensive position with up to 100% of its assets temporarily
invested in high quality corporate bonds or notes or government securities, or
held in cash. While the Portfolio is in a defensive position, the opportunity to
achieve its investment objective may be limited.
<PAGE>
AST AIM BALANCED PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to provide a
well-diversified portfolio of stocks that will produce both capital growth and
current income.
Principal Investment Policies and Risks:
The Portfolio attempts to meet its objective by investing, normally, a
minimum of 30% and a maximum of 70% of its total assets in equity securities and
a minimum of 30% and a maximum of 70% of its total assets in non-convertible
debt securities. The Portfolio may invest up to 25% of its total assets in
convertible securities (which, depending on the nature of the convertible
security, may be considered equity securities for purposes of the Portfolio's
30-70% range for investments in equity securities). The Portfolio may invest up
to 10% of its total assets in high-yield debt securities rated below investment
grade or non-rated debt securities deemed to be of comparable quality ("junk
bonds"). The Portfolio may also invest up to 20% of its total assets in foreign
securities.
In selecting the percentages of assets to be invested in equity or debt
securities, the Sub-advisor considers such factors as general market and
economic conditions, as well as market, economic, industry and company trends,
yields, interest rates and changes in fiscal and monetary policies. The
Sub-advisor will primarily purchase equity securities for growth of capital and
debt securities for income purposes. However, the Sub-advisor will focus on
companies whose securities have the potential for both capital appreciation and
income generation. The Sub-advisor considers whether to sell a security when it
believes that the security no longer has that potential.
As a fund that invests both in equity and debt securities, the
Portfolio's risk of loss and share price fluctuation (and potential for gain)
may be less than funds investing primarily in equity securities and more than
funds investing in primarily in debt securities. Of course, both equity and debt
securities may decline in value. Prices of equity securities fluctuate in
response to many factors, including the historical and prospective earnings of
the issuer, the value of its assets, general economic conditions, interest
rates, investor perceptions and market liquidity. Prices of debt securities
fluctuate in response to market factors such as changes in interest rates and in
response to changes in the credit quality of specific issuers. The Portfolio's
level of risk will increase to the extent it invests more heavily in long-term
debt securities or lower-rated debt securities.
The values of the convertible securities in which the Portfolio may
invest will be affected by market interest rates, the risk that the issuer may
default on interest or principal payments, and the value of the underlying
common stock into which these securities may be converted. Specifically, because
the convertible securities the Portfolio purchases typically pay fixed interest
and dividends, their values may fall if market interest rates rise and rise if
market interest rates fall. Additionally, an issuer may have the right to buy
back convertible securities at a time and price that is unfavorable to the
Portfolio.
Foreign securities have additional risks, including exchange rate
changes, political and economic upheaval, the relative lace of information about
these companies, relatively low market liquidity and the potential lack of
strict financial and accounting controls and standards.
Other Investments:
The Portfolio may write call options on securities, but only on a
covered basis; that is, the Portfolio will own the underlying security. In
addition, the Portfolio may purchase put options or write call options on
securities indices for the purpose of providing a partial hedge against a
decline in the value of its portfolio securities. The Portfolio may purchase and
sell stock index and interest rate futures contracts and related options in
order to hedge the value of its investments against changes in market
conditions. The Portfolio may also engage in various types of foreign currency
hedging transactions in connection with its foreign investments. The Portfolio
may from time to time make short sales "against the box."
Additional information about options, futures contracts, convertible
securities, lower-rated debt securities, foreign securities and other
investments that the Portfolio may make is included in this Prospectus under
"Certain Risk Factors and Investment Methods."
Temporary Investments. In anticipation of or in response to adverse
market conditions or for cash management purposes, the Portfolio may hold all or
a portion of its assets in cash, money market instruments, bonds or other debt
securities. While the Portfolio is in such a defensive position, the opportunity
to achieve its investment objective of both capital growth and current income
may be limited.
<PAGE>
AST AMERICAN CENTURY STRATEGIC BALANCED PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth and current income.
Principal Investment Policies and Risks:
The Sub-advisor intends to maintain approximately 60% of the
Portfolio's assets in equity securities and the remainder in bonds and other
fixed income securities. Both the Portfolio's equity and fixed income
investments will fluctuate in value. The equity securities will fluctuate
depending on the performance of the companies that issued them, general market
and economic conditions, and investor confidence. The fixed income investments
will be affected primarily by rising or falling interest rates and the credit
quality of the issuers. As a fund that invests both in equity and fixed income
securities, the Portfolio's risk of loss and share price fluctuation will tend
to be less than funds investing primarily in equity securities and more than
funds investing primarily in fixed income securities.
Equity Investments. With the equity portion of the Portfolio, the
Sub-advisor utilizes quantitative management techniques in a two-step process
that draws heavily on computer technology. In the first step, the Sub-advisor
ranks stocks, primarily the 1,500 largest publicly traded U.S. companies as
measured by market capitalization. These rankings are determined by using a
computer model that combines measures of a stock's value and measures of its
growth potential. To measure value, the Sub-advisor uses ratios of stock price
to book value and stock price to cash flow, among others. To measure growth, the
manager uses, among others, the rate of growth in a company's earnings and
changes in its earnings estimates.
In the second step, the Sub-advisor uses a technique called portfolio
optimization. In portfolio optimization, the Sub-advisor uses a computer to
build a portfolio of stocks from the ranking described earlier that it thinks
will provide the best balance between risk and expected return. The goal is to
create an equity portfolio that provides better returns than the S&P 500 Index
without taking on significant additional risk.
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 and may be higher or lower depending
on the mix the Sub-advisor believes will be most appropriate 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 is invested in a diversified
portfolio of government securities, corporate fixed income securities,
mortgage-backed and asset-backed securities, and similar securities. The
Sub-advisor's strategy is to actively manage the Portfolio by investing the
Portfolio's fixed income assets in sectors it believes are undervalued (relative
to the other sectors) and which represent better relative long-term investment
opportunities.
The Sub-advisor will adjust the weighted average portfolio maturity in
response to expected changes in interest rates. Under normal market conditions,
the weighted average maturity of the fixed income portion of the Portfolio will
range from 3 to 10 years. During periods of rising interest rates, the weighted
average maturity may be reduced 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 Portfolio may be moved toward the longer end of its
maturity range.
Debt securities that comprise the Portfolio's fixed income portfolio
will primarily be investment grade obligations. However, the Portfolio may
invest up to 10% of its fixed income assets in high-yield securities or "junk
bonds." 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 their risks, see this Prospectus under "Certain Risk Factors and
Investment Methods."
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. The Sub-advisor
also considers the impact of foreign exchange rates in selecting securities
denominated in foreign currencies.
Foreign Securities. The Portfolio may invest up to 25% of its total
assets in equity and debt securities of foreign issuers, including foreign
governments and their agencies, when these securities meet its standards of
selection. (As noted above, approximately 20% of the fixed income portion of the
Portfolio normally will be invested in foreign securities.) These investments
will be made primarily in issuers in developed markets. The Portfolio may make
such investments either directly in foreign securities, or by purchasing
depositary receipts for foreign securities. 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.
Other Investments:
The Portfolio may invest in derivative securities. Certain of these
derivative securities may be described as "index/structured" securities, which
are securities whose value or performance is linked to other equity securities
(as in the case of depositary receipts), currencies, interest rates, securities
indices or other financial indicators ("reference indices"). 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 because the Portfolio may not invest in oil and gas
leases or futures. The Portfolio may make short sales "against the box."
For further information on these securities and investment practices,
see this Prospectus under "Certain Risk Factors and Investment Methods."
<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 portfolio of
fixed income and equity securities.
Principal Investment Policies and Risks:
The Portfolio normally invests approximately 60% of its total assets in
equity securities and 40% in fixed income securities. This mix may vary over
shorter time periods; the equity portion may range between 50-70% and the fixed
income portion between 30-50%.
The Sub-advisor concentrates common stock investments in larger, more
established companies, but the Portfolio may include small and medium-sized
companies with good growth prospects. The Portfolio's exposure to smaller
companies is not expected to be substantial, and will not constitute more than
30% of the equity portion of the Portfolio. Up to 35% of the equity portion may
be invested in foreign (non-U.S. dollar denominated) equity securities. The
fixed income portion of the Portfolio will be allocated among investment grade
securities (50-100% of the fixed income portion); high yield or "junk" bonds (up
to 30%); foreign (non-U.S.
dollar denominated) high quality debt securities (up to 30%); and cash reserves
(up to 20%).
The precise mix of equity and fixed income investments will depend on
the Sub-advisor's outlook for the markets. Shifts between stocks and bonds will
normally be done gradually and the Sub-advisor will not attempt to precisely
"time" the market. The Portfolio's investments in foreign equity and debt
securities are intended to provide additional diversification, and the
Sub-advisor will normally have at least three different countries represented in
both the foreign equity and foreign debt portions of the Portfolio.
Securities may be sold for a variety of reasons, such as to effect a
change in asset allocation, to secure gains or limit losses, or to re-deploy
assets to more promising opportunities.
As a fund that invests both in equity and fixed income securities, the
Portfolio risk of loss and share price fluctuation (and potential for gain) will
tend to be less than funds investing primarily in equity securities and more
than funds investing primarily in fixed income securities. Of course, both
equity and fixed income securities may decline in value.
Equity securities may decline because the stock market as a whole
declines, or because of reasons specific to the company, such as disappointing
earnings or changes in its competitive environment. The Portfolio's level of
risk will increase if a significant portion of the Portfolio is invested in
securities of small-cap companies. Like other fixed income funds, the fixed
income portion of the Portfolio is subject to changes in market interest rates
and changes in the credit quality of specific issuers. Because of the
Portfolio's focus on fixed income securities with intermediate to long
maturities, changes in market interest rates may cause substantial declines in
the Portfolio's share price. The Portfolio's level of risk will increase if a
significant portion of the Portfolio is invested in lower-rated high yield bonds
or in foreign securities.
Equity Securities. Investments in non-U.S. dollar denominated stocks
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. Stocks
of companies in developing countries may be included. The equity portion of the
Portfolio also may include convertible securities, preferred stocks and
warrants.
Investments in small companies involve both higher risk and greater
potential for appreciation. 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 move more abruptly than securities of larger companies.
Fixed Income Securities. Bond investments may include U.S. Treasury and
agency issues, corporate debt securities (including non-investment grade "junk"
bonds), mortgage-backed securities (including derivatives such as collateralized
mortgage obligations and stripped mortgage-backed securities) and asset-backed
securities. While the weighted average maturities of each component of the fixed
income portion (i.e., investment grade, high yield, etc.) of the Portfolio will
differ, the weighted average maturity of the fixed income portion as a whole
(except for the cash reserves component) is expected to be in the range of 7 to
12 years. The cash reserves component will consist of liquid short-term
investments of one year or less rated within the top two credit categories by at
least one established rating organization or, if unrated, of equivalent
investment quality as determined by the Sub-advisor.
Other Investments:
The Portfolio may enter into stock index, interest rate or currency
futures contracts (or options thereon) for hedging purposes or to provide an
efficient means of adjusting the Portfolio's exposure to the equity markets. The
Portfolio may write covered call options and purchase put and call options on
foreign currencies, securities, and financial indices. The Portfolio may invest
up to 10% of its total assets in hybrid instruments, which combine the
characteristics of futures, options and securities. To the extent the Portfolio
uses these investments, it will be exposed to additional volatility and
potential losses. The Portfolio may enter into forward foreign currency exchange
contracts in connection with its foreign investments.
For an additional discussion of these other investments and their
risks, see this Prospectus under "Certain Risk Factors and Investment Methods."
Temporary Investments. As noted above, up to 20% of the fixed income
portion of the Portfolio normally may consist of cash reserves. In addition, the
Portfolio may maintain cash reserves without limitation for temporary defensive
purposes. While the Portfolio is in a defensive position, the opportunity to
achieve its investment objective of a high level of total return may be limited.
Cash reserves also provide flexibility in meeting redemptions and paying
expenses.
<PAGE>
AST T. ROWE PRICE INTERNATIONAL BOND PORTFOLIO:
Investment Objective: The investment objective of the Portfolio is to provide
high current income and capital growth by investing in high-quality, non
dollar-denominated government and corporate bonds outside the United States.
Principal Investment Policies and Risks:
To achieve its objectives, the Portfolio will invest at least 65% of
its assets in high-quality, non-U.S. dollar denominated government and corporate
bonds outside the United States. The Portfolio 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
Sub-advisor believes that the currency risk can be minimized through hedging.
Although the Portfolio expects to maintain an intermediate-to-long
weighted average maturity, there are no maturity restrictions on the overall
portfolio or on individual securities. While the Portfolio may engage in foreign
currency transactions such as forward foreign currency exchange contracts, the
Portfolio normally does not hedge its foreign currency exposure back to the
dollar. Nor will the Portfolio normally involve more than 50% of its total
assets in hedging Portfolio holdings against other foreign currencies
("cross-hedging"). The Sub-advisor attempts to reduce currency 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 ("junk 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. Up to
20% of the Portfolio's assets may be invested in foreign bonds denominated in
U.S. dollars, such as Brady Bonds and other emerging market bonds.
Like any fixed income fund, the value of the Portfolio will fluctuate
in response to changes in market interest rates and the credit quality of
particular companies. International fixed income investing, however, involves
additional risks that can increase the potential for losses. These additional
risks include varying stages of economic and political development of foreign
countries, differing regulatory and accounting standards in non-U.S. markets,
and higher transactions cost. Because the Portfolio's investments are primarily
denominated in foreign currencies, exchange rates are also likely to have a
significant impact on total Portfolio performance. For example, a rise in the
U.S. dollar's value relative to the Japanese yen will decrease the U.S. dollar
value of a Japanese bond held in the Portfolio, even though the price of that
bond in yen remains unchanged. Therefore, because of these currency risks and
the risks of investing in foreign securities generally, the Portfolio will
involve a greater degree of risk and share price fluctuation than a fund
investing primarily in domestic fixed income securities. In addition, the
Portfolio's focus on longer maturity bonds will tend to cause greater
fluctuations in value when interest rates change.
Types of Debt Securities. The Portfolio's investments in debt
securities may include securities issued or guaranteed by foreign governments,
their agencies, instrumentalities or political subdivisions, securities issued
or guaranteed by supranational organizations (e.g., European Investment Bank,
InterAmerican Development Bank or the World Bank), bank or bank holding company
securities, and convertible debt securities.
The Portfolio may invest in zero coupon securities, which are
securities that are purchased at a discount from their face value, but that do
not make cash interest payments. Zero coupon securities are subject to greater
fluctuation in market value as a result of changing interest rates than debt
obligations that make current cash interest payments.
The Portfolio may invest in Brady Bonds, which are used to as a means
of restructuring the external debt burden of certain emerging countries. Even if
the bonds are collateralized, they are often considered speculative investments
because of the country's credit history or other factors. 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 Trust's expenses, shareholders will also indirectly bear similar
expenses of such trusts.
Nondiversified Investment Company. The Portfolio intends to select its
investments from a number of country and market sectors, and intends to have
investments in securities of issuers from a minimum of three different
countries. However, the Portfolio is considered a "nondiversified" investment
company for purposes of the Investment Company Act of 1940. As such, 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, except with respect to
certain short-term investments. As a nondiversified fund, a price decline in any
one of the Portfolio's holdings may have a greater effect on the Portfolio's
value than on the value of a fund that is more broadly diversified.
Other Investments:
The Portfolio may buy and sell futures contracts (and related options)
for a number of reasons including: to manage exposure to changes in interest
rates, securities prices and currency exchange rates; as an efficient means of
adjusting overall exposure to certain markets; to earn income; to protect the
value of portfolio securities; and to adjust the portfolio's duration. The
Portfolio may purchase or write call and put options on securities, financial
indices, and foreign currencies. The Portfolio may invest up to 10% of its total
assets in hybrid instruments, which combine the characteristics of futures,
options and securities.
Additional information on the securities in which the Portfolio may
invest and their risks in included below under "Certain Risk Factors and
Investment Methods."
Temporary Investments. To protect against adverse movements of interest
rates, the Portfolio may invest without limit in short-term obligations
denominated in U.S. and foreign currencies such as certain bank obligations,
commercial paper, short-term government and corporate obligations, and
repurchase agreements. Cash reserves also provide flexibility in meeting
redemptions and paying expenses. While the Portfolio is in a defensive position,
the opportunity to achieve its investment objective of high current income and
capital growth may be limited.
<PAGE>
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.
Principal Investment Policies and Risks:
The Portfolio will invest at least 65% of its assets in lower-rated
corporate fixed income securities ("junk bonds"). These fixed income securities
may include preferred stocks, convertible securities, bonds, debentures, notes,
equipment lease certificates and equipment trust certificates. The securities in
which the Portfolio invests usually will be rated below the three highest rating
categories of a nationally recognized rating organization (AAA, AA, or A for
Standard & Poor's Corporation ("Standard & Poor's") and Aaa, Aa or A for Moody's
Investors Service, Inc. ("Moody's")) or, if unrated, are of comparable quality.
There is no lower limit on the rating of securities in which the Portfolio may
invest. The Portfolio may purchase or hold securities rated in the lowest rating
category or securities in default.
A fund that invests primarily in lower-rated fixed income securities
will be subject to greater risk and share price fluctuation than a typical fixed
income fund, and may be subject to an amount of risk that is comparable to or
greater than many equity funds. Lower-rated securities will usually offer higher
yields than higher-rated securities, but with more risk of loss of principal and
interest. This is because of the reduced creditworthiness of the securities and
the increased risk of default. Like equity securities, lower-rated fixed income
securities tend to reflect short-term corporate and market developments to a
greater extent than higher-rated fixed income securities, which tend to react
primarily to fluctuations in market interest rates.
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 industries sensitive to market cycles, where deterioration in a
company's cash flow may impair its ability to meet its obligations under the
bonds. From time to time, 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, the value of the securities may
fall, and the Portfolio may bear 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. Adverse
publicity and the perception of investors relating to these securities and their
issuers, whether or not warranted, may also affect the price or liquidity of
lower-rated bonds. For an additional discussion of the risks involved in
lower-rated securities, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Methods by which the Sub-advisor attempts to reduce the risks involved
in lower-rated securities include:
Credit Research. The Sub-advisor will perform its own credit
analysis in addition to using rating organizations and other sources, and may
have discussions with the issuer's management or other investment analysts
regarding issuers. The Sub-advisor's credit analysis will consider the issuer's
financial soundness, its responsiveness to changing business and market
conditions, and its anticipated cash flow and earnings. In evaluating an issuer,
the Sub-advisor places special emphasis on the estimated current value of the
issuer's assets rather than their 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.
Other Investments:
Under normal circumstances, the Portfolio will not invest more than 10%
of its total assets in equity securities. The Portfolio may own zero coupon
bonds or pay-in-kind securities, which are fixed income securities that do not
make regular cash interest payments. The prices of these securities are
generally more sensitive to changes in market interest rates than are
conventional bonds. Additionally, interest on zero coupon bonds and pay-in-kind
securities must be reported as taxable income to the Portfolio even though it
receives no cash interest until the maturity of such securities.
The Portfolio may invest in securities issued by real estate investment
trusts, which are companies that hold real estate or mortgage investments.
Usually, real estate investment trusts are not diversified, and, therefore, are
subject to the risks of a single project or a small number of projects. They
also may be heavily dependent on cash flows from the property they own, may bear
the risk of defaults on mortgages, and may be affected by changes in the value
of the underlying property.
Temporary Investments. The Portfolio may also invest all or a part of
its assets temporarily in cash or cash items for defensive purposes during times
of unusual market conditions or to maintain liquidity. Cash items may include
certificates of deposit and other bank obligations; commercial paper (generally
lower-rated); short-term notes; obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities; and repurchase agreements.
While the Portfolio is in a defensive position, the opportunity to achieve its
investment objective of high current income will be limited.
<PAGE>
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 and prudent
investment management.
Principal Investment Policies and Risks:
The Portfolio will invest at least 65% of its assets in the following
types of fixed income securities;
<TABLE>
<CAPTION>
<S> <C>
o securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
o corporate debt securities, including convertible securities and commercial paper;
o mortgage and other asset-backed securities;
o structured notes, including hybrid or "indexed" securities, and loan participations;
o delayed funding loans and revolving credit securities;
o bank certificates of deposit, fixed time deposits and bankers' acceptances;
o repurchase agreements and reverse repurchase agreements;
o obligations of foreign governments or their subdivisions, agencies and instrumentalities; and
o obligations of international agencies or supranational entities.
</TABLE>
Portfolio holdings will be concentrated in areas of the bond market (based on
quality, sector, interest rate or maturity) that the Sub-advisor believes to be
relatively undervalued. In selecting fixed income securities, the Sub-advisor
uses economic forecasting, interest rate anticipation, credit and call risk
analysis, foreign currency exchange rate forecasting, and other securities
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 management of
duration (a measure of a fixed income security's expected life that incorporates
its yield, coupon interest payments, final maturity and call features into one
measure) is one of the fundamental tools used by the Sub-advisor.
The Portfolio will invest in fixed-income securities of varying
maturities. The average portfolio duration of the Portfolio generally 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 ("junk bonds") but are 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).
Generally, over the long term, the return obtained by a portfolio
investing primarily in fixed income securities such as the Portfolio is not
expected to be as great as that obtained by a portfolio investing in equity
securities. At the same time, the risk and price fluctuation of a fixed income
fund 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.
However, the Portfolio can and routinely does invest in certain complex fixed
income securities (including various types of mortgage-backed and asset-backed
securities) and engage in a number of investment practices (including futures,
swaps and dollar rolls) as described below, that many other fixed income funds
do not utilize. These investments and practices are designed to increase the
Portfolio's return or hedge its investments, but may increase the risk to which
the Portfolio is subject.
Like other fixed income funds, the Portfolio is subject to market risk.
Bond values fluctuate based on changes in interest rates, market conditions,
investor confidence and announcements of economic, political or financial
information. Generally, the value of fixed income securities will change
inversely with changes in market interest rates. As interest rates rise, market
value tends to decrease. This risk will be greater for long-term securities than
for short-term securities. Certain mortgage-backed and asset-backed securities
and derivative instruments in which the Portfolio may invest may be particularly
sensitive to changes in interest rates. The Portfolio is also subject to credit
risk, which is the possibility that an issuer of a security (or a counterparty
to a derivative contract) will default or become unable to meet its obligation.
Generally, the lower the rating of a security, the higher its degree of credit
risk.
The following paragraphs describe some specific types of fixed-income
investments that the Portfolio may invest in, and some of the investment
practices that the Portfolio will engage in. More information about some of
these investments, including futures, options and mortgage-backed and
asset-backed securities, is included below under "Certain Risk Factors and
Investment Methods."
U.S. Government Securities. The Portfolio may invest in various types
of U.S. Government securities, including those that are supported by the full
faith and credit of the United States; those that are supported by the right of
the issuing agency to borrow from the U.S. Treasury; those that are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others that are supported only by the credit of the
instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar instruments, including convertible
securities and preferred stock. Debt securities may be acquired with warrants
attached. The rate of return or return of principal on some debt obligations may
be linked or indexed to exchange rates between the U.S. dollar and a foreign
currency or currencies.
While the Sub-advisor may regard some countries or companies as
favorable investments, pure fixed income opportunities may be unattractive or
limited due to insufficient supply or legal or technical restrictions. In such
cases, the Portfolio may consider equity securities or convertible bonds to gain
exposure to such investments.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The interest rates on these securities are tied to other interest
rates, such as money-market indices or Treasury bill rates, and reset
periodically. While these securities provide the Portfolio with a certain degree
of protection against losses caused by rising interest rates, they will cause
the Portfolio's interest income to decline if market interest rates decline.
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 fixed at issuance, and is
generally lower than the interest rate on typical bonds. Over the life of the
bond, however, this interest will be paid based on a principal value that has
been adjusted for inflation. Repayment of the adjusted principal upon maturity
may be guaranteed, but the market value of the bonds is not guaranteed, and will
fluctuate. The Portfolio may invest in inflation-indexed bonds that do not
provide a repayment guarantee. While these securities are expected to be
protected from long-term inflationary trends, short-term increases in inflation
may lead to losses.
Catastrophe Bonds. Catastrophe bonds are fixed income securities for
which the return of principal and payment of interest is contingent upon the
non-occurrence of a specific "trigger" event. The trigger event may be, for
example, a hurricane or an earthquake in a specific geographic region that
causes losses exceeding a specific amount. If the trigger event occurs, the
Portfolio may lose all or a portion of the amount it invested in the bond.
Catastrophe bonds may also expose the Portfolio to certain other risks,
including default, adverse regulatory interpretation, and adverse tax
consequences.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-backed and other asset-backed securities,
including collateralized mortgage obligations. The value of some mortgage-backed
and asset-backed securities in which the Portfolio invests may be particularly
sensitive to changes in market interest rates.
Reverse Repurchase Agreements and Dollar Rolls. In addition to entering
into reverse repurchase agreements (as described below under "Certain Risk
Factors and Investment Methods"), the Portfolio may also enter into dollar
rolls. In a dollar roll, 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. The Portfolio
forgoes principal and interest paid on the securities sold in a dollar roll, but
the Portfolio is compensated by the difference between the 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. Reverse repurchase agreements and dollar rolls can be
viewed as collateralized borrowings and, like other borrowings, will tend to
exaggerate fluctuations in Portfolio's share price and may cause the Portfolio
to need to sell portfolio securities at times when it would otherwise not wish
to do so.
Foreign 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 invest
up to 10% of its assets in securities of issuers based in developing countries
(as determined by the Sub-advisor). The Portfolio may buy and sell foreign
currency futures contracts and options on foreign currencies and foreign
currency futures contracts, and enter into forward foreign currency exchange
contracts for the purpose of hedging currency exchange risks arising from the
Portfolio's investment or anticipated investment in securities denominated in
foreign currencies.
Derivative Instruments. The Portfolio may purchase and write call and
put options on securities, securities indices and on foreign currencies. 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 U.S. or foreign exchanges or boards of trade. The Portfolio may also
enter into swap agreements with respect to foreign currencies, interest rates
and securities indices. The Portfolio may use these techniques to hedge against
changes in interest rates, currency exchange rates or securities prices or as
part of its overall investment strategy.
For a discussion of futures and options and their risks, see this
Prospectus under "Certain Risk Factors and Investment Methods." The Portfolio's
investments in swap agreements are described directly below.
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for the purposes of attempting to obtain
a desired return at a lower cost 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, the
two parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular investments or instruments. The returns to be
exchanged between the parties are calculated with respect to a "notional
amount," i.e., a specified dollar amount that is hypothetically 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.
Under most swap agreements entered into by the Portfolio, the parties'
obligations are determined on a "net basis." Consequently, the Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to a
net amount based on the relative values of the positions held by each party.
Whether the Portfolio's use of swap agreements will be successful will
depend on the sub-advisor's ability to predict that certain types of investments
are likely to produce greater returns than other investments. Moreover, the
Portfolio may not receive the expected amount under a swap agreement if the
other party to the agreement defaults or becomes bankrupt. The swaps market is
relatively new and is largely unregulated.
<PAGE>
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.
Principal Investment Policies and Risks:
The Portfolio will invest at least 65% of its assets in the following
types of fixed income securities;
<TABLE>
<CAPTION>
<S> <C>
o securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
o corporate debt securities, including convertible securities and commercial paper;
o mortgage and other asset-backed securities;
o structured notes, including hybrid or "indexed" securities, and loan participations;
o delayed funding loans and revolving credit securities;
o bank certificates of deposit, fixed time deposits and bankers' acceptances;
o repurchase agreements and reverse repurchase agreements;
o obligations of foreign governments or their subdivisions, agencies and instrumentalities; and
o obligations of international agencies or supranational entities.
</TABLE>
Portfolio holdings will be concentrated in areas of the bond market
(based on quality, sector, interest rate or maturity) that the Sub-advisor
believes to be relatively undervalued. In selecting fixed income securities, the
Sub-advisor uses economic forecasting, interest rate anticipation, credit and
call risk analysis, foreign currency exchange rate forecasting, and other
securities 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
management of duration (a measure of a fixed income security's expected life
that incorporates its yield, coupon interest payments, final maturity and call
features into one measure) is one of the fundamental tools used by the
Sub-advisor.
The Portfolio will invest in 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 fixed income
securities that are rated below investment grade ("junk bonds") but are 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).
Generally, over the long term, the return obtained by a portfolio
investing primarily in fixed income securities such as the Portfolio is not
expected to be as great as that obtained by a portfolio investing in equity
securities. At the same time, the risk and price fluctuation of a fixed income
fund 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.
However, the Portfolio can and routinely does invest in certain complex fixed
income securities (including various types of mortgage-backed and asset-backed
securities) and engage in a number of investment practices (including futures,
swaps and dollar rolls) as described below, that many other fixed income funds
do not utilize. These investments and practices are designed to increase the
Portfolio's return or hedge its investments, but may increase the risk to which
the Portfolio is subject.
Like other fixed income funds, the Portfolio is subject to market risk.
Bond values fluctuate based on changes in interest rates, market conditions,
investor confidence and announcements of economic, political or financial
information. Generally, the value of fixed income securities will change
inversely with changes in market interest rates. As interest rates rise, market
value tends to decrease. This risk will be greater for long-term securities than
for short-term securities. Therefore, the Portfolio's share price is expected to
fluctuate less than the AST PIMCO Total Return Bond Portfolio, because its
average duration will be shorter. Certain mortgage-backed and asset-backed
securities and derivative instruments in which the Portfolio may invest may be
particularly sensitive to changes in interest rates. The Portfolio is also
subject to credit risk, which is the possibility that an issuer of a security
(or a counterparty to a derivative contract) will default or become unable to
meet its obligation. Generally, the lower the rating of a security, the higher
its degree of credit risk.
The following paragraphs describe some specific types of fixed-income
investments that the Portfolio may invest in, and some of the investment
practices that the Portfolio will engage in. More information about some of
these investments, including futures, options and mortgage-backed and
asset-backed securities, is included below under "Certain Risk Factors and
Investment Methods."
U.S. Government Securities. The Portfolio may invest in various types
of U.S. Government securities, including those that are supported by the full
faith and credit of the United States; those that are supported by the right of
the issuing agency to borrow from the U.S. Treasury; those that are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others that are supported only by the credit of the
instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar instruments, including convertible
securities and preferred stock. Debt securities may be acquired with warrants
attached. The rate of return or return of principal on some debt obligations may
be linked or indexed to exchange rates between the U.S. dollar and a foreign
currency or currencies.
While the Sub-advisor may regard some countries or companies as
favorable investments, pure fixed income opportunities may be unattractive or
limited due to insufficient supply or legal or technical restrictions. In such
cases, the Portfolio may consider equity securities or convertible bonds to gain
exposure to such investments.
Variable and Floating Rate Securities. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The interest rates on these securities are tied to other interest
rates, such as money-market indices or Treasury bill rates, and reset
periodically. While these securities provide the Portfolio with a certain degree
of protection against losses caused by rising interest rates, they will cause
the Portfolio's interest income to decline if market interest rates decline.
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 fixed at issuance, and is
generally lower than the interest rate on typical bonds. Over the life of the
bond, however, this interest will be paid based on a principal value that has
been adjusted for inflation. Repayment of the adjusted principal upon maturity
may be guaranteed, but the market value of the bonds is not guaranteed, and will
fluctuate. The Portfolio may invest in inflation-indexed bonds that do not
provide a repayment guarantee. While these securities are expected to be
protected from long-term inflationary trends, short-term increases in inflation
may lead to losses.
Catastrophe Bonds. Catastrophe bonds are fixed income securities for
which the return of principal and payment of interest is contingent upon the
non-occurrence of a specific "trigger" event. The trigger event may be, for
example, a hurricane or an earthquake in a specific geographic region that
causes losses exceeding a specific amount. If the trigger event occurs, the
Portfolio may lose all or a portion of the amount it invested in the bond.
Catastrophe bonds may also expose the Portfolio to certain other risks,
including default, adverse regulatory interpretation, and adverse tax
consequences.
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-backed and other asset-backed securities,
including collateralized mortgage obligations and stripped mortgage-backed
securities. The value of some mortgage-backed and asset-backed securities in
which the Portfolio invests may be particularly sensitive to changes in market
interest rates.
Reverse Repurchase Agreements and Dollar Rolls. In addition to entering
into reverse repurchase agreements (as described below under "Certain Risk
Factors and Investment Methods"), the Portfolio may also enter into dollar
rolls. In a dollar roll, 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. The Portfolio
forgoes principal and interest paid on the securities sold in a dollar roll, but
the Portfolio is compensated by the difference between the 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. Reverse repurchase agreements and dollar rolls can be
viewed as collateralized borrowings and, like other borrowings, will tend to
exaggerate fluctuations in Portfolio's share price and may cause the Portfolio
to need to sell portfolio securities at times when it would otherwise not wish
to do so.
Foreign 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 and
sell foreign currency futures contracts and options on foreign currencies and
foreign currency futures contracts, and enter into forward foreign currency
exchange contracts for the purpose of hedging currency exchange risks arising
from the Portfolio's investment or anticipated investment in securities
denominated in foreign currencies.
Derivative Instruments. The Portfolio may purchase and write call and
put options on securities, securities indices and on foreign currencies. 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 U.S. or foreign exchanges or boards of trade. The Portfolio may also
enter into swap agreements with respect to foreign currencies, interest rates
and securities indices. The Portfolio may use these techniques to hedge against
changes in interest rates, currency exchange rates or securities prices or as
part of its overall investment strategy.
For a discussion of futures and options and their risks, see this
Prospectus under "Certain Risk Factors and Investment Methods." The Portfolio's
investments in swap agreements are described directly below.
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for the purposes of attempting to obtain
a desired return at a lower cost 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, the
two parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular investments or instruments. The returns to be
exchanged between the parties are calculated with respect to a "notional
amount," i.e., a specified dollar amount that is hypothetically 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.
Under most swap agreements entered into by the Portfolio, the parties'
obligations are determined on a "net basis." Consequently, the Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to a
net amount based on the relative values of the positions held by each party.
Whether the Portfolio's use of swap agreements will be successful will
depend on the sub-advisor's ability to predict that certain types of investments
are likely to produce greater returns than other investments. Moreover, the
Portfolio may not receive the expected amount under a swap agreement if the
other party to the agreement defaults or becomes bankrupt. The swaps market is
relatively new and is largely unregulated.
<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.
Principal Investment Policies and Risks:
As a money market fund, the Portfolio seeks to maintain a stable net
asset value of $1.00 per share. In other words, the Portfolio attempts to
operate so that shareholders do not lose any of the principal amount they invest
in the Portfolio. Of course, there can be no assurance that the Portfolio will
achieve its goal of a stable net asset value, and shares of the Portfolio are
neither insured nor guaranteed by the U.S. government or any other entity. For
instance, the issuer or guarantor of a portfolio security or the other party to
a contract could default on its obligation, and this could cause the Portfolio's
net asset value to fall below $1. In addition, the income earned by the
Portfolio will fluctuate based on market conditions and other factors.
Under the regulatory requirements applicable to money market funds, the
Portfolio must maintain a weighted average portfolio maturity of not more than
90 days and invest in high quality U.S. dollar-denominated securities that have
effective maturities of not more than 397 days. In addition, the Portfolio will
limit its investments to those securities that, in accordance with guidelines
adopted by the Trustees of the Trust, present minimal credit risks. The
Portfolio will not purchase any security (other than a United States Government
security) unless:
o if rated by only one nationally recognized statistical rating organization
(such as Moody's and Standard & Poor's), such organization has rated it
with the highest rating assigned to short-term debt securities;
o if rated by more than one nationally recognized statistical rating
organization, at least two rating organizations have rated it with the
highest rating assigned to short-term debt securities; or
o it is not rated, but is determined to be of comparable quality in accordance
with procedures noted above.
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 Directors that
disposing of the investment would not be in the Portfolio's best interest.
Subject to the above requirements, 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 and instrumentalities either
directly or through repurchase agreements. U.S. Government obligations 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. Some 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 are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others are supported only
by the credit of the agency. There is no assurance that the U.S. Government will
provide financial support to one of its agencies 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 U.S. and foreign banks, savings and loan associations
and savings banks meeting certain total asset minimums. 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 commitments of their member countries, and there is no assurance
these commitments will be undertaken or met.
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 U.S.
dollar-denominated and is not subject to foreign withholding tax.
Asset-Backed Securities. As may be permitted by current laws and
regulations, the Portfolio may invest in asset-backed securities up to 10% of
its net assets.
Synthetic Instruments. As may be permitted by current laws and
regulations and if expressly permitted by the Directors of the Company, 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
Sub-advisor will review the structure of synthetic instruments to identify
credit and liquidity risks and will monitor such risks.
Foreign Securities. Foreign investments must be denominated in U.S. dollars
and may be made directly in securities of foreign issuers or in the form of
American Depositary Receipts and European Depositary Receipts.
For more information on certain of these investments, see this
Prospectus under "Certain Risk Factors and Investment Methods."
<PAGE>
PORTFOLIO TURNOVER:
Each Portfolio may sell its portfolio securities, regardless of the
length of time that they have been held, if the Sub-advisor and/or the
Investment Manager determines that it would be in the Portfolio's best interest
to do so. It may be appropriate to buy or sell portfolio securities due to
economic, market, or other factors that are not within the Sub-advisor's or
Investment Manager's control. Such transactions will increase a Fund's
"portfolio turnover." A 100% portfolio turnover rate would occur if all of the
securities in a portfolio of investments were replaced during a given period.
Although turnover rates may vary substantially from year to year, it is
anticipated that the following Portfolios regularly may regularly have annual
rates of turnover exceeding 100%:
AST Founders Passport Portfolio
AST Janus Overseas Growth Portfolio
AST American Century International Growth Portfolio
AST Janus Small-Cap Growth Portfolio
AST Kemper Small-Cap Growth Portfolio
AST Neuberger Berman Mid-Cap Growth Portfolio
AST Neuberger Berman Mid-Cap Value Portfolio
AST Marsico Capital Growth Portfolio
AST JanCap Growth Portfolio
AST Cohen & Steers Realty Portfolio
AST T. Rowe Price International Bond Portfolio
AST PIMCO Total Return Bond Portfolio
AST PIMCO Limited Maturity Bond Portfolio
A high rate of portfolio turnover involves correspondingly higher
brokerage commission expenses and other transaction costs, which are borne by a
Portfolio and will reduce its performance.
NET ASSET VALUE:
The net asset value per share ("NAV") of each Portfolio is determined
as of the close of the New York Stock Exchange (the "NYSE") (normally 4:00 p.m.
Eastern Time) on each day that the NYSE is open for business. NAV is determined
by dividing the value of a Portfolio's total assets, less any liabilities, by
the number of total shares of that Portfolio outstanding. In general, the assets
of each Portfolio (except the AST Money Market Portfolio) are valued on the
basis of market quotations. However, in certain circumstances where market
quotations are not readily available or are believed to be inaccurate, assets
are valued by methods that are believed to accurately reflect their fair value.
The assets of the AST Money Market Portfolio are valued by the amortized cost
method, which is intended to approximate market value. Because NAV is calculated
and purchases may be made only on business days, and because securities traded
on foreign exchanges may trade on other days, the value of a Portfolio's
investments may change on days when shares cannot be purchased or redeemed.
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 investing
assets attributable to variable annuity contracts and variable life insurance
policies ("contractholders"), 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 to be effected on
that day under the variable annuity contracts and variable life insurance
policies. Orders are effected on days on which the NYSE is open for trading.
Orders received before 4:00 P.M. Eastern time are effected at the NAV 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 NAV calculated the next business day. Payment
for redemptions will be made 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. However, 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. Please refer to
the prospectuses for the variable annuity contracts and variable insurance
policies for further information on these fees.
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. The profit sharing plan covering employees of
ASLAC and its affiliates, which is a retirement plan qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended, also may directly own
shares of the Trust. Certain conflicts of interest may arise as a result of
investment in the Trust by various insurance companies for the benefit of their
contractholders and by various qualified plans. These conflicts could arise
because of differences in the tax treatment of the various investors, because of
actions of the Participating Insurance Companies and/or the qualified plans, or
other reasons. The Trust does not currently expect that any material conflicts
of interest will arise. Nevertheless, the Trustees intend to monitor events in
order to identify any material irreconcilable conflicts and to determine what
action, if any, should be taken in response to such conflicts. Should any
conflict arise that would require a substantial amount of assets to be withdrawn
from the Trust, orderly portfolio management could be disrupted.
MANAGEMENT OF THE TRUST:
Investment Manager: American Skandia Investment Services, Incorporated
("ASISI"), One Corporate Drive, Shelton, Connecticut, acts as Investment Manager
to the Trust. ASISI has served as Investment Manager since 1992, and currently
serves as Investment Manager to a total of 50 investment company portfolios
(including the Portfolios of the Trust). ASISI is an indirect wholly-owned
subsidiary of Skandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish
company that owns, directly or indirectly, a number of insurance companies in
many countries. The predecessor to Skandia commenced operations in 1855.
The Trust's Investment Management Agreements with ASISI (the
"Management Agreements") provide that ASISI will furnish each applicable
Portfolio with investment advice and administrative services 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 Sub-advisors to
conduct the investment programs of each Portfolio, including the purchase,
retention and sale of portfolio securities. The Investment Manager is
responsible for monitoring the activities of the Sub-advisors and reporting on
such activities to the Trustees. The Investment Manager must also provide, or
obtain and supervise, the executive, administrative, accounting, custody,
transfer agent and shareholder servicing services that are deemed advisable by
the Trustees.
The Trust has filed with the Securities and Exchange Commission an
application for an order which, if granted, would permit ASISI, subject to
approval by the Board of Trustees of the Trust, to change sub-advisors for a
Portfolio in the future, and to permit ASISI to enter into new sub-advisory
agreements, without obtaining shareholder approval of the changes. This order
(which has been granted to other investment companies that are organized in a
similar manner as the Trust) is intended to facilitate the efficient supervision
and management of the sub-advisors by ASISI and the Trustees.
Sub-advisors:
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, and serves as investment advisor to a
number of other investment companies and private accounts. Founders managed
assets aggregating approximately $7.6 billion as of December 31, 1998.
Tracy P. Stouffer, a Vice President of Investments of Founders and a
Chartered Financial Analyst, has been responsible for the management of the AST
Founders Passport Portfolio since July 1999. Before joining Founders, Ms.
Stouffer was a vice president and portfolio manager with Federated Global, Inc.
from 1995 until July 1999, and a vice president and portfolio manager with
Clariden Asset Management from 1988 to 1995.
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 $32 billion under management as of December 31, 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.
A I M Capital Management, Inc. ("AIM"), 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173, serves as Sub-advisor for the AST AIM International
Equity Portfolio and the AST AIM Balanced Portfolio. AIM has acted as an
investment advisor since 1986 and, together with its parent, A I M Advisors,
Inc., advises or manages over 110 investment portfolios encompassing a broad
range of investment objectives. As of December 31, 1998, AIM managed
approximately $109 billion in assets.
AIM became the Sub-advisor of the Portfolios on May 4, 1999 upon the
resignation of Putnam Investment Management, Inc., the previous Sub-advisor for
the Portfolios. (The AST AIM International Portfolio was known as the AST Putnam
International Equity Portfolio, and the AST AIM Balanced Portfolio was known as
the AST Putnam Balanced Portfolio.)
AIM uses a team approach to investment management. The members of the team
responsible for the management of the AST AIM International Equity Portfolio are
A. Dale Griffin, III, Clas G. Olsson and Barrett K. Sides. The members of the
team have managed the Portfolio since AIM became the Portfolio's Sub-Advisor in
May 1999, and are all officers of AIM. Mr. Griffin, Senior Portfolio Manager,
has been associated with AIM and/or its affiliates since 1989. Mr. Olsson,
Portfolio Manager, has been associated with AIM and/or its affiliates since
1994. Mr. Sides, Portfolio Manager, has been associated with AIM and/or its
affiliates since 1990.
The members of the team responsible for the management of the AST AIM
Balanced Portfolio are Claude C. Cody IV, Robert G. Alley, Craig A. Smith,
Carolyn L. Gibbs and Meggan M. Walsh. The members of the team have managed the
Portfolio since AIM became the Portfolio's Sub-advisor in May 1999, and are all
officers of AIM. Mr. Cody, Senior Portfolio Manager, has been associated with
AIM and/or its affiliates since 1992. Mr. Alley, Senior Portfolio Manager, has
been associated with AIM and/or its affiliates since 1992. Mr. Smith, Portfolio
Manager, has been associated with AIM and/or its affiliates since 1989. Ms.
Gibbs, Senior Portfolio Manager, has been associated with AIM and/or its
affiliates since 1992. Ms. Walsh, Portfolio Manager, has been associated with
AIM and/or its affiliates since 1991.
Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver,
Colorado 80206-4923, serves as Sub-advisor for the AST Janus Overseas Growth
Portfolio, the AST Janus Small-Cap Growth Portfolio and the AST JanCap 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 December 31, 1998, Janus managed
assets worth over $106 billion.
The portfolio manager responsible for management of the AST Janus Overseas
Growth Portfolio is Helen Young Hayes, Vice President of Janus. Ms. Hayes joined
Janus in 1987.
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.
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.
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, the AST American Century Income & 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. As of December 31, 1998, American Century
and its affiliates managed assets totaling approximately $80 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, has been a portfolio manager member of the international
team since 1994 and has managed the Portfolio since its inception. 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 AST American Century Income & Growth 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.
American Century became the Sub-advisor of the AST American Century
Income & Growth Portfolio on May 4, 1999 upon the resignation of Putnam
Investment Management, Inc., the previous Sub-advisor for the Portfolio. (The
AST American Century Income & Growth Portfolio was known as the AST Putnam Value
Growth & Income Portfolio.)
The portfolio manager members of the team responsible for the
day-to-day management of the equity portion of the AST American Century
Strategic Balanced Portfolio are the same as the individuals noted above who
manage the AST American Century Income & Growth Portfolio. The fixed income
portion of the AST American Century Strategic Balanced Portfolio is managed by a
team of portfolio managers with expertise in different areas of fixed income
investing. The portfolio manager leader of the team responsible for the
day-to-day management of the fixed income portion of the Portfolio is Brian
Howell. Mr. Howell joined American Century in 1987 as a research analyst and was
promoted to his current position as portfolio manager in January 1994.
Massachusetts Financial Services Company ("MFS"), which is located at
500 Boylston Street, Boston, Massachusetts 02116, serves as Sub-advisor for the
AST MFS Global Equity Portfolio, the AST MFS Growth Portfolio, and the AST MFS
Growth with Income Portfolio. MFS and its predecessor organizations have a
history of money management dating from 1924. As of June 30, 1999, the net
assets under the management of the MFS organization were approximately $___
billion.
The portfolio manager responsible for the management of the AST MFS Global
Equity Portfolio is David R. Mannheim. Mr. Mannheim, a Senior Vice President of
MFS, has managed the Portfolio since its inception and has been employed by MFS
as a portfolio manager since 1988.
The portfolio manager responsible for the management of the AST MFS
Growth Portfolio is Stephen Pesek. Mr. Pesek, a Vice President of MFS, has
managed the Portfolio since its inception and has been employed by MFS as a
portfolio manager since 1994.
The AST MFS Growth with Income Portfolio is managed by John D. Laupheimer
and Mitchell D. Dynan. Both have managed the Portfolio since its inception. Mr.
Laupheimer is a Senior Vice President of MFS, and has been employed by MFS as a
portfolio manager since 1981. Mr. Dynan is also a Senior Vice President of MFS,
and has been employed by MFS as a portfolio manager since 1986.
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 $280 billion under management as of December 31, 1998 and
has been engaged in the management of investment funds for more than seventy
years.
Peter Chin, CFA is the lead portfolio manager for the Portfolio, and Roy C.
McKay, CFA is the other portfolio manager. Both have managed the Portfolio since
June 1999. Mr. Chin is a Senior Vice President of Scudder Kemper and has been
with the firm since 1973. Mr. McKay is a Manager Director of Scudder Kemper and
has been with the firm since 1988.
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 Small Cap Value Portfolio and the AST Lord Abbett Growth and Income
Portfolio. Lord Abbett has been an investment manager for over 68 years. As of
December 31, 1998, Lord Abbett managed approximately $28 billion in a family of
mutual funds and other advisory accounts.
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.
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.
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 Small Company Value Portfolio, the AST T. Rowe Price Natural Resources
Portfolio and the AST T. Rowe Price Asset Allocation Portfolio. T. Rowe Price
was founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1998,
the firm and its affiliates managed approximately $148 billion for approximately
six million individual and institutional accounts.
T. Rowe Price manages each Portfolio through an Investment Advisory
Committee. 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.
The Investment Advisory Committee for the AST T. Rowe Price Asset
Allocation Portfolio is 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. 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 Investment Advisory Committee for the AST T. Rowe Price Natural
Resources Portfolio is 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. 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 Investment Advisory Committee for the AST T. Rowe Price Small Company
Value Portfolio is composed of the following members: Preston G. Athey,
Chairman, Hugh M. Evans III and Gregory A. McCrickard. 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.
Neuberger Berman Management Inc. ("NB Management"), 605 Third Avenue,
New York, NY 10158, serves as sub-advisor for the AST Neuberger Berman Mid-Cap
Growth Portfolio and the AST Neuberger Berman Mid-Cap Value Portfolio. NB
Management and its predecessor firms have specialized in the management of
mutual funds since 1950. Neuberger Berman, LLC, an affiliate of NB Management,
acts as a principal broker in the purchase and sale of portfolio securities for
the Portfolios for which it serves as Sub-advisor, and provides NB Management
with certain assistance in the management of the Portfolios without added cost
to the Portfolios or ASISI. NB Management and its affiliates manage securities
accounts, including mutual funds, that had approximately $55 billion of assets
as of December 31, 1998.
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 NB 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. Prior to joining NB
Management in 1997, Ms. Silver was a portfolio manager for several large mutual
funds managed by a prominent investment adviser. Prior to joining NB Management,
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.
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 since December 1992, and was
an employee of NB Management from 1990 to December 1992. Mr. Gendelman joined NB
Management in 1994, where he is currently a Vice President. 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.
OppenheimerFunds, Inc. ("OppenheimerFunds"), Two World Trade Center,
New York, New York 10048-0203, serves as Sub-advisor for the AST Oppenheimer
Large-Cap Growth Portfolio. OppenheimerFunds has operated as an investment
adviser since 1959. OppenheimerFunds and its subsidiaries currently manage
investment companies with assets of more than $95 billion as of December 31,
1998.
Bruce L. Bartlett, CFA has been the portfolio manager responsible for
management of the Portfolio since July 1999. Mr. Bartlett is a Senior Vice
President and Portfolio Manager for OppenheimerFunds who joined OppenheimerFunds
in June 1995. Previously, Mr. Bartlett was a Vice President and Senior Portfolio
Manager at First of America Investment Corporation.
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, President and Chief Executive Officer of
Marsico Capital, has had primary responsibility for management of the Portfolio
since its inception. 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. As of
December 31, 1998, Marsico Capital managed over $3.9 billion in assets.
Bankers Trust Company ("Bankers Trust") is the Sub-advisor to the AST
Bankers Trust Managed Index 500 Portfolio. 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. Bankers Trust
is one of the nation's largest and most experienced investment managers with
approximately $362 billion in assets under management globally as of December
31, 1998.
On March 11, 1999, Bankers Trust announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. Pursuant to its agreement with the U.S. Attorney's Office,
Bankers Trust agreed to pay a $60 million fine to federal authorities.
Separately, Bankers Trust agreed to pay a $3.5 million fine to the State of New
York. The events leading up to the guilty pleas did not arise out of the
investment advisory or mutual fund management activities of Bankers Trust or its
affiliates.
As a result of the plea, Bankers Trust would not be able to continue to
provide sub-advisory services to the Portfolio absent an order from the
Securities and Exchange Commission that permit it to do so. The Commission has
granted such as order.
Kathleen A. Condon, Managing Director of Bankers Trust and a Chartered
Financial Analyst, has been responsible for the day-to-day management of the
Portfolio since July 1999. Ms. Condon is presently head of equity index
investment management and has been employed by Bankers Trust since 1970.
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 is the leading U.S. manager of
portfolios dedicated to investments in real estate investment trusts ("REITS").
As of December 31, 1998, Cohen & Steers managed approximately $4 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.
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 $258 billion of assets as of
December 31, 1998.
The portfolio managers responsible for management of the Portfolio are
Charles P. Mayer and Donovan J. (Jerry) Paul. 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 director and senior vice president of INVESCO. From 1993 to
1994, he was vice president of INVESCO. 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.
Federated Investment Counseling ("Federated Investment"), Federated
Investors Tower, Pittsburgh, Pennsylvania 15222-3779, serves as Sub-advisor for
the AST Federated High Yield Portfolio. Federated was organized in 1989, and
Federated and its affiliates serve as investment advisors to a number of
investment companies and private accounts. Total assets under management or
administration by Federated and its affiliates as of December 31, 1998 was over
$140 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.
Pacific Investment Management Company ("PIMCO"), 840 Newport Center
Drive, Suite 300, 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
December 31, 1998, had approximately $158 billion of assets under management.
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.
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 and its affiliates offer a wide
range of services to governmental, institutional, corporate and individual
customers, and act as investment advisor to individual and institutional clients
with combined assets under management of approximately $310 billion as of
December 31, 1998. J.P. Morgan has managed investments for clients since 1913,
and has managed short-term fixed income assets since 1969.
<PAGE>
Fees and Expenses:
Investment Management Fees. ASISI receives a fee, payable each month,
for the performance of its services. ASISI pays each Sub-advisor a portion of
such fee for the performance of the Sub-advisory services at no additional cost
to any Portfolio. The Investment Management fee for each Portfolio will differ,
reflecting the differing objectives, policies and restrictions of each
Portfolio. Each Portfolio's fee is accrued daily for the purposes of determining
the sale and redemption price of the Portfolio's shares. The fees paid to ASISI
for the fiscal year ended December 31, 1998 by each Portfolio that was in
operation for that entire fiscal year, stated as a percentage of the Portfolio's
average daily net assets, were as follows:
<TABLE>
<CAPTION>
Portfolio: Annual Rate:
<S> <C>
AST Founders Passport Portfolio: 1.00%
AST T. Rowe Price International Equity Portfolio: 1.00%
AST AIM International Equity Portfolio: 0.87%
AST Janus Overseas Growth Portfolio: 1.00%
AST American Century International Growth Portfolio: 1.00%
AST Janus Small-Cap Growth Portfolio: 0.90%
AST Lord Abbett Small Cap Value Portfolio: 0.95%
AST T. Rowe Price Small Company Value Portfolio: 0.90%
AST Neuberger Berman Mid-Cap Growth Portfolio:1 0.85%
AST Neuberger Berman Mid-Cap Value Portfolio:2 0.82%
AST T. Rowe Price Natural Resources Portfolio: 0.90%
AST Oppenheimer Large-Cap Growth Portfolio:3 1.00%
AST Marsico Capital Growth Portfolio: 0.90%
AST JanCap Growth Portfolio: 0.87%
AST Bankers Trust Managed Index 500 Portfolio: 0.60%
AST Cohen & Steers Realty Portfolio: 1.00%
AST American Century Income & Growth Portfolio: 0.75%
AST Lord Abbett Growth and Income Portfolio: 0.75%
AST INVESCO Equity Income Portfolio: 0.75%
AST AIM Balanced Portfolio: 0.74%
AST American Century Strategic Balanced Portfolio: 0.85%
AST T. Rowe Price Asset Allocation Portfolio: 0.85%
AST T. Rowe Price International Bond Portfolio: 0.80%
AST Federated High Yield Portfolio: 0.75%
AST PIMCO Total Return Bond Portfolio: 0.65%
AST PIMCO Limited Maturity Bond Portfolio: 0.65%
AST Money Market Portfolio: 0.45%
</TABLE>
1 Prior to May 1, 1998, Berger Associates, Inc. served as Sub-advisor
for the Portfolio (formerly the Berger Capital Growth Portfolio). Under the new
Investment Management Agreement for the Portfolio, fees are payable at 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.
2 Prior to May 1, 1998, Federated Investment Counseling served as
Sub-advisor for the Portfolio (formerly the Federated Utility Income Portfolio).
Under the new Investment Management Agreement for the Portfolio, fees are
payable at 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.
3 Prior to December 31, 1998, Robertson, Stephens & Company Investment
Management, L.P. served as Sub-advisor for the Portfolio (formerly the Robertson
Stephens Value + Growth Portfolio). Under the new Investment Management
Agreement for the Portfolio, fees are payable at 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.
The investment management fee rate for the AST MFS Global Equity
Portfolio which had not commenced operations as of the date of this Prospectus
is an annual rate of 1.00% of the average daily net assets of the Portfolio. The
investment management fee rate for the AST Kemper Small-Cap Growth Portfolio,
which commenced operations on January 4, 1999, is as follows: 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 management fee rate for the AST MFS Growth Portfolio,
which had not commenced operations as of the date of this Prospectus, is an
annual rate of .90% of the average daily net assets of the Portfolio. The
investment management fee rate for the AST MFS Growth with Income Portfolio,
which had not commenced operations as of the date of this Prospectus, is an
annual rate of .90% of the average daily net assets of the Portfolio.
For more information about investment management fees, including
voluntary fee waivers and the fee rates applicable at various asset levels, and
the fees payable by ASISI to each of the Sub-advisors, please see the Trust's
SAI under "Investment Advisory and Other Services."
Other Expenses. In addition to Investment Management fees, each
Portfolio pays other expenses, including costs incurred in connection with the
maintenance of its securities law registrations, printing and mailing
prospectuses and statements of additional information to shareholders, certain
office and financial accounting services, taxes or governmental fees, brokerage
commissions, 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. The Trust may also pay
Participating Insurance Companies for printing and delivery of certain documents
(including prospectuses, semi-annual and annual reports and any proxy materials)
to holders of variable annuity contracts and variable life insurance policies
whose assets are invested in the Trust. Expenses not directly attributable to
any specific Portfolio or Portfolios are allocated on the basis of the net
assets of the Portfolios.
Distribution Plan. The Trust has adopted a Distribution Plan (the
"Distribution Plan") under Rule 12b-1 under the Investment Company Act of 1940
to permit the American Skandia Marketing, Inc. ("ASM"), an affiliate of ASISI,
to receive brokerage commissions in connection with purchases and sales of
securities held by the Portfolios, and to use these commissions to promote the
sale of shares of the Portfolios. Under the Distribution Plan, transactions for
the purchase and sale of securities for a Portfolio may be directed to certain
brokers for execution ("clearing brokers") who have agreed to pay part of the
brokerage commissions received on these transactions to ASM for "introducing"
transactions to the clearing broker. In turn, ASM will use the brokerage
commissions received as an introducing broker to pay various
distribution-related expenses, such as advertising, printing of sales materials,
and payments to dealers. No Portfolio will pay any new fees or charges resulting
from the Distribution Plan, nor is it expected that the brokerage commissions
paid by a Portfolio will increase as the result of implementation of the
Distribution Plan.
TAX MATTERS:
Each Portfolio intends to distribute substantially all its net
investment income. Dividends from investment income are expected to be declared
and distributed annually (except in the case of the AST Money Market Portfolio,
where dividends will be declared daily and paid monthly), although the Trustees
of the Trust may decide to declare dividends at other intervals. Similarly, any
net realized long- and short-term capital gains of each Portfolio will be
declared and distributed at least annually either during of after the close of
the Portfolio's fiscal year. Distributions will be made to the various separate
accounts of the Participating Insurance Companies and to qualified plans (not to
holders of variable insurance contracts or to plan participants) in the form of
additional shares (not in cash). The result is that the investment performance
of the Portfolios, either in the form of dividends or capital gains, will be
reflected in the value of the variable contracts or the qualified plans.
Holders of variable annuity contracts or variable life insurance
policies should consult the prospectuses of their respective contracts or
policies for information on the federal income tax consequences to such holders,
and plan participants should consult any applicable plan documents for
information on the federal income tax consequences to such participants. In
addition, variable contract owners and qualified plan participants may wish to
consult with their own tax advisors as to the tax consequences of investments in
the Trust, including the application of state and local taxes.
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<PAGE>
FINANCIAL HIGHLIGHTS: The financial highlights table is intended to help
you understand the Portfolios' financial performance for the past five years
(or, for Portfolios that have not been in operation for five years, since their
inceptions). Certain information reflects financial results for a single
Portfolio share. The total returns in the table represent the rate that an
investor would have earned or lost in a Portfolio. Except for the financial
information for the period ended June 30, 1999, which is unaudited, the
information has been audited by Deloitte & Touche LLP, the Trust's independent
auditors. The report of the independent auditors, along with the Portfolios'
financial statements, are included in the annual reports of the separate
accounts funding the variable annuity contracts and variable life insurance
policies, which are available without charge upon request to the Trust at One
Corporate Drive, Shelton, Connecticut or by calling (800) 752-6342. No financial
information is included for the AST MFS Global Equity, the AST Kemper Small-Cap
Growth Portfolio, the AST MFS Growth Portfolio and the AST MFS Growth with
Income Portfolio, which had not commenced operations prior to January 1, 1999.
<PAGE>
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
The following is a description of certain securities and investment
methods that the Portfolios may invest in or use, and certain of the risks
associated with such securities and investment methods. The primary investment
focus of each Portfolio is described above under "Investment Objective and
Policies" and an investor should refer to that section to obtain information
about each Portfolio. In general, whether a particular Portfolio may invest in a
specific type of security or use an investment method is described above or in
the Company's SAI under "Investment Programs of the Funds." As noted below,
however, certain risk factors and investment methods apply to all or most of the
Portfolios.
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 (sell) call and put options on securities, securities indices and
foreign currencies, enter into futures contracts and use options on futures
contracts, and enter into swap agreements with respect to foreign currencies,
interest rates, and securities indices. In general, derivative instruments are
securities or other instruments whose value is derived from or related to the
value of some other instrument or asset.
There are many types of derivatives and many different ways to use
them. Some derivatives and derivative strategies involve very little risk, while
others can be extremely risky and can lead to losses in excess of the amount
invested in the derivative. A Portfolio may use derivatives to hedge against
changes in interest rates, foreign currency exchange rates or securities prices,
to generate income, as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities, or for other
reasons.
The use of these strategies involves certain special risks, including
the risk that the price movements of derivative instruments will not correspond
exactly with those of the investments from which they are derived. In addition,
strategies involving derivative instruments that are intended to reduce the risk
of loss can also reduce the opportunity for gain. Furthermore, regulatory
requirements for a Portfolio to set aside assets to meet its obligations with
respect to derivatives may result in a Portfolio being unable to purchase or
sell securities when it would otherwise be favorable to do so, or in a Portfolio
needing to sell securities at a disadvantageous time. A Portfolio may also be
unable to close out its derivatives positions when desired. There is no
assurance that a Portfolio will engage in derivative transactions. Certain
derivative instruments and some of their risks are described in more detail
below.
Options. Most of the Portfolios may purchase or write (sell) call or
put options on securities, financial indices or currencies. The purchaser of an
option on a security or currency obtains the right to purchase (in the case of a
call option) or sell (in the case of a put option) the security or currency at a
specified price within a limited period of time. Upon exercise by the purchaser,
the writer (seller) of the option has the obligation to buy or sell the
underlying security at the exercise price. An option on a securities index is
similar to an option on an individual security, except that the value of the
option depends on the value of the securities comprising the index, and all
settlements are made in cash.
A Portfolio will pay a premium to the party writing the option when it
purchases an option. In order for a call option purchased by a Portfolio to be
profitable, the market price of the underlying security must rise sufficiently
above the exercise price to cover the premium and other transaction costs.
Similarly, 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 other transaction costs.
Generally, the Portfolios will write call options only if they are
covered (i.e., the Fund owns the security subject to the option or has the right
to acquire it without additional cost). By writing a call option, a Portfolio
assumes the risk that it may be required to deliver a security for a price lower
than its market value at the time the option is exercised. Effectively, a
Portfolio that writes a covered call option gives up the opportunity for gain
above the exercise price should the market price of the underlying security
increase, but retains the risk of loss should the price of the underlying
security decline. A Portfolio will write call options in order to obtain a
return from the premiums received and will retain the premiums whether or not
the options are exercised, which will help offset a decline in the market value
of the underlying securities. A Portfolio that writes a put option likewise
receives a premium, but assumes the risk that it may be required to purchase the
underlying security at a price in excess of its current market value.
A Portfolio may sell an option that it has previously purchased prior
to the purchase or sale of the underlying security. Any such sale would result
in a 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 option. A
Portfolio may terminate an option it has written by entering into a closing
purchase transaction in which it purchases an option of the same series as the
option written.
Futures Contracts and Related Options. Each Portfolio (except the AST
Neuberger Berman Mid-Cap Growth Portfolio, AST Neuberger Berman Mid-Cap Value
Portfolio, the AST Lord Abbett Growth and Income Portfolio, the AST INVESCO
Equity Income Portfolio, the AST Federated High Yield Portfolio, and the AST
Money Market Portfolio) may enter into financial futures contracts and related
options. The seller of a futures contract agrees to sell the securities or
currency called for in the contract and the buyer agrees to buy the securities
or currency at a specified price at a specified future time. Financial futures
contracts may relate to securities indices, interest rates or foreign
currencies. Futures contracts are usually settled through net cash payments
rather than through actual delivery of the securities underlying the contract.
For instance, in a stock index futures contract, the 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 when the contract expires and the
price specified in the contract. A Portfolio may use futures contracts to hedge
against movements in securities prices, interest rates or currency exchange
rates, or as an efficient way to gain exposure to these markets.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in the contract at the
exercise price at any time during the life of the option. The writer of the
option is required upon exercise to assume the opposite position.
Under regulations of the Commodity Futures Trading Commission ("CFTC"),
no Portfolio will:
(i) purchase or sell futures or options on futures contracts or stock
indices for purposes other than bona fide hedging transactions (as defined by
the CFTC) if as a result the sum of the initial margin deposits and premiums
required to establish positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions would exceed 5%
of the fair market value of each Portfolio's net assets; and
(ii) enter into any futures contracts if the aggregate amount of that
Portfolio's commitments under outstanding futures contracts positions would
exceed the market value of its total assets.
Risks of Options and Futures Contracts. Options and futures contracts
can be highly volatile and their use can reduce a Portfolio's performance.
Successful use of these strategies requires the ability to predict future
movements in securities prices, interest rates, currency exchange rates, and
other economic factors. If a Sub-advisor seeks to protect a Portfolio against
potential adverse movements in the relevant financial markets using these
instruments, and such markets do not move in the predicted direction, the
Portfolio could be left in a less favorable position than if such strategies had
not been used. A Portfolio's potential losses from the use of futures extends
beyond its initial investment in such contracts.
Among the other risks inherent in the use of options and futures are
(a) the risk of imperfect correlation between the price of options and futures
and the prices of the securities or currencies to which they relate, (b) the
fact that skills needed to use these strategies are different from those needed
to select portfolio securities and (c) the possible need to defer closing out
certain positions to avoid adverse tax consequences. With respect to options on
stock indices and stock index futures, the risk of imperfect correlation
increases the more the holdings of the Portfolio differ from the composition of
the relevant index. These instruments may not have a liquid secondary market.
Option positions established in the over-the-counter market may be particularly
illiquid and may also involve the risk that the other party to the transaction
fails to meet its obligations.
FOREIGN SECURITIES:
Investments in securities of foreign issuers may involve risks that are
not present with domestic investments. While investments in foreign securities
can reduce risk by providing further diversification, such investments involve
"sovereign risks" in addition to the credit and market risks to which securities
generally are subject. Sovereign risks 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. 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. In some
countries, there may also be the possibility of expropriation or confiscatory
taxation, difficulty in enforcing contractual and other obligations, political
or social instability or revolution, or diplomatic developments that could
affect investments in those countries.
Securities of some foreign issuers are less liquid and their prices are
more volatile than securities of comparable domestic issuers. Further, it may be
more difficult for the Trust's agents to keep currently informed about corporate
actions and decisions that may affect the price of portfolio securities.
Brokerage commissions on foreign securities exchanges, which may be fixed, may
be higher than in the United States. Settlement of transactions in some foreign
markets may be less frequent or less reliable than in the United States, which
could affect the liquidity of investments. For example, securities that are
traded in foreign markets may trade on days (such as Saturday or Holidays) when
a Portfolio does not compute its price or accept purchase or redemption orders.
As a result, a shareholder may not be able to act on developments taking place
in foreign countries as they occur.
American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), and International Depositary
Receipts ("IDRs"). ADRs are U.S. dollar-denominated receipts generally issued by
a domestic bank evidencing its ownership of a security of a foreign issuer. ADRs
generally are publicly traded in the United States. ADRs are subject to many of
the same risks as direct investments in foreign securities, although ownership
of ADRs may reduce or eliminate certain risks associated with holding assets in
foreign countries, such as the risk of expropriation. EDRs, GDRs and IDRs are
receipts similar to ADRs that typically trade in countries other than the United
States.
Depositary receipts may be issued as sponsored or unsponsored programs.
In sponsored programs, the issuer makes arrangements to have its securities
traded as depositary receipts. In unsponsored programs, the issuer may not be
directly involved in 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.
Developing Countries. Although none of the Portfolios invest primarily
in securities of issuers in developing countries, many of the Funds may invest
in these securities to some degree. Many of the risks described above with
respect to investing in foreign issuers are accentuated when the issuers are
located in developing countries. Developing countries may be politically and/or
economically unstable, and the securities markets in those countries may be less
liquid or subject to inadequate government regulation and supervision.
Developing countries have often experienced high rates of inflation or sharply
devalued their currencies against the U.S. dollar, causing the value of
investments in companies located in these countries to decline. Securities of
issuers in developing countries may be more volatile and, in the case of debt
securities, more uncertain as to payment of interest and principal. Investments
in developing countries may include securities created through the Brady Plan,
under which certain heavily-indebted countries have restructured their bank debt
into bonds.
Currency Fluctuations. Investments in foreign securities may be
denominated in foreign currencies. The value of a Portfolio's investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
exchange rates and exchange control regulations. A Portfolio's share price may,
therefore, also be affected by changes in currency exchange rates. Foreign
currency exchange rates generally are determined by the forces of supply and
demand in foreign exchange markets, including perceptions of the relative merits
of investment in different countries, actual or perceived changes in interest
rates or other complex factors. Currency exchange rates also can be affected
unpredictably by the intervention or the failure to intervene by U.S. or foreign
governments or central banks, 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.
While the introduction of a single currency, the euro, on January 1,
1999 for participating nations in the European Economic and Monetary Union
generally occurred without significant market or operational disruption, the
euro still presents certain political and operational uncertainties. These
uncertainties may include political reaction against the euro in participating
nations and operational difficulties as the result of the fact that some
securities still pay dividends and interest in the old currencies. These
uncertainties could cause market disruptions, and could adversely affect the
value of securities held by the Portfolios.
Foreign Currency Transactions. A Portfolio that invests in securities
denominated in foreign currencies will need to engage in foreign currency
exchange transactions. Such transactions may occur on a "spot" basis at the
exchange rate prevailing at the time of the transaction. Alternatively, a
Portfolio may enter into forward foreign currency exchange contracts. A forward
contract involves an obligation to purchase or sell a specified currency at a
specified future date at a price set at the time of the contract. A Portfolio
may enter into a forward contract when it wishes to "lock in" the U.S. dollar
price of a security it expects to or is obligated to purchase or sell in the
future. This practice may be referred to as "transaction hedging." In addition,
when a Portfolio's Sub-advisor believes that the currency of a particular
country may suffer or enjoy a significant movement compared to another currency,
the Portfolio may enter into a forward contract to sell or buy the first foreign
currency (or a currency that acts as a proxy for such currency). This practice
may be referred to as "portfolio hedging." In any event, the precise matching of
the forward contract amounts and the value of the securities involved generally
will not be possible. No Portfolio will enter into a forward contract if it
would be obligated to sell an amount of foreign currency in excess of the value
of the Fund's securities or other assets denominated in that currency, or will
sell an amount of proxy currency in excess of the value of securities
denominated in the related currency. The effect of entering into a forward
contract on a Portfolio's share price will be similar to selling securities
denominated in one currency and purchasing securities denominated in another.
Although a forward contract may reduce a Portfolio's losses on securities
denominated in foreign currency, it may also reduce the potential for gain on
the securities if the currency's value moves in a direction not anticipated by
the Sub-advisor.
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 the company's income for purposes of receiving dividend payments
and on the company's assets in the event of liquidation. (Some of the
Sub-advisors consider preferred stocks to be equity securities for purposes of
the various Portfolios' investment policies and restrictions, while others
consider them fixed income securities.) 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.
FIXED INCOME SECURITIES:
Most of the Portfolios, including the Portfolios that invest primarily
in equity securities, may invest to some degree in bonds, notes, debentures and
other obligations of corporations and governments. Fixed-income securities are
generally subject to two kinds of risk: credit risk and market risk. Credit risk
relates to the ability of the issuer to meet interest and principal payments as
they come due. The ratings given a security by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P"), which are described in
detail in the Appendix to the Company's SAI, provide a generally useful guide as
to such credit risk. The lower the rating, the greater the credit risk the
rating service perceives to exist with respect to the security. Increasing the
amount of Portfolio assets invested in lower-rated securities generally will
increase the Portfolio's income, but also will increase the credit risk to which
the Portfolio is subject. Market risk relates to the fact that the prices of
fixed income securities generally will be affected by changes in the level of
interest rates in the markets generally. An increase in interest rates will tend
to reduce the prices of such securities, while a decline in interest rates will
tend to increase their prices. In general, the longer the maturity or duration
of a fixed income security, the more its value will fluctuate with changes in
interest rates.
Lower-Rated Fixed Income Securities. Lower-rated high-yield bonds
(commonly known as "junk bonds") are those that are rated lower than the four
highest categories by a nationally recognized statistical rating organization
(for example, lower than Baa by Moody's or BBB by S&P), or, if not rated, are of
equivalent investment quality as determined by the Sub-advisor. Lower-rated
bonds are generally considered to be high risk investments as they are subject
to greater credit risk than higher-rated bonds. In addition, the market for
lower-rated bonds may be thinner and less active than the market for
higher-rated bonds, and the prices of lower-rated high-yield bonds may fluctuate
more than the prices of higher-rated bonds, particularly in times of market
stress. Because the risk of default is higher in lower-rated bonds, a
Sub-advisor's research and analysis tend to be very important ingredients in the
selection of these bonds. In addition, the exercise by an issuer of redemption
or call provisions that are common in lower-rated bonds may result in their
replacement by lower yielding bonds.
Bonds rated in the four highest ratings categories are frequently
referred to as "investment grade." However, bonds rated in the fourth category
(Baa or BBB) are considered medium grade and may have speculative
characteristics.
MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are securities representing interests in
"pools" of mortgage loans on residential or commercial real property and that
generally provide for monthly payments of both interest and principal, in effect
"passing through" monthly payments made by the individual borrowers on the
mortgage loans (net of fees paid to the issuer or guarantor of the securities).
Mortgage-backed securities are frequently issued by U.S. Government agencies or
Government-sponsored enterprises, and payments of interest and principal on
these securities (but not their market prices) may be guaranteed by the full
faith and credit of the U.S. Government or by the agency only, or may be
supported by the issuer's ability to borrow from the U.S. Treasury.
Mortgage-backed securities created by non-governmental issuers may be supported
by various forms of insurance or guarantees.
Like other fixed-income securities, the value of a mortgage-backed
security will generally decline when interest rates rise. However, when interest
rates are declining, their value may not increase as much as other fixed-income
securities, because early repayments of principal on the underlying mortgages
(arising, for example, from sale of the underlying property, refinancing, or
foreclosure) may serve to reduce the remaining life of the security. If a
security has been purchased at a premium, the value of the premium would be lost
in the event of prepayment. Prepayments on some mortgage-backed securities may
necessitate that a Portfolio find other investments, which, because of
intervening market changes, will often offer a lower rate of return. In
addition, the mortgage securities market may be particularly affected by changes
in governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs). CMOs are a type of mortgage
pass-through security that are typically issued in multiple series with each
series having a different maturity. Principal and interest payments from the
underlying collateral are first used to pay the principal on the series with the
shortest maturity; in turn, the remaining series are paid in order of their
maturities. Therefore, depending on the type of CMOs in which a Portfolio
invests, the investment may be subject to greater or lesser risk than other
types of mortgage-backed securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities are mortgage pass-through securities that have been divided into
interest and principal components. "IOs" (interest only securities) receive the
interest payments on the underlying mortgages while "POs" (principal only
securities) receive the principal payments. The cash flows and yields on IO and
PO classes are extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage loans. If the underlying mortgages
experience higher than anticipated prepayments, an investor in an IO class of a
stripped mortgage-backed security may fail to recoup fully its initial
investment, even if the IO class is highly rated or is derived from a security
guaranteed by the U.S. Government. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments, the price on a PO class will be
affected more severely than would be the case with a traditional mortgage-backed
security. Unlike other fixed-income and other mortgage-backed securities, the
value of IOs tends to move in the same direction as interest rates.
ASSET-BACKED SECURITIES:
Asset-backed securities conceptually are similar to mortgage
pass-through securities, but they are secured by and payable from payments on
assets such as credit card, automobile or trade loans, rather than mortgages.
The credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support or enhancement provided. In
addition, asset-backed securities involve prepayment risks that are similar in
nature to those of mortgage pass-through securities.
CONVERTIBLE SECURITIES AND WARRANTS:
Certain of the Portfolios may invest in convertible securities.
Convertible securities are bonds, notes, debentures and preferred stocks that
may be converted into or exchanged for shares of common stock. Many convertible
securities are rated below investment grade because they fall below ordinary
debt securities in order of preference or priority on the issuer's balance
sheet. Convertible securities generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. Frequently, convertible securities are callable by the issuer,
meaning that the issuer may force conversion before the holder would otherwise
choose.
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 the
warrants. A warrant will expire without value if the rights under such warrant
are not exercised prior to its expiration date.
<PAGE>
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD COMMITMENT TRANSACTIONS:
The Portfolios (other than the AST Founders Passport Portfolio, the AST
Kemper Small-Cap Growth Portfolio, the AST Oppenheimer Large-Cap Growth
Portfolio, the AST Cohen & Steers Realty Portfolio, the AST Lord Abbett Growth
and Income Portfolio, and the AST INVESCO Equity Income Portfolio) may purchase
securities on a when-issued, delayed-delivery or forward commitment basis. These
transactions generally involve the purchase of a security with payment and
delivery due at some time in the future. A 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. If the seller fails to complete
the sale, the Fund may lose the opportunity to obtain a favorable price and
yield. While the Portfolios will generally engage in such when-issued,
delayed-delivery and forward commitment transactions with the intent of actually
acquiring the securities, a Portfolio may sometimes sell such a security prior
to the settlement date. The AST Money Market Portfolio will not enter into these
commitments if they would exceed 15% of the value of the Fund's total assets
less its liabilities other than liabilities created by these commitments.
Certain Portfolios may also sell securities on a
delayed-delivery or forward commitment basis. If the Portfolio does so, it will
not participate in future gains or losses on the security. If the other party to
such a transaction fails to pay for the securities, the Portfolio could suffer a
loss.
ILLIQUID AND RESTRICTED SECURITIES:
Subject to guidelines adopted by the Trustees of the Trust, each
Portfolio may invest up to 15% of its net assets in illiquid securities (except
for the AST Money Market Portfolio, which is limited to 10% of its net assets,
and the AST Oppenheimer Large-Cap Growth Portfolio, which is limited to 5% of
its net assets). Illiquid securities are those that, because of the absence of a
readily available market or due to legal or contractual restrictions on resale,
cannot be sold within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the investment. Therefore,
a Portfolio may find it difficult to sell illiquid securities at the time
considered most advantageous by its Sub-advisor and may incur expenses that
would not be incurred in the sale of securities that were freely marketable.
Certain securities that would otherwise be considered illiquid because
of legal restrictions on resale to the general public may be traded among
qualified institutional buyers under Rule 144A of the Securities Act of 1933.
These Rule 144A securities, and well as commercial paper that is sold in private
placements under Section 4(2) of the Securities Act, may be deemed liquid by the
Portfolio's Sub-advisor under the guidelines adopted by the Directors of the
Company. However, the liquidity of a Portfolio's investments in Rule 144A
securities could be impaired if trading does not develop or declines.
REPURCHASE AGREEMENTS:
Each Portfolio (other than the AST Lord Abbett Growth and Income
Portfolio) may enter into 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.
Repurchase agreements must be fully collateralized and can be entered into only
with well-established banks and broker-dealers that have been deemed
creditworthy by the Sub-advisor. Repurchase transactions are intended to be
short-term transactions, usually with the seller repurchasing the securities
within seven days. Repurchase agreements that mature in more than seven days are
subject to a Portfolio's limit on illiquid securities.
A Portfolio that enters into a repurchase agreement may lose money in
the event that the other party defaults on its obligation and the Portfolio is
delayed or prevented from disposing of the collateral. A Portfolio also might
incur a loss if the value of the collateral declines, and it might incur costs
in selling the collateral or asserting its legal rights under the agreement. If
a defaulting seller filed for bankruptcy or became insolvent, disposition of
collateral might be delayed pending court action.
The AST Neuberger Berman Mid-Cap Growth Portfolio will not invest more
than 25% of its net assets in repurchase agreements.
<PAGE>
REVERSE REPURCHASE AGREEMENTS:
Certain Portfolios (specifically, the AST Janus Overseas Growth
Portfolio, the AST Janus Small-Cap Growth Portfolio, the AST Neuberger Berman
Mid-Cap Growth Portfolio, the AST Neuberger Berman Mid-Cap Value Portfolio, the
AST Marsico Capital Growth Portfolio, the AST JanCap Growth Portfolio, the AST
PIMCO Total Return Bond Portfolio, the AST PIMCO Limited Maturity Bond Portfolio
and the AST Money Market Portfolio) may enter into reverse repurchase
agreements. In a reverse repurchase agreement, a Portfolio sells a portfolio
instrument and agrees to repurchase it at an agreed upon date and price, which
reflects an effective interest rate. It may also be viewed as a borrowing of
money by the Portfolio and, like borrowing money, may increase fluctuations in a
Portfolio's share price. When entering into a reverse repurchase agreement, a
Portfolio must set aside on its books cash or other liquid assets in an amount
sufficient to meet its repurchase obligation.
BORROWING:
Each Portfolio may borrow money from banks. 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, such
Portfolio must reduce such borrowings so as to meet the necessary test within
three business days. The AST Money Market Portfolio will not purchase securities
when outstanding borrowings are greater than 5% of the Portfolio's total assets,
and the AST AIM Balanced Portfolio will not purchase securities when any
borrowings are outstanding. If a Portfolio borrows money, its share price may
fluctuate more widely until the borrowing is repaid.
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 has the right 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.
OTHER INVESTMENT COMPANIES:
The Company 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 Sub-advisors may invest Portfolio assets in money
market funds that they advise. 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.
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 in preparation
for the year 2000. At this time, there can be no assurance that the actions
taken by the Service Providers, who are generally not affiliated with the
Investment Manager, 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 Portfolios' foreign investments.
The Investment Manager and the Trust are seeking further assurances
from the Service Providers that all of the systems they use in connection with
the Portfolios 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, and is attempting to develop contingency
plans in the event that the Service Providers' systems are not adapted in time.
<PAGE>
Mailing Address
American Skandia Trust
One Corporate Drive
Shelton, CT 06484
Investment Manager
American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, CT 06484
Sub-Advisors
A I M Capital Management, Inc.
American Century Investment Management, Inc.
Bankers Trust Company
Cohen & Steers Capital Management, Inc.
Federated Investment Counseling
Founders Asset Management LLC
INVESCO Funds Group, Inc.
Janus Capital Corporation
J.P. Morgan Investment Management Inc.
Lord, Abbett & Co.
Marsico Capital Management, LLC
Massachusetts Financial Services Company
Neuberger Berman Management Inc.
OppenheimerFunds, Inc.
Pacific Investment Management Company
Rowe Price-Fleming International, Inc.
Scudder Kemper Investments, Inc.
T. Rowe Price Associates, Inc.
Custodians
PFPC Trust Company
Airport Business Center, International Court 2
200 Stevens Drive
Philadelphia, PA 19113
The Chase Manhattan Bank
One Pierrepont Plaza
Brooklyn, NY 11201
Administrator
Transfer and Shareholder Servicing Agent
PFPC Inc.
103 Bellevue Parkway
Wilmington, DE 19809
Independent Accountants
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Legal Counsel
Stradley Ronon Stevens & Young
2600 One Commerce Square
Philadelphia, PA 19103
INVESTOR INFORMATION SERVICES:
Shareholder inquiries should be made by calling (800) 752-6342 or by
writing to the American Skandia Trust at One Corporate Drive, Shelton,
Connecticut 06484.
Additional information about the Portfolios is included in a Statement
of Additional Information, which is incorporated by reference into this
Prospectus. Additional information about the Portfolios' investments is
available in the annual and semi-annual reports to holders of variable annuity
contracts and variable life insurance policies. In the annual reports, you will
find a discussion of the market conditions and investment strategies that
significantly affected each Portfolio's performance during its last fiscal year.
The Statement of Additional Information and additional copies of annual and
semi-annual reports are available without charge by calling the above number.
The information in the Company filings with the Securities and Exchange
Commission (including the Statement of Additional Information) is available from
the Commission. Copies of this information may be obtained, upon payment of
duplicating fees, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. The information can also be reviewed and copied at
the Commission's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. Finally, information about the Company is available on the
Commission's Internet site at http://www.sec.gov.
Investment Company Act File No. 811-5186
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION October 18, 1999
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 Founders Passport Portfolio, the AST T.
Rowe Price International Equity Portfolio, the AST AIM International Equity
Portfolio, the AST Janus Overseas Growth Portfolio, the AST American Century
International Growth Portfolio, the AST MFS Global Equity Portfolio, the AST
Janus Small-Cap Growth Portfolio, the AST Kemper Small-Cap Growth Portfolio, the
AST Lord Abbett Small Cap Value Portfolio, the AST T. Rowe Price Small Company
Value Portfolio, the AST Neuberger Berman Mid-Cap Growth Portfolio, the AST
Neuberger Berman Mid-Cap Value Portfolio, the AST T. Rowe Price Natural
Resources Portfolio, the AST Oppenheimer Large-Cap Growth Portfolio, the AST MFS
Growth Portfolio, the AST Marsico Capital Growth Portfolio, the AST JanCap
Growth Portfolio, the AST Bankers Trust Managed Index 500 Portfolio, the AST
Cohen & Steers Realty Portfolio, the AST American Century Income & Growth
Portfolio, the AST Lord Abbett Growth and Income Portfolio, the AST MFS Growth
with Income Portfolio, the AST INVESCO Equity Income Portfolio, the AST AIM
Balanced Portfolio, the AST American Century Strategic Balanced Portfolio, the
AST T. Rowe Price Asset Allocation Portfolio, the AST T. Rowe Price
International Bond Portfolio, the AST Federated High Yield Portfolio, the AST
PIMCO Total Return Bond Portfolio, the AST PIMCO Limited Maturity Bond Portfolio
and the AST Money Market 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) Founders Asset Management LLC: AST Founders
Passport Portfolio; (b) Rowe Price-Fleming International, Inc.: AST T. Rowe
Price International Equity Portfolio, AST T. Rowe Price International Bond
Portfolio; (c) A I M Capital Management, Inc.: AST AIM International Equity
Portfolio, AST AIM Balanced Portfolio; (d) Janus Capital Corporation: AST JanCap
Growth Portfolio, AST Janus Overseas Growth Portfolio, AST Janus Small-Cap
Growth Portfolio; (e) American Century Investment Management, Inc.: AST American
Century International Growth Portfolio, AST American Century Income & Growth
Portfolio, AST American Century Strategic Balanced Portfolio; (f) Massachusetts
Financial Services: AST MFS Global Equity Portfolio, AST MFS Growth Portfolio,
AST MFS Growth with Income Portfolio; (g) Scudder Kemper Investments, Inc.: AST
Kemper Small-Cap Growth Portfolio; (h) Lord, Abbett & Co.: AST Lord Abbett
Growth and Income Portfolio, AST Lord Abbett Small Cap Value Portfolio; (i) 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; (j) Neuberger Berman Management, Incorporated: AST Neuberger Berman
Mid-Cap Value Portfolio, AST Neuberger Berman Mid-Cap Growth Portfolio; (k)
OppenheimerFunds, Inc.: AST Oppenheimer Large-Cap Growth Portfolio; (l) Marsico
Capital Management, LLC: AST Marsico Capital Growth Portfolio; (m) Bankers Trust
Company: AST Bankers Trust Managed Index 500 Portfolio; (n) Cohen & Steers
Capital Management, Inc.: AST Cohen & Steers Realty Portfolio; (o) INVESCO Funds
Group, Inc.: AST INVESCO Equity Income Portfolio; (p) Federated Investment
Counseling: AST Federated High Yield Portfolio; (q) Pacific Investment
Management Company: AST PIMCO Total Return Bond Portfolio, AST PIMCO Limited
Maturity Bond Portfolio; and (r) J.P. Morgan Investment Management Inc.: AST
Money Market 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 October 18, 1999.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Caption Page
<S> <C>
General Information and History...................................................................................3
Investment Objectives and Policies................................................................................3
AST Founders Passport Portfolio..............................................................................3
AST T. Rowe Price International Equity Portfolio............................................................11
AST AIM International Equity Portfolio......................................................................20
AST Janus Overseas Growth Portfolio.........................................................................27
AST American Century International Growth Portfolio.........................................................30
AST MFS Global Equity Portfolio...............................................................................
AST Janus Small-Cap Growth Portfolio........................................................................33
AST Kemper Small-Cap Growth Portfolio.......................................................................36
AST Lord Abbett Small Cap Value Portfolio...................................................................40
AST T. Rowe Price Small Company Value Portfolio.............................................................43
AST Neuberger Berman Mid-Cap Growth Portfolio...............................................................53
AST Neuberger Berman Mid-Cap Value Portfolio................................................................59
AST T. Rowe Price Natural Resources Portfolio...............................................................66
AST Oppenheimer Large-Cap Growth Portfolio..................................................................76
AST MFS Growth Portfolio......................................................................................
AST Marsico Capital Growth Portfolio........................................................................78
AST JanCap Growth Portfolio.................................................................................80
AST Bankers Trust Managed Index 500 Portfolio...............................................................83
AST Cohen & Steers Realty Portfolio.........................................................................87
AST American Century Income & Growth Portfolio..............................................................91
AST Lord Abbett Growth and Income Portfolio.................................................................96
AST MFS Growth with Income Portfolio..........................................................................
AST INVESCO Equity Income Portfolio.........................................................................97
AST AIM Balanced Portfolio..................................................................................98
AST American Century Strategic Balanced Portfolio..........................................................103
AST T. Rowe Price Asset Allocation Portfolio...............................................................109
AST T. Rowe Price International Bond Portfolio.............................................................118
AST Federated High Yield Portfolio.........................................................................127
AST PIMCO Total Return Bond Portfolio......................................................................130
AST PIMCO Limited Maturity Bond Portfolio..................................................................142
AST Money Market Portfolio.................................................................................155
Investment Restrictions.........................................................................................157
Certain Risk Factors and Investment Methods.....................................................................173
Portfolio Turnover..............................................................................................188
Organization and Management of the Trust........................................................................189
Investment Advisory and Other Services..........................................................................192
Brokerage Allocation............................................................................................202
Allocation of Investments.......................................................................................203
Computation of Net Asset Values.................................................................................203
Sale of Shares..................................................................................................204
Description of Shares of the Trust..............................................................................204
Underwriter.....................................................................................................205
Tax Matters.....................................................................................................205
Performance.....................................................................................................206
Custodian.......................................................................................................209
Other Information...............................................................................................209
Financial Statements............................................................................................209
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 AIM International Equity Portfolio (formerly, the AST Putnam
International Equity Portfolio and 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 AIM Balanced Portfolio (formerly, the AST Putnam Balanced Portfolio and
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 American Century Income & Growth Portfolio (formerly, 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
Managed Index 500 Portfolio were first offered as of January 2, 1998. The AST
Kemper Small-Cap Growth Portfolio was first offered as of January 4, 1999. The
AST MFS Global Equity Portfolio, the AST MFS Growth Portfolio and the AST MFS
Growth with Income Portfolio had not been offered prior to the date of this
Prospectus.
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 Founders Passport Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital appreciation.
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. The Portfolio generally will not enter into forward contracts with a
term greater than one year. 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.
Temporary Defensive 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. 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"). For more information on mortgage-backed securities, see
this Statement and the Company'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 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 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.
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.
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."
The Portfolio may also 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.
The Portfolio will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
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. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). 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.
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 by the Portfolio to cover the position, or alternative cover (such as
owning an offsetting position) will be employed.
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 financial 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 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 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. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
option, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Portfolio would be required to
distribute any such gain even though it would not receive proceeds from the sale
at the time the option, futures or forward position is entered into.
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 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, (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 net 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."
Cash Reserves. The Portfolio's cash 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.
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 AIM International Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
Investment Policies:
In managing the Portfolio, the Sub-advisor seeks to apply to the
Portfolio the same investment strategy that it applies to several of its other
managed portfolios that have similar investment objectives but that invest
primarily in United States equities markets. The Portfolio will utilize to the
extent practicable a fully managed investment policy providing for the selection
of securities which meet certain quantitative standards determined by the
Sub-advisor. The Sub-advisor reviews carefully the earnings history and
prospects for growth of each company considered for investment by the Portfolio.
It is anticipated that common stocks will be the principal form of investment of
the Portfolio. The Portfolio is primarily comprised of securities of two basic
categories of companies: (a) "core" companies, which the Sub-advisor considers
to have experienced above-average and consistent long-term growth in earnings
and to have excellent prospects for outstanding future growth, and (b) "earnings
acceleration" companies, which the Sub-advisor believes are currently enjoying a
dramatic increase in earnings.
If a particular foreign company meets the quantitative standards
determined by the Sub-advisor, its securities may be acquired by the Portfolio
regardless of the location of the company or the percentage of the Portfolio's
investments in the company's country or region. However, the Sub-advisor will
also consider other factors in making investment decisions for the Portfolio,
including such factors as the prospects for relative economic growth among
countries or regions, economic and political conditions, currency exchange
fluctuations, tax considerations and the liquidity of a particular security.
The Sub-advisor recognizes that often there is less public information
about foreign companies than is available in reports supplied by domestic
companies, that foreign companies are not subject to uniform accounting and
financial reporting standards, and that there may be greater delays experienced
by the Portfolio in receiving financial information supplied by foreign
companies than comparable information supplied by domestic companies. In
addition, the value of the Portfolio's investments that are denominated in a
foreign currency may be affected by changes in currency exchange rates. For
these and other reasons, the Sub-advisor from time to time may encounter greater
difficulty applying its disciplined stock selection strategy to an international
equity investment portfolio than to a portfolio of domestic equity securities.
Any income realized by the Portfolio will be incidental and will not be
an important criterion in the selection of portfolio securities.
Under normal market conditions the Portfolio will invest at least 70%
of its total assets in marketable equity securities, including common stock,
preferred stock, and other securities having the characteristics of stock (such
as an equity or ownership interest in a company) of foreign companies that are
listed on a recognized foreign securities exchange or traded on a foreign
over-the-counter market. The Portfolio may also satisfy the foregoing
requirement in part by investing in the securities of foreign issuers in the
form of ADRs, EDRs, or other securities representing underlying securities of
foreign issuers.
The Portfolio will emphasize investment in foreign companies in the
developed countries of Western Europe (such as Germany, France, Switzerland, the
Netherlands and the United Kingdom) and the Pacific Basin (such as Japan, Hong
Kong and Australia), but the Portfolio may also invest in the securities of
companies located in developing countries (such as Turkey, Malaysia and Mexico)
in various regions of the world. The risks of investment in the equity markets
of developing countries are described in more detail immediately below and in
this Statement under "Certain Risk Factors and Investment Methods."
Real Estate Investment Trusts ("REITs"). The Portfolio may invest in
equity and/or debt securities issued by REITs. Such investments will not exceed
5% of the total assets of the Portfolio.
REITs are trusts that sell equity or debt securities to investors and
use the proceeds to invest in real estate or interests therein. A REIT may focus
on particular types of projects, such as apartment complexes, or geographic
regions, such as the Southeastern United States, or both.
To the extent that the Portfolio invests in REITs, it could conceivably
own real estate directly as a result of a default on the securities it owns. The
Portfolio, therefore, may be subject to certain risks associated with the direct
ownership of real estate, including difficulties in valuing and trading real
estate, declines in the value of real estate, environmental liability risks,
risks related to general and local economic conditions, adverse change in the
climate for real estate, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates.
In addition to the risks described above, equity REITs may be affected
by any 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.
Equity and mortgage REITs are dependent upon management skill, and are generally
not diversified and therefore are subject to the risk of financing single or a
limited number of projects. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation, and the possibility that
the REIT will fail to maintain its exemption from the 1940 Act. Changes in
interest rates may also affect the value of debt securities of REITs held by the
Portfolio. By investing in REITs indirectly through the Portfolio, a shareholder
will bear not only his/her proportionate share of the expenses of the Portfolio,
but also, indirectly, similar expenses of the REITs.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. A repurchase agreement is collateralized by the security acquired by
the Portfolio and the value of the acquired security is marked to market daily
in order to minimize the Portfolio's risk. Repurchase agreements usually are for
short periods, such as one or two days, but may be entered into for longer
periods of time. Repurchase agreements will be secured by U.S. Treasury
securities, U.S. Government agency securities (including, but not limited to
those which have been stripped of their interest payments and mortgage-backed
securities) and commercial paper. In the event of bankruptcy or other default of
a seller of a repurchase agreement, the Portfolio may experience losses,
including possible reduced levels of income and lack of access to income during
this period.
Additional information about repurchase agreements and their risks are
included in the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Lending of Portfolio Securities. While 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 the right to call
its loans and obtain the securities on three business days' notice or, in
connection with securities trading on foreign markets, within such longer period
of time that coincides with the normal settlement period for purchases and sales
of such securities in such foreign markets. 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.
Additional information about the lending of portfolio securities is included in
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowings. The Portfolio may borrow money to a limited extent from
banks for temporary or emergency purposes subject to the limitations under the
1940 Act. In addition, the Portfolio does not intend to engage in leverage;
therefore, consistent with current interpretations of the SEC, the Portfolio
will not purchase additional securities while borrowings exceed 5% of the
Portfolio's total assets. Additional information about borrowing is included in
the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Securities Issued on a When-Issued or Delayed-Delivery Basis. The
Portfolio may purchase securities on a "when-issued" basis, that is, delivery of
and payment for the securities is not fixed at the date of purchase, but is set
after the securities are issued (normally within forty-five days after the date
of the transaction). The Portfolio also may purchase or sell securities on a
delayed-delivery basis. The payment obligation and the interest rate that will
be received on the delayed delivery-securities are fixed at the time the buyer
enters into the commitment. If the Portfolio purchases a when-issued security or
enters into a delayed-delivery agreement, the Portfolio's custodian bank will
segregate cash or other liquid assets in an amount at least equal to the
when-issued commitment or delayed-delivery agreement commitment. Additional
information about when-issued and delayed-delivery transactions and their risks
is included in this Statement and in the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Short Sales "Against the Box." As described in the Trust's Prospectus,
the Portfolio may make short sales against the box. To secure its obligation to
deliver the securities sold short, the Portfolio will deposit in escrow in a
separate account with its custodian an equal amount of the securities sold short
or securities convertible into or exchangeable for such securities. Since the
Portfolio ordinarily will want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the securities
sold short, the Portfolio will normally close out a short position covered by
convertible securities by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities that it already
holds.
The Portfolio will make a short sale, as a hedge, when it believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for such security. In such case, any future losses in the Portfolio's long
position should be reduced by a gain in the short position. Conversely, any gain
in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses are reduced will depend upon the amount of
the security 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. In determining the number of
shares to be sold short against a Portfolio's position in a convertible
security, the anticipated fluctuation in the conversion premium is considered.
The Portfolio may also make short sales to generate additional income from the
investment of the cash proceeds of short sales. In no event may more than 10% of
the value of the Portfolio's total assets be deposited or pledged as collateral
for short sales at any time.
Rule 144A Securities. The Portfolio may purchase privately placed
securities that are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 (the "1933 Act"). This Rule permits certain qualified
institutional buyers, such as the Portfolio, to trade in securities that have
not been registered under the 1933 Act. The Sub-advisor, under the guidelines
adopted by 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. The determination of whether a Rule 144A security is liquid 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 will
consider, as it deems appropriate under the circumstances, the (i) frequency of
trades and quotes, (ii) number of dealers and potential purchasers, (iii) dealer
undertakings to make a market, and (iv) nature of the security and of
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by the Sub-advisor 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 will be reviewed
to determine what, if any, action is required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Additional
information about illiquid and Rule 144A securities is included in the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio normally invests primarily in foreign
securities, including American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). Generally, ADRs, in registered form, are designed
for use in the United States securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. ADRs and EDRs may be listed on
stock exchanges, or traded in OTC markets in the United States or Europe, as the
case may be. ADRs, like other securities traded in the United States, will be
subject to negotiated commission rates.
To the extent the Portfolio invests in securities denominated in
foreign currencies, the Portfolio bears the risk of changes in the exchange
rates between U.S. currency and the foreign currency, as well as the
availability and status of foreign securities markets. The Portfolio's
investments in securities denominated in foreign currencies generally will be
marketable equity securities (including common and preferred stock, depositary
receipts for stock and fixed income or equity securities exchangeable for or
convertible into stock) of foreign companies that generally are listed on a
recognized foreign securities exchange or traded in a foreign over-the-counter
market. The Portfolio may also invest in foreign securities listed on recognized
U.S. securities exchanges or traded in the U.S. over-the-counter market.
Investments by the Portfolio in foreign securities, whether denominated
in U.S. currencies or foreign currencies, may entail risks that are greater than
those associated with domestic investments. The risks of investing in foreign
securities are discussed in detail in this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods." Investment by the Portfolio
in ADRs, EDRs and similar securities also may entail some or all or these risks.
The Sub-advisor seeks to mitigate the risks associated with foreign investment
through diversification and active professional management.
Developing Countries. A developing country or emerging market
country can be considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the developed European countries (primarily in
Western Europe), the United States, Canada, Japan, Australia, New Zealand, Hong
Kong and Singapore. The characteristics of markets can change over time.
Currently, the Sub-advisor believes that investing in many emerging markets is
not desirable or feasible because of the lack of adequate custody arrangements
for the Portfolio's assets, overly burdensome repatriation and similar
restrictions, the lack of organized and liquid securities markets, unacceptable
political risks or other reasons. As desirable opportunities to invest in
securities in emerging markets develop, the Portfolio may expand and further
broaden the group of emerging markets in which it invests.
Many of the risks relating to foreign securities generally will be
greater for emerging markets than for developed countries. Many emerging markets
have experienced substantial rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets for certain developing
markets. Economies in emerging markets generally are heavily dependent upon
international trade and accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries with which they
trade. There also may be a lower level of securities market monitoring and
regulation of developing markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely limited. The
possibility of revolution and the dependence on foreign economic assistance may
be greater in these countries than in developed countries.
In addition, brokerage commissions, custodial services and other costs
relating to investment in foreign markets may be particularly high with respect
to emerging markets. Such markets have different settlement and clearance
procedures. 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 settlement problems may cause
emerging market securities to be illiquid. The inability of the Portfolio to
make intended securities purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of a
portfolio security caused by settlement problems could result 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, could result in
liability to the purchaser. Certain emerging markets may lack clearing
facilities equivalent to those in developed countries. Accordingly, settlements
can pose additional risks in such markets and ultimately can expose the
Portfolio to the risk of losses resulting from its inability to recover from a
counterparty.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Portfolio's portfolio
securities in such markets may not be readily available. The Portfolio's
portfolio securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Trust's Board of
Trustees.
Portfolio Turnover. Any particular security will be sold, and the
proceeds reinvested, whenever such action is deemed prudent from the viewpoint
of the Portfolio's investment objectives, regardless of the holding period of
that security. Additional information about portfolio turnover is included in
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Options, Futures and Currency Strategies. The Portfolio may use forward
contracts, futures contracts, options on securities, options on indices, options
on currencies, and options on futures contracts to attempt to hedge against the
overall level of investment and currency risk normally associated with the
Portfolio's investments. These instruments are often referred to as
"derivatives," which may be defined as financial instruments whose performance
is derived, at least in part, from the performance of another asset (such as a
security, currency or an index of securities).
General Risks of Options, Futures and Currency Strategies. The use by
the Portfolio of options, futures contracts and forward currency contracts
involves special considerations and risks. For example, there might be imperfect
correlation, or even no correlation, between the price movements or an
instrument (such as an option contract) and the price movements of the
investments being hedged. In these circumstances, if a "protective put" is used
to hedge a potential decline in a security and the security does decline in
price, the put option's increased value may not completely offset the loss in
the underlying security. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as changing
interest rates, market liquidity, and speculative or other pressures on the
markets in which the hedging instrument is traded.
The Portfolio will not enter into a hedging transaction if the
Sub-advisor determines that the cost of hedging will exceed the potential
benefit to the Portfolio.
Additional information on these instruments is included in this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods." Certain risks pertaining to particular strategies are described in the
sections that follow.
Cover. Transactions using forward contracts, futures contracts and options
(other than options purchased by a Portfolio) expose the Portfolio to an
obligation to another party. A Portfolio will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, forward contracts or futures contracts
or (2) cash or liquid assets with a value sufficient at all times to cover its
potential obligations not covered as provided in (1) above. The Portfolio will
comply with SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash or liquid securities.
Assets used as cover cannot be sold while the position in the
corresponding forward contract, futures contract or option is open, unless they
are replaced with other appropriate assets. If a large portion of a Portfolio's
assets is used for cover or otherwise set aside, it could affect portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
Writing Call Options. The Portfolio may write (sell) covered
call options on securities, futures contracts, forward contracts, indices and
currencies. Writing call options can serve as a limited hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option.
Writing Put Options. The Portfolio may write (sell) put
options on securities, futures contracts, forward contracts, indices and
currencies. The Portfolio would write a put option at an exercise price that,
reduced by the premium received on the option, reflects the lower price it is
willing to pay for the underlying security, contract or currency. The risk in
such a transaction would be that the market price of the underlying security,
contract or currency would decline below the exercise price less the premium
received.
Purchasing Put Options. The Portfolio may purchase put options
on securities, futures contracts, forward contracts, indices and currencies. The
Portfolio may enter into closing sale transactions with respect to such options,
exercise such option or permit such option to expire.
The Portfolio may also purchase put options on underlying securities,
contracts or currencies against which it has written other put options. For
example, where the Portfolio has written a put option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a put option with a different strike price and/or expiration date that
would eliminate some or all of the risk associated with the written put. Used in
combinations, these strategies are commonly referred to as "put spreads."
Likewise, the Portfolio may write call options on underlying securities,
contracts or currencies against which it has purchased protective put options.
This strategy is commonly referred to as a "collar."
Purchasing Call Options. The Portfolio may purchase covered call
options on securities, futures contracts, forward contracts, indices and
currencies. The Portfolio may enter into closing sale transactions with respect
to such options, exercise such options or permit such options to expire.
The Portfolio may also purchase call options on underlying securities,
contracts or currencies against which it has written other call options. For
example, where the Portfolio has written a call option on an underlying
security, rather than entering a closing transaction of the written option, it
may purchase a call option with a different strike price and/or expiration date
that would eliminate some or all of the risk associated with the written call.
Used in combinations, these strategies are commonly referred to as "call
spreads."
Options may be either listed on an exchange or traded in
over-the-counter ("OTC") markets. Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation) and have standardized strike prices and
expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. The Portfolio will not purchase an OTC option
unless it believes that daily valuations for such options are readily
obtainable. OTC options differ from exchange-traded options in that OTC options
are transacted with dealers directly and not through a clearing corporation
(which would guarantee performance). Consequently, there is a risk of
non-performance by the dealer. Since no exchange is involved, OTC options are
valued on the basis of an average of the last bid prices obtained from dealers,
unless a quotation from only one dealer is available, in which case only that
dealer's price will be used.
Index Options. The risks of investment in index options may be
greater than options on securities. Because index options are settled in cash,
when the Portfolio writes a call on an 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 writing a call index
option position by holding a diversified portfolio of securities 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 underlie the index and, as a result, bears a risk that the value
of the securities held will not be perfectly correlated with the value of the
index.
Limitations on Options. The Portfolio will not write options
it, immediately after such sale, the aggregate value of securities or
obligations underlying the outstanding options exceeds 20% of the Portfolio's
total assets. The Portfolio will not purchase options if, at the time of the
investment, the aggregate premiums paid for the options will exceed 5% of the
Portfolio's total assets.
Interest Rate, Currency and Stock Index Futures Contracts. The
Portfolio may enter into interest rate, currency or stock index futures
contracts (collectively, "Futures" or "Futures Contracts") and options on
Futures as a hedge against changes in prevailing levels of interest rates,
currency exchange rates or stock price levels, respectively, in order to
establish more definitely the effective return on securities or currencies held
or intended to be acquired by it. The Portfolio's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates,
and decreases in currency exchange rates and stock prices, and purchase of
Futures as an offset against the effect of expected declines in interest rates,
and increases in currency exchange rates or stock prices.
A Futures Contract is a two party agreement to buy or sell a specified
amount of a specified security or currency (or deliver a cash settlement price,
in the case of an index future) for a specified price at a designated date, time
and place. A stock index future provides for the delivery, at a designated date,
time and place, of an amount of cash equal to a specified dollar amount times
the difference between the stock index value at the close of trading on the
contract and the price agreed upon in the Futures Contract; no physical delivery
of stocks comprising the index is made.
The Portfolio will only enter into Futures Contracts that are traded on
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading thereon in the United States
are regulated under the Commodity Exchange Act and by the Commodity Futures
Trading Commission ("CFTC").
The Portfolio's Futures transactions will be entered into for hedging
purposes only; that is, Futures will be sold to protect against a decline in the
price of securities or currencies that the Portfolio owns, or Futures will be
purchased to protect the Portfolio against an increase in the price of
securities or currencies it has committed to purchase or expects to purchase.
If the Portfolio were unable to liquidate a Future or an option on
Futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio might be
required to maintain the position being hedged by the Future or option or to
maintain cash or securities in a segregated account.
Additional information on Futures, options on Futures, and their risks
is included in this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Forward Contracts. A forward contract is an obligation, usually
arranged with a commercial bank or other currency dealer, to purchase or sell a
currency against another currency at a future date and price as agreed upon by
the parties. The Portfolio either may accept or make delivery of the currency at
the maturity of the forward contract. The Portfolio may also, if its contra
party agrees prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Forward contracts are traded
over-the-counter, and not on organized commodities or securities exchanges. As a
result, it may be more difficult to value such contracts, and it may be
difficult to enter into closing transactions.
The cost to the Portfolio of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does
establish a rate of exchange in advance.
Additional information on forward contracts and their risks is included
in this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Other Investment Companies. The Portfolio may invest in other
investment companies to the extent permitted by the 1940 Act and rules and
regulations thereunder, and, if applicable, exemptive orders granted by the SEC.
Investment Policy Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the AST AIM International Equity
Portfolio. This limitation is not a "fundamental" restriction, and may be
changed by the Trustees without shareholder approval. The Portfolio will not:
1. Make investments for the purpose of gaining control of a company's
management.
AST Janus Overseas Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term growth of capital.
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.
Pursuant to an exemptive order granted by the Securities and Exchange
Commission, the Portfolio and other funds advised or sub-advised by the
Sub-advisor may invest in repurchase agreements and other money market
instruments through a joint trading account. The Portfolio may also enter into
reverse repurchase agreements. The Portfolio will enter into such agreements
only to provide cash to satisfy unusually heavy redemption requests and for
other temporary or emergency purposes, rather than to obtain cash to make
additional investments. 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 American Century International Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth.
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
("transaction hedging"); (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 ("portfolio hedging"). It's anticipated that the
Fund will enter into portfolio hedges much less frequently than transaction
hedges.
As to transaction hedging, 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 portfolio hedging, 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. 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.
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.
Repurchase Agreements. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in repurchase agreements. The
Portfolio will limit repurchase agreement transactions to securities issued by
the U.S. government, its agencies and instrumentalities.
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.
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 developing countries may involve a high
degree of risk and may present a risk of default or renegotiation or
rescheduling of debt payments.
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.
AST MFS Global Equity Portfolio:
Investment Objective: The investment objective of the Portfolio is capital
growth.
Investment Policies:
U.S. Government Securities. The Portfolio may invest in U.S. Government
securities including (i) U.S. Treasury obligations, all of which are backed by
the full faith and credit of the U.S. Government and (ii) U.S. Government
securities, some of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the Government National
Mortgage Association ("GNMA"); some of which are backed only by the credit of
the issuer itself, e.g., obligations of the Student Loan Marketing Association;
and some of which are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations, e.g., obligations of the
Federal National Mortgage Association ("FNMA").
U.S. Government securities also include interest in trust or other entities
representing interests in obligations that are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities.
Equity Securities. The Portfolio may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
Foreign Securities. The Portfolio may invest in dollar-denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. For a discussion of the risks involved in
foreign securities, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Depository Receipts. The Portfolio may invest in American Depository
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other types of
depository receipts. ADRs are certificates by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depository
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
For the purposes of the Portfolio's policy to invest a certain percentage of its
assets in foreign securities, the investments of the Portfolio in ADRs, GDRs and
other types of depository receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depository which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S. depositories.
Under the terms of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depository of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. The Portfolio may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United Sates can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Portfolio may purchase securities in local markets and direct delivery of
these shares to the local depositary of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Portfolio's custodian in five days. The Portfolio may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, information available to a
U.S. investor will be limited to the information the foreign issuer is required
to disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in a foreign currency.
Emerging Markets. The Portfolio may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
Company Debt. Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Portfolio's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments have occurred frequently over the history of certain emerging
markets and could adversely affect the Portfolio's assets should these
conditions recur.
Foreign currencies. Some emerging market countries may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
Inflation. Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Liquidity; Trading Volume; Regulatory Oversight. The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore , there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situations may arise in one or
more emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Portfolio may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
SEC. If market prices are not readily available, the Portfolio's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Directors.
Withholding. Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested. The Sub-adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
Forward Contracts. The Portfolio may enter into contracts for the
purchase or sale of a specific currency at a future date at a price at the time
the contract is entered into (a "Forward Contract"), for hedging purposes (e.g.,
to protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
The Portfolio does not presently intend to hold Forward Contracts
entered into until maturity, at which time it would be required to deliver or
accept delivery of the underlying currency, but will seek in most instances to
close out positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Portfolio's profit or loss based upon the value of
the Contracts at the time the offsetting transactions is executed.
The Portfolio will also enter into transactions in Forward Contracts
for other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Portfolio may purchase a given
foreign currency through a Forward Contract if, in the judgement of the
Sub-adviser, the value of such currency is expected to rise relative to the U.S.
dollar. Conversely, the Portfolio may sell the currency through a Forward
Contract if the Sub-adviser believes that its value will decline relative to the
dollar.
For an additional discussion of Forward Contracts see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Portfolio may purchase and sell futures
contracts ("Future Contracts") on stock indices, foreign currencies, interest
rates or interest-rate related instruments, indices or foreign currencies or
commodities. The Portfolio also may purchase and sell Futures Contracts on
foreign or domestic fixed income securities or indices of such securities
including municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures Contracts call for settlement only on the expiration
date and cannot be exercised at any other time during their term.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipations of or during market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Portfolio intends to purchase. As
such purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
The Portfolio may purchase and sell foreign currency futures contracts
for hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the dollar cost of foreign-denominated securities, or increase the
dollar cost of foreign-denominated securities to be acquired, even if the value
of such securities in the currencies in which they are denominated remains
constant. The Portfolio may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Portfolio could protect against a rise in the dollar
cost of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant security, which could offset, in whole or in part, the
increased cost of such securities resulting from the rise in the dollar value of
the underlying currencies. Where the Portfolio purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired instead
decline, the Portfolio will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
For further information on Futures Contracts, see this Statement under
"Certain Risk Factors and Investment Methods."
Investment in Other Investment Companies. The Portfolio may invest in
other investment companies, including both open-end and closed-end companies.
Investments in closed-end investment companies may involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities.
Options. The Portfolio may invest in the following types of options, which
involves the risks described below under the caption "Risk Factors."
Options on Foreign Currencies. The Portfolio may purchase and write
options on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Portfolio may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effect of the adverse movements in exchange rates.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. Foreign currency
options written by the Portfolio will generally be covered in a manner similar
to the covering of other types of options.
Options on Futures Contracts. The Portfolio may also purchase and write
options to buy or sell those Futures Contracts in which it may invest as
described above under "Futures Contracts." Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
Options on Futures Contracts that are written or purchased by the
Portfolio on U.S. Exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to the
regulation by the CFTC and the performance guarantee of the exchange
clearinghouse. In addition, Options on Futures Contracts may be traded on
foreign exchanges. The Portfolio may cover the writing of call Options on
Futures Contracts (a) through purchases of the underlying Futures Contract, (b)
through ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on the
same Futures Contract and in the same principal amount as the call written where
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written if the Portfolio owns liquid and unencumbered assets equal to the
difference. The Portfolio may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through the
ownership of liquid and unencumbered assets equal to the value of the security
or index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
(ii) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call Options on
Futures Contracts may also be covered 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. Upon the exercise of a call Option on a Futures
Contract written by the Portfolio, the Portfolio will be required to sell the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Portfolio is exercised, the Portfolio will be required to purchase the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the sale of such Contract, will close out its futures position.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures positions,
the Portfolio's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio securities.
Options on Securities. The Portfolio may write (sell) covered put and call
options, and purchase put and call options, on securities.
A call option written by the Portfolio 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 for additional
cash consideration if the Portfolio owns liquid and unencumbered assets equal to
the amount of cash consideration) upon conversion or exchange of other
securities held in its portfolio. A call option 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 Portfolio owns liquid and unencumbered assets equal
to the difference. If the portfolio writes a put option it must segregate liquid
and unencumbered assets with a value equal to the exercise price, 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 or where the exercise price of the put held is
less than the exercise price of the put written if the Portfolio owns liquid and
unencumbered assets equal to the difference. Put and call options written by the
Portfolio may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations.
Effecting a closing transaction in the case of a written call option
will permit the Portfolio to write another call option on the underlying
security with either a different exercise price or expiration date or both, or
in the case of a written put option will permit the Portfolio to write another
put option to the extent that the Portfolio owns liquid and unencumbered assets.
Such transactions permit the Portfolio to generate additional premium income,
which will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the
Portfolio, provided that another option on such security is not written. If the
Portfolio desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction in connection
with the option prior to or concurrent with the sale of the security.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call option against that security. The exercise price of the call option the
Portfolio determines to write will depend upon the expected price movement of
the underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will decline moderately
during the option period. Buy-and-write transactions using out-of-the-money call
options may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, the Portfolio's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise price,
less related transaction costs. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price or the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Portfolio may elect to close the position or retain the option until it is
exercised, at which time the Portfolio will be required to take delivery of the
security at the exercise price; the Portfolio's return will be the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Portfolio in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call options on
the same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those instances
where one of the options is exercised, the loss on the purchase or sale of the
underlying security may exceed the amount of the premiums received.
The writing of options on securities will not be undertaken by the
Portfolio solely for hedging purposes, and could involve certain risks which are
not present in the case of hedging transactions. Moreover, even where options
are written for hedging purposes, such transactions constitute only a partial
hedge against declines in the value of portfolio securities or against increases
in the value of securities to be acquired, up to the amount of the premium. The
Portfolio may also purchase options for hedging purposes or to increase its
return.
The Portfolio may also purchase call options to hedge against an
increase in the price of securities that the Portfolio anticipates purchasing in
the future. If such increase occurs, the call option will permit the Portfolio
to purchase the securities at the exercise price, or to close out the options at
a profit.
Options on Stock Indices. The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices. The
Portfolio may cover written call options on stock indices by owning securities
whose price changes, in the opinion of the Sub-adviser, are expected to be
similar to those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or for
additional cash consideration if the Portfolio owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or exchange of
other securities in its portfolio. The Portfolio may also cover call options on
stock indices by holding a call on the same index 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 Portfolio own liquid and
unencumbered assets equal to the difference. If the Portfolio writes put options
on stock indices, it must segregate liquid and unencumbered assets with a value
equal to the exercise price, or hold a put on the same stock index and in the
same principal amount as the put written where the exercise price of the put
held (a) is equal to or greater than the exercise price of the put written or
(b) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The purchase of call options on stock indices may be used by the
Portfolio 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 for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid it the value of the index does
not rise. The purchase of call options on stock indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included. The composition of the index is changed periodically.
For an additional discussion of options, see this Statement under
"Certain Risk Factors and Investment Methods."
Special Risk Factors.
Risk of Imperfect Correlation of Hedging Instruments with the
Portfolio's Portfolio. The use of derivatives for "cross hedging" purposes (such
as a transaction in a Forward Contract on one currency to hedge exposure to a
different currency) may involve greater correlation risks. Consequently, the
Portfolio bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
It should be noted that stock index futures contracts or options based
upon a narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Portfolio enters into transactions
in options or futures on narrowly-based indices for hedging purposes, movements
in the value of the index should, if the hedge is successful, correlate closely
with the portion of the Portfolio's portfolio or the intended acquisitions being
hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the derivative
and the price of the underlying index or obligation. The anticipated spread
between the prices may be distorted due to the difference in the nature of the
markets such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the derivatives markets. In this
regard, trading by speculators in derivatives has in the past occasionally
resulted in market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Portfolio
is subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the extent
of any loss suffered by the Portfolio in connection with such transactions.
In writing a covered call option on a security, index or futures
contract, the Portfolio also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. For example, where
the Portfolio covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index, and
the Portfolio may not be fully covered. As a result, the Portfolio could be
subject to risk of loss in the event of adverse market movements.
Risks of Non-Hedging Transactions. The Portfolio may enter transactions
in derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. Nevertheless, the method of
covering an option employed by the Portfolio may not fully protect it against
risk of loss and, in any event, the Portfolio could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Portfolio may also enter into futures, Forward Contracts for non-hedging
purposes. For example, the Portfolio may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Portfolio will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures, Forward
Contracts may be leveraged, which could expose the Portfolio to greater risk of
loss than such purchases or sales. Entering into transactions in derivatives for
other than hedging purposes, therefore, could expose the Portfolio to
significant risk of loss if the prices, rates or values of the underlying
instruments or indices do not move in the direction or to the extent
anticipated.
With respect to the writing of straddles on securities, the Portfolio
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by providing
the Portfolio with two simultaneous premiums on the same security, but involve
additional risk, since the Portfolio may have an option exercised against it
regardless of whether the price of the security increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market. Prior to
exercise or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. In that event, it may not
be possible to close out a position held by the Portfolio, and the Portfolio
could be required to purchase or sell the instrument underlying an option, make
or receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if the Portfolio has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio securities
or other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse impact
on the Portfolio's ability effectively to hedge its portfolio, and could result
in trading losses.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions or to
recover excess variation margin payments.
Potential Bankruptcy of a Clearinghouse or Broker. When the Portfolio
enters into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Portfolio has effected the transaction. In that
event, the Portfolio might not be able to recover amounts deposited as margin,
or amounts owed to the Portfolio in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of such
amounts. Moreover, the performance guarantee of an exchange clearinghouse
generally extends only to its members and the Portfolio could sustain losses,
notwithstanding such guarantee, in the event of the bankruptcy of its broker.
Trading and Position Limits. The exchanges on which futures and options
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers.) Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Sub-adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Portfolio.
Risks of Options on Futures Contracts. The amount of risk the Portfolio
assumes when it purchases an Option on a Futures Contract is the premium paid
for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an Option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the price of the option may not correlate
with movements in the price of the underlying security, index, currency or
Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S. Exchanges. Transactions
in Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are subject
to all of the correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by the Portfolio.
Further, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Portfolio makes investment and trading decisions in connection
with other transactions. Moreover, because the foreign currency market is a
global, 24-hour market, events could occur in that market which will not be
reflected in the forward, futures or options market until the following day,
thereby making it more difficult for the Portfolio to respond to such events in
a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Portfolio in Futures Contracts
and exchange-traded options, on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) the SEC. To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not be possible to
enter into a desired transaction.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and the Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or security,
thereby restricting the Portfolio's ability to enter into desired hedging
transactions.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded on
exchanges located in foreign countries. Such transactions may not be conducted
in the same manner as those entered into on U.S. exchanges, and may be subject
to different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
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 (the
"OCC"), thereby reducing the risk of counterparty default.
The purchase and sale of exchange-traded foreign currency options, is
subject to 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.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements with sellers who are member firms (or a subsidiary thereof) of the
New York Stock Exchange or members of the Federal Reserve System or recognized
primary U.S. Government securities dealers which the Sub-adviser has determined
to be creditworthy. The securities that the Portfolio purchases and holds
through its agent are U.S. Government securities. The repurchase price may be
higher than the purchase price, the difference being income to the Portfolio, or
the purchase price may be the same, with interest at a standard rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Government
securities.
The Portfolio only enters into repurchase agreements after the
Sub-adviser has determined that the seller is creditworthy, and the Sub-adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Portfolio has the right to make margin calls at any time if the value of the
securities falls below the agreed upon amount of collateral.
For an additional discussion of repurchase agreements, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may purchase securities that are
not registered under the Securities Act of 1933 ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities") and commercial paper
issued under Section 4(2) of the 1933 Act ("4(2) paper"). The Board of Trustees
has delegated to the Sub-adviser the daily function of determining and
monitoring the liquidity of Rule 144A securities and Section 4(2) paper. The
Board, however, retains oversight of the liquidity and availability of
information. Subject the Portfolio's limitation on investments in illiquid
investments, the Portfolio may also invest in restricted securities that may not
be sold under Rule 144A, which presents certain risks. In addition, the
Portfolio might have to sell these securities at less than fair value. Market
quotations for these securities will be less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
Additional information about restricted securities and their risks is
included in the Trust's prospectus under "Certain Risk factors and Investment
Methods."
Short Term Instruments. The Portfolio may hold cash and invest in cash
equivalents, such as short-term U.S. Government Securities, commercial paper and
bank instruments.
Temporary Defensive Positions. During periods of unusual market
conditions when the Sub-adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Portfolio may be invested in cash
(including foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government securities and related repurchase agreements.
Warrants. The Portfolio may invest in warrants. The strike price of
warrants typically is much lower than the current market price of the underlying
securities, yet they are subject to similar price fluctuations, in absolute
terms. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Additional information regarding warrants is included in this Statement
and the Trust's Prospectus under "Certain Risk factors and Investment Methods."
"When-Issued" Securities. The Portfolio may purchase securities on a
"when-issued," "forward commitment," or "delayed delivery basis." The commitment
to purchase a security for which payment will be made on a future date may be
deemed a separate security. While awaiting delivery of securities purchased on
such basis, the Portfolio will identify liquid and unencumbered assets equal to
its forward delivery commitment.
For more information about when-issued securities, please see this
Statement under "Certain Risk Factors and Investment Methods."
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. Pursuant to an exemptive order granted by the Securities
and Exchange Commission, the Portfolio and other funds advised or sub-advised by
the Sub-advisor may invest in repurchase agreements and other money market
instruments through a joint trading account.
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, rather than to
obtain cash to make additional investments. 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.
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. 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.
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. 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 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. 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. 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. 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. 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 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 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. 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. 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."
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 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.
AST Lord Abbett Small Cap Value Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
long-term capital appreciation.
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 premiums paid for foreign currency put options will not exceed
5% of the net assets of the Portfolio.
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 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 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.
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.
Debt Securities. The Portfolio may invest in straight bonds or other
debt securities, including lower rated, high-yield bonds. 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. The Portfolio
has no present intention to commit more than 5% of gross assets to investing in
debt securities. For a discussion of debt securities, including lower rated,
high-yield bonds, 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 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.
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.
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." The Portfolio will not purchase a junk bond if immediately after such
purchase the Portfolio would have more than 5% of its total assets invested in
such 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, 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. 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%.
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 by the Portfolio
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.
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 financial 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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
option, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Portfolio would be required to
distribute any such gain even though it would not receive proceeds from the sale
at the time the option, futures or forward position is entered into.
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."
Money Market Securities. The Portfolio will hold a certain portion of its
assets in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, rated in the two highest rating categories, maturing in
one year or less.
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 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. The Portfolio may write covered call options on
securities it owns. Generally, the purpose of writing these options is to reduce
the effect of price fluctuation of securities held by 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, 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 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.
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.
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
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. 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. 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."
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. Options on foreign currencies may be traded on U.S. or foreign exchanges
or over-the-counter options or foreign currencies that 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.
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. 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 no longer would be eligible for purchase by the
Portfolio, 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.
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 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 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.
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.
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 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.
The Portfolio will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
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. 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%.
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 by the Portfolio 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.
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 financial 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 will generally not
enter into a forward contract with a term of greater than one year.
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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
option, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Portfolio would be required to
distribute any such gain even though it would not receive proceeds from the sale
at the time the option, futures or forward position is entered into.
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.
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 Portfolio
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 MFS Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
to provide long-term growth of capital and future income rather than current
income.
Investment Policies:
Variable and Floating Rate Obligations. The Portfolio may invest in
floating or variable rate securities. Investments in variable or floating rate
securities normally will involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on behalf of the Portfolio on short notice at par plus accrued
interest, which amount may be more or less than the amount of the bondholder
paid for them. The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before the Portfolio is entitled to receive payment of the
obligation upon demand or (ii) the period remaining until the obligation's next
interest rate adjustment. If not redeemed by the Portfolio through the demand
feature, the obligations mature on a specified date, which may range up to
thirty years from the date of issuance.
Equity Securities. The Portfolio may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
Foreign Securities. The Portfolio may invest in dollar-denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. For a discussion of the risks involved in
foreign securities, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Depository Receipts. The Portfolio may invest in American Depository
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other types of
depository receipts. ADRs are certificates by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depository
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
For the purposes of the Portfolio's policy to invest a certain percentage of its
assets in foreign securities, the investments of the Portfolio in ADRs, GDRs and
other types of depository receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depository which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S. depositories.
Under the terms of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depository of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. The Portfolio may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United Sates can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Portfolio may purchase securities in local markets and direct delivery of
these shares to the local depositary of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Portfolio's custodian in five days. The Portfolio may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, information available to a
U.S. investor will be limited to the information the foreign issuer is required
to disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in a foreign currency.
Emerging Markets. The Portfolio may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
Company Debt. Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Portfolio's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments have occurred frequently over the history of certain emerging
markets and could adversely affect the Portfolio's assets should these
conditions recur.
Foreign currencies. Some emerging market countries may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
Inflation. Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Liquidity; Trading Volume; Regulatory Oversight. The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore , there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Portfolio may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
SEC. If market prices are not readily available, the Portfolio's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Withholding. Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested. The Sub-adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
Forward Contracts. The Portfolio may enter into contracts for the
purchase or sale of a specific currency at a future date at a price at the time
the contract is entered into (a "Forward Contract"), for hedging purposes (e.g.,
to protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
The Portfolio does not presently intend to hold Forward Contracts
entered into until maturity, at which time it would be required to deliver or
accept delivery of the underlying currency, but will seek in most instances to
close out positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Portfolio's profit or loss based upon the value of
the Contracts at the time the offsetting transactions is executed.
The Portfolio will also enter into transactions in Forward Contracts
for other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Portfolio may purchase a given
foreign currency through a Forward Contract if, in the judgement of the
Sub-adviser, the value of such currency is expected to rise relative to the U.S.
dollar. Conversely, the Portfolio may sell the currency through a Forward
Contract if the Sub-adviser believes that its value will decline relative to the
dollar.
For an additional discussion of Forward Contracts see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Futures Contracts. The Portfolio may purchase and sell futures
contracts ("Future Contracts") on stock indices, foreign currencies, interest
rates or interest-rate related instruments, indices of foreign currencies or
commodities. The Portfolio also may purchase and sell Futures Contracts on
foreign or domestic fixed income securities or indices of such securities
including municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures Contracts call for settlement only on the expiration
date and cannot be exercised at any other time during their term.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipations of or during market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Portfolio intends to purchase. As
such purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
The Portfolio may purchase and sell foreign currency futures contracts
for hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the dollar cost of foreign-denominated securities, or increase the
dollar cost of foreign-denominated securities to be acquired, even if the value
of such securities in the currencies in which they are denominated remains
constant. The Portfolio may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Portfolio could protect against a rise in the dollar
cost of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant security, which could offset, in whole or in part, the
increased cost of such securities resulting from the rise in the dollar value of
the underlying currencies. Where the Portfolio purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired instead
decline, the Portfolio will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
For further information on Futures Contracts, see this Statement under
"Certain Risk Factors and Investment Methods."
Investment in Other Investment Companies. The Portfolio may invest in
other investment companies, including both open-end and closed-end companies.
Investments in closed-end investment companies may involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities.
Options. The Portfolio may invest in the following types of options, which
involves the risks described below under the caption "Risk Factors."
Options on Foreign Currencies. The Portfolio may purchase and write
options on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Portfolio may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effect of the adverse movements in exchange rates.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. Foreign currency
options written by the Portfolio will generally be covered in a manner similar
to the covering of other types of options.
Options of Futures Contracts. The Portfolio may also purchase and write
options to buy or sell those Futures Contracts in which it may invest as
described above under "Futures Contracts." Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
Options on Futures Contracts that are written or purchased by the
Portfolio on U.S. Exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to the
regulation by the CFTC and the performance guarantee of the exchange
clearinghouse. In addition, Options on Futures Contracts may be traded on
foreign exchanges. The Portfolio may cover the writing of call Options on
Futures Contracts (a) through purchases of the underlying Futures Contract, (b)
through ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on the
same Futures Contract and in the same principal amount as the call written where
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written if the Portfolio owns liquid and unencumbered assets equal to the
difference. The Portfolio may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through the
ownership of liquid and unencumbered assets equal to the value of the security
or index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
(ii) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call Options on
Futures Contracts may also be covered 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. Upon the exercise of a call Option on a Futures
Contract written by the Portfolio, the Portfolio will be required to sell the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Portfolio is exercised, the Portfolio will be required to purchase the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the sale of such Contract, will close out its futures position.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures positions,
the Portfolio's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio securities.
Options on Securities. The Portfolio may write (sell) covered put and call
options, and purchase put and call options, on securities.
A call option written by the Portfolio 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 for additional
cash consideration if the Portfolio owns liquid and unencumbered assets equal to
the amount of cash consideration) upon conversion or exchange of other
securities held in its portfolio. A call option 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 Portfolio owns liquid and unencumbered assets equal
to the difference. If the portfolio writes a put option it must segregate liquid
and unencumbered assets with a value equal to the exercise price, 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 or where the exercise price of the put held is
less than the exercise price of the put written if the Portfolio owns liquid and
unencumbered assets equal to the difference. Put and call options written by the
Portfolio may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations.
Effecting a closing transaction in the case of a written call option
will permit the Portfolio to write another call option on the underlying
security with either a different exercise price or expiration date or both, or
in the case of a written put option will permit the Portfolio to write another
put option to the extent that the Portfolio owns liquid and unencumbered assets.
Such transactions permit the Portfolio to generate additional premium income,
which will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the
Portfolio, provided that another option on such security is not written. If the
Portfolio desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction in connection
with the option prior to or concurrent with the sale of the security.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call option against that security. The exercise price of the call option the
Portfolio determines to write will depend upon the expected price movement of
the underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will decline moderately
during the option period. Buy-and-write transactions using out-of-the-money call
options may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, the Portfolio's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise price,
less related transaction costs. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price or the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Portfolio may elect to close the position or retain the option until it is
exercised, at which time the Portfolio will be required to take delivery of the
security at the exercise price; the Portfolio's return will be the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Portfolio in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call options on
the same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those instances
where one of the options is exercised, the loss on the purchase or sale of the
underlying security may exceed the amount of the premiums received.
The writing of options on securities will not be undertaken by the
Portfolio solely for hedging purposes, and could involve certain risks which are
not present in the case of hedging transactions. Moreover, even where options
are written for hedging purposes, such transactions constitute only a partial
hedge against declines in the value of portfolio securities or against increases
in the value of securities to be acquired, up to the amount of the premium. The
Portfolio may also purchase options for hedging purposes or to increase its
return.
The Portfolio may also purchase call options to hedge against an
increase in the price of securities that the Portfolio anticipates purchasing in
the future. If such increase occurs, the call option will permit the Portfolio
to purchase the securities at the exercise price, or to close out the options at
a profit.
Options on Stock Indices. The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices. The
Portfolio may cover written call options on stock indices by owning securities
whose price changes, in the opinion of the Sub-adviser, are expected to be
similar to those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or for
additional cash consideration if the Portfolio owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or exchange of
other securities in its portfolio. The Portfolio may also cover call options on
stock indices by holding a call on the same index 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 Portfolio own liquid and
unencumbered assets equal to the difference. If the Portfolio writes put options
on stock indices, it must segregate liquid and unencumbered assets with a value
equal to the exercise price, or hold a put on the same stock index and in the
same principal amount as the put written where the exercise price of the put
held (a) is equal to or greater than the exercise price of the put written or
(b) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The purchase of call options on stock indices may be used by the
Portfolio 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 for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid it the value of the index does
not rise. The purchase of call options on stock indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included. The composition of the index is changed periodically.
For an additional discussion of options, see this Statement under
"Certain Risk Factors and Investment Methods."
Special Risk Factors.
Risk of Imperfect Correlation of Hedging Instruments with the Portfolio's
Portfolio. The use of derivatives for "cross hedging" purposes (such as a
transaction in a Forward Contract on one currency to hedge exposure to a
different currency) may involve greater correlation risks. Consequently, the
Portfolio bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
It should be noted that stock index futures contracts or options based
upon a narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Portfolio enters into transactions
in options or futures on narrowly-based indices for hedging purposes, movements
in the value of the index should, if the hedge is successful, correlate closely
with the portion of the Portfolio's portfolio or the intended acquisitions being
hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the derivative
and the price of the underlying index or obligation. The anticipated spread
between the prices may be distorted due to the difference in the nature of the
markets such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the derivatives markets. In this
regard, trading by speculators in derivatives has in the past occasionally
resulted in market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Portfolio
is subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the extent
of any loss suffered by the Portfolio in connection with such transactions.
In writing a covered call option on a security, index or futures
contract, the Portfolio also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. For example, where
the Portfolio covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index, and
the Portfolio may not be fully covered. As a result, the Portfolio could be
subject to risk of loss in the event of adverse market movements.
Risks of Non-Hedging Transactions. The Portfolio may enter transactions
in derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. Nevertheless, the method of
covering an option employed by the Portfolio may not fully protect it against
risk of loss and, in any event, the Portfolio could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Portfolio may also enter into futures, Forward Contracts for non-hedging
purposes. For example, the Portfolio may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Portfolio will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures, Forward
Contracts may be leveraged, which could expose the Portfolio to greater risk of
loss than such purchases or sales. Entering into transactions in derivatives for
other than hedging purposes, therefore, could expose the Portfolio to
significant risk of loss if the prices, rates or values of the underlying
instruments or indices do not move in the direction or to the extent
anticipated.
With respect to the writing of straddles on securities, the Portfolio
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by providing
the Portfolio with two simultaneous premiums on the same security, but involve
additional risk, since the Portfolio may have an option exercised against it
regardless of whether the price of the security increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market. Prior to
exercise or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. In that event, it may not
be possible to close out a position held by the Portfolio, and the Portfolio
could be required to purchase or sell the instrument underlying an option, make
or receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if the Portfolio has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio securities
or other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse impact
on the Portfolio's ability effectively to hedge its portfolio, and could result
in trading losses.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions or to
recover excess variation margin payments.
Potential Bankruptcy of a Clearinghouse or Broker. When the Portfolio
enters into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Portfolio has effected the transaction. In that
event, the Portfolio might not be able to recover amounts deposited as margin,
or amounts owed to the Portfolio in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of such
amounts. Moreover, the performance guarantee of an exchange clearinghouse
generally extends only to its members and the Portfolio could sustain losses,
notwithstanding such guarantee, in the event of the bankruptcy of its broker.
Trading and Position Limits. The exchanges on which futures and options
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers.) Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Sub-adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Portfolio.
Risks of Options on Futures Contracts. The amount of risk the Portfolio
assumes when it purchases an Option on a Futures Contract is the premium paid
for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an Option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the price of the option may not correlate
with movements in the price of the underlying security, index, currency or
Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S. Exchanges. Transactions
in Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are subject
to all of the correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by the Portfolio.
Further, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Portfolio makes investment and trading decisions in connection
with other transactions. Moreover, because the foreign currency market is a
global, 24-hour market, events could occur in that market which will not be
reflected in the forward, futures or options market until the following day,
thereby making it more difficult for the Portfolio to respond to such events in
a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Portfolio in Futures Contracts
and exchange-traded options, on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) the SEC. To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not be possible to
enter into a desired transaction.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and the Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or security,
thereby restricting the Portfolio's ability to enter into desired hedging
transactions.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded on
exchanges located in foreign countries. Such transactions may not be conducted
in the same manner as those entered into on U.S. exchanges, and may be subject
to different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
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 (the
"OCC"), thereby reducing the risk of counterparty default.
The purchase and sale of exchange-traded foreign currency options, is
subject to 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.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements with sellers who are member firms (or a subsidiary thereof) of the
New York Stock Exchange or members of the Federal Reserve System or recognized
primary U.S. Government securities dealers which the Sub-adviser has determined
to be creditworthy. The securities that the Portfolio purchases and holds
through its agent are U.S. Government securities. The repurchase price may be
higher than the purchase price, the difference being income to the Portfolio, or
the purchase price may be the same, with interest at a standard rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Government
securities.
The Portfolio only enters into repurchase agreements after the
Sub-adviser has determined that the seller is creditworthy, and the Sub-adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Portfolio has the right to make margin calls at any time if the value of the
securities falls below the agreed upon amount of collateral.
For an additional discussion of repurchase agreements, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may purchase securities that are
not registered under the Securities Act of 1933 ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities") and commercial paper
issued under Section 4(2) of the 1933 Act ("4(2) paper"). The Board of Trustees
has delegated to the Sub-adviser the daily function of determining and
monitoring the liquidity of Rule 144A securities and Section 4(2) paper. The
Board, however, retains oversight of the liquidity and availability of
information. Subject the Portfolio's limitation on investments in illiquid
investments, the Portfolio may also invest in restricted securities that may not
be sold under Rule 144A, which presents certain risks. In addition, the
Portfolio might have to sell these securities at less than fair value. Market
quotations for these securities will be less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
Additional information about restricted securities and their risks is
included in the Trust's prospectus under "Certain Risk factors and Investment
Methods."
Short Term Instruments. The Portfolio may hold cash and invest in cash
equivalents, such as short-term U.S. Government Securities, commercial paper and
bank instruments.
Temporary Defensive Positions. During periods of unusual market
conditions when the Sub-adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Portfolio may be invested in cash
(including foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government securities and related repurchase agreements.
"When-Issued" Securities. The Portfolio may purchase securities on a
"when-issued," "forward commitment," or "delayed delivery basis." The commitment
to purchase a security for which payment will be made on a future date may be
deemed a separate security. While awaiting delivery of securities purchased on
such basis, the Portfolio will identify liquid and unencumbered assets equal to
its forward delivery commitment.
For more information about when-issued securities, please see this
Statement under "Certain Risk Factors and Investment Methods."
AST Marsico Capital Growth Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth. 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 high-yield/high-risk and mortgage- and
asset-backed 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 and mortgage- and asset-backed securities,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Zero Coupon, Pay-in-Kind, and Step Coupon Bonds. The Fund may purchase
zero coupon, pay-in-kind, and step coupon bonds. 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.
For an additional discussion of zero coupon securities, see this SAI 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 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.
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.
Corporate Bonds and Debentures. The Portfolio may purchase corporate
bonds and debentures, including bonds rated below investment grade. The
Portfolio will not invest more than 5% of its net assets in bonds rated below
investment grade. For a discussion of lower rated securities, see this Statement
and the Trust's Prospectus 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
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. Pursuant to an exemptive order granted by the
Securities and Exchange Commission, the Portfolio and other funds advised or
sub-advised by the Sub-advisor may invest in repurchase agreements and other
money market instruments through a joint trading account. The Portfolio may also
enter into reverse repurchase agreements. The Portfolio will enter into such
agreements only to provide cash to satisfy unusually heavy redemption requests
and for other temporary or emergency purposes, rather than to obtain cash to
make additional investments. 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 Bankers Trust Managed Index 500 Portfolio:
Investment Objective: The investment objective of the AST Bankers Trust Managed
Index 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:
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.
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.
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 Portfolio 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 Managed Index
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 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. 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.
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. 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").
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 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.
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 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.
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.
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. 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 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. 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.
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 American Century Income & Growth Portfolio:
Investment Objective: The primary investment objective of the Portfolio is
to seek capital growth. Current income is a secondary investment objective.
Investment Policies:
In general, within the restrictions outlined here and in the Trust's
Prospectus, the Sub-advisor has broad powers to decide how to invest fund
assets. Investments are varied according to what is judged advantageous under
changing economic conditions. It is the Sub-advisor's intention that the
Portfolio will generally consist of domestic and foreign common stocks and
equity equivalent securities. However, subject to the specific limitations
applicable to the Portfolio, the Sub-advisor may invest the assets of the
Portfolio in varying amounts in other instruments, such as those discussed
below, when such a course is deemed appropriate in order to attempt to attain
its investment objective.
Senior securities that, in the opinion of the manager, are high-grade
issues also may be purchased for defensive purposes. However, so long as a
sufficient number of such securities are available, the manager intends to keep
the Portfolio fully invested in stocks that meet the Portfolio's investment
criteria, regardless of the movement of stock prices generally. In most
circumstances, the Portfolio's actual level of cash and cash equivalents will be
less than 10%. As noted in the Prospectus, the Sub-advisor may use S&P 500 Index
futures as a way to expose the Portfolio's cash assets to the market, while
maintaining liquidity. The Sub-advisor may not leverage the Portfolio through
investment in these futures, so there should be no greater market risk to the
Portfolio than if they purchased stocks.
As a diversified fund as defined in the 1940 Act, the Portfolio will not, with
respect to 75% of its total assets, invest more than 5% of its total assets in
the securities of a single issuer. To meet federal tax requirements for
qualification as a regulated investment company, the Portfolio must limit its
investments so that at the close of each quarter of its taxable year (1) no more
than 25% of its total assets are invested in the securities of a single issuer
(other than the U.S government or a regulated investment company), and (2) with
respect to at least 50% of its total assets, no more than 5% of its total assets
are invested in the securities of a single issuer.
Foreign Securities. The Portfolio may invest an unlimited amount of its
assets in the securities of foreign issuers, including foreign governments, when
these securities meet its standards of selection. Securities of foreign issuers
may trade in the U.S. or foreign securities markets.
Investments in foreign securities involve risks that are different from
and generally greater than investments in U.S. securities. These risks are
discussed in this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods." In addition, because most foreign securities
are denominated in non-U.S. currencies, the investment performance of the
Portfolio could be affected by changes in foreign currency exchange rates.
Currency exchange rates can be volatile at times in response to supply and
demand in the currency exchange markets, international balances of payments,
governmental intervention, speculation, and other political and economic
conditions. As discussed below, the Portfolio may purchase and sell foreign
currency on a spot basis and may engage in forward currency contracts, currency
options and futures transactions for hedging or any other lawful purpose.
In certain countries one securities broker may represent all or a
significant part of the trading volume, resulting in higher trading costs and
decreased liquidity due to a lack of alternative trading partners. 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 due to subsequent declines in the
value of the portfolio security or, if the Portfolio has entered into a contract
to sell the security, liability to the purchaser.
Evidence of securities ownership may be uncertain in many foreign
countries. In many of these countries, the most notable of which is the Russian
Federation, the ultimate evidence of securities ownership is the share register
held by the issuing company or its registrar. While some companies may issue
share certificates or provide extracts of the company's share register, these
are not negotiable instruments and are not effective evidence of securities
ownership. In an ownership dispute, the company's share register is controlling.
As a result, there is a risk that the Portfolio's trade details could be
incorrectly or fraudulently entered on the issuer's share register at the time
of the transaction, or that the Portfolio's ownership could thereafter be
altered or deleted entirely, resulting in a loss to the Portfolio.
Depositary Receipts. The Portfolio may invest in foreign companies
through American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), ordinary shares and New York shares. Additional information about ADRs
and EDRs is included in the Trust's prospectus under "Certain Risk Factors and
Investment Methods." Ordinary shares are shares of foreign issuers that are
traded abroad and on a U.S. exchange. New York shares are shares that a foreign
issuer has allocated for trading in the United States. ADRs, ordinary shares,
and New York shares all may be purchased with and sold for U.S. dollars, which
protects the fund from foreign settlement risks.
Forward Currency Exchange Contracts. The Portfolio may purchase and
sell foreign currency either on a spot (i.e., cash) basis and may engage in
forward foreign currency exchange contracts, currency options and futures
transactions for hedging or any lawful purpose. The Portfolio will segregate on
its records cash or other liquid assets in an amount sufficient to cover its
obligations under the contract.
The Sub-advisor does not intend to enter into such contracts on a
regular basis. Normally, consideration of the prospect for currency parties 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.
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 fund to purchase, on the same maturity date, the same amount of
the foreign currency.
Convertible Securities. A convertible security is a fixed income
security that offers the potential for capital appreciation through a conversion
feature that enables the holder to convert the fixed income security into a
stated number of shares of common stock. As fixed income securities, convertible
securities provide a stable stream of income, with generally higher yields than
common stocks. Because convertible securities offer the potential to benefit
from increases in the market price of the underlying common stock, however, they
generally offer lower yields than non-convertible securities of similar quality.
Of course, like all fixed income securities, there can be no assurance of
current income because the issuers of the convertible securities may default on
their obligations. In addition, there can be no assurance of capital
appreciation because the value of the underlying common stock will fluctuate.
Unlike a convertible security that is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation Systems. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Portfolio at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
Additional information about convertible securities is included in the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales "Against the Box." As discussed in the Trust's Prospectus,
the Portfolio may engage in short sales if, at the time of the short sale, the
Portfolio owns or has the right to acquire securities equivalent in kind and
amount to the securities being sold short. While the short sale is maintained,
the Portfolio will segregate assets to collateralize 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. 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.
Derivative Securities. To the extent permitted by its investment
objectives and policies discussed elsewhere herein, 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-backed 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.
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 because 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 is a range of risks associated with derivative investments,
including:
o the risk that the underlying security, interest rate, market index or
other financial asset will not move in the direction the portfolio
manager anticipates;
o 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;
o the risk that adverse price movements in an instrument can result in a
loss substantially greater than the Portfolio's initial investment; and
o the risk that the counterparty will fail to perform its obligations.
The Sub-advisor will report to the Investment Manager on activity in derivative
securities, and the Investment Manager will report to the Trust's Board of
Trustees as necessary.
Futures and Related Options. The Portfolio may enter into futures
contracts, options or options on futures contracts. The Portfolio may not,
however, enter into a futures transaction for speculative purposes. Generally,
futures transactions will be used to:
o protect against a decline in market value of the Portfolio's securities
(taking a short futures position), or
o protect against the risk of an increase in market value for securities in
which the Portfolio generally invests at a time when the Portfolio is not
fully-invested (taking a long futures position), or
o provide a temporary substitute for the purchase of an individual security
that may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts and
writing calls, hedge the Portfolio's investments against price fluctuations.
Other strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control the Portfolio's
exposure to market fluctuations, the use of futures contracts may be a more
effective means of hedging this exposure. While the Portfolio will pay brokerage
commissions in connection with opening and closing out futures positions, these
costs are lower than the transaction costs incurred in the purchase and sale of
the underlying securities.
For example, the "sale" of a future by the Portfolio means the
Portfolio becomes obligated to deliver the security (or securities, in the case
of an "index" future) at a specified price on a specified date. The "purchase"
of a future means the Portfolio becomes obligated to buy the security (or
securities) at a specified price on a specified date. The Portfolio may engage
in futures and options transactions based on securities indices that are
consistent with the Portfolio's investment objectives. Examples of indices that
may be used include the Bond Buyer Index of Municipal Bonds for fixed income
funds, or the S&P 500 Index for equity funds. The Portfolio also may engage in
futures and options transactions based on specific securities, such as U.S.
Treasury bonds or notes. Futures contracts are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
government agency.
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. The margin deposit is intended to assure completion of the
contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish margin deposit requirements that are higher than
the exchange minimums. 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 marking
the contract to market.
Futures and options prices can be volatile, and trading in these
markets involves certain risks, which are described in more detail in this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods." The Sub-advisor will seek to minimize these risks by limiting the
contracts entered into on behalf of the Portfolio to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
Options on Futures. By purchasing an option on a futures contract, the
Portfolio obtains the right, but not the obligation, to sell the futures
contract (a put option) or to buy the contract (a call option) at a fixed strike
price. The Portfolio can terminate its position in a put option by allowing it
to expire or by exercising the option. If the option is exercised, the Portfolio
completes the sale of the underlying instrument at the strike price. Purchasing
an option on a futures contract does not require the Portfolio to make margin
payments unless the option is exercised.
Although they do not currently intend to do so, the Portfolio may write
(or sell) call options that obligate it to sell (or deliver) the option's
underlying instrument upon exercise of the option. While the receipt of option
premiums would mitigate the effects of price declines, the Portfolio would give
up some ability to participate in a price increase on the underlying instrument.
If the Portfolio were to engage in options transactions, it would own the
futures contract at the time a call were written and would keep the contract
open until the obligation to deliver it pursuant to the call expired.
When-Issued and Forward Commitment Agreements. The Portfolio may
sometimes purchase new issues of securities on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future date
(typically 15 to 45 days later).
In purchasing securities on a when-issued or forward commitment basis,
the Portfolio will segregate until the settlement date cash or other liquid
assets in an amount sufficient to meet the purchase price. When the time comes
to pay for the when-issued securities, the Portfolio will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, by selling the when-issued securities themselves
(which may have a market value greater or less than the Portfolio's payment
obligation). Additional information about when-issued and forward commitment
transactions is included in this Statement and in 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. 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.
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.
Other Investment Companies. The Portfolio may invest in other mutual
funds, including those advised by the Sub-advisor, provided that the investment
is consistent with the fund's investment policies and restrictions and with the
limitations of the 1940 Act. Under the 1940 Act, the Portfolio's investment in
such securities, subject to certain exceptions, currently is limited to (a) 3%
of the total voting stock of any one investment company, (b) 5% of the
Portfolio's total assets with respect to any one investment company and (c) 10%
of the Portfolio's total assets in the aggregate. Such purchases will be made in
the open market where no commission or profit to a sponsor or dealer results
from the purchase other than the customary brokers' commissions. Additional
information about other investment companies is included in the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Restricted and Illiquid Securities. The Portfolio may, from time to
time, purchase restricted or illiquid securities, including Rule 144A
securities, when they present attractive investment opportunities and otherwise
meet the Portfolio's criteria for selection. Additional information on illiquid
and Rule 144A securities and their risks is included in the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
With respect to securities eligible for resale under Rule 144A, the
staff of the SEC has taken the position that the liquidity of such securities in
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 Trust's Board of Trustees has established
guidelines 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 it
has adopted. The Sub-advisor also will consider appropriate remedies to minimize
the effect on the Portfolio's liquidity if a Rule 144A security held by the
Portfolio is or becomes illiquid.
Short-Term Securities. In order to meet anticipated redemptions, to
hold assets pending the purchase of additional securities for the Portfolio, or,
in some cases, for temporary defensive purposes, the Portfolio may invest a
portion of its assets in money market and other short-term securities.
Examples of those securities include:
<TABLE>
<CAPTION>
<S> <C>
o Securities issued or guaranteed by the U.S. government and its agencies and instrumentalities;
o Commercial Paper;
o Certificates of Deposit and Eurodollar Certificates of Deposit;
o Bankers' Acceptances;
o Short-term notes, bonds, debentures, or other debt instruments; and
o Repurchase agreements.
</TABLE>
U.S. Government Securities. The Portfolio may invest in U.S. government
securities, including bills, notes, and bonds issued by the U.S. Treasury and
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government. Some U.S. government securities are supported by the direct full
faith and credit pledge of the U.S. government; others are supported by the
right of the issuer to borrow from the U.S. Treasury; others, such as securities
issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. government to purchase the agencies'
obligations; and others are supported only by assurance that the U.S. government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
Repurchase Agreements. 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 funds will limit repurchase
agreement transactions to securities issued by the U.S. government, its agencies
and instrumentalities. The Portfolio will not invest more than 15% of its assets
in repurchase agreements maturing in more than seven days and other illiquid
securities.
Lending of Securities. The Portfolio may lend its securities. Additional
information on securities lending and its risk is included in this Statement and
the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
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.
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 MFS Growth with Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
to provide reasonable current income and long-term capital growth and income.
Investment Policies:
Corporate Debt Securities. The Portfolio may invest in debt securities,
such as convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and similar entities.
Variable and Floating Rate Obligations. The Portfolio may invest in
floating or variable rate securities. Investments in variable or floating rate
securities normally will involve industrial development or revenue bonds which
provide that the rate of interest is set as a specific percentage of a
designated base rate, such as rates on Treasury Bonds or Bills or the prime rate
at a major commercial bank, and that a bondholder can demand payment of the
obligations on behalf of the Portfolio on short notice at par plus accrued
interest, which amount may be more or less than the amount of the bondholder
paid for them. The maturity of floating or variable rate obligations (including
participation interests therein) is deemed to be the longer of (i) the notice
period required before the Portfolio is entitled to receive payment of the
obligation upon demand or (ii) the period remaining until the obligation's next
interest rate adjustment. If not redeemed by the Portfolio through the demand
feature, the obligations mature on a specified date, which may range up to
thirty years from the date of issuance.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds. The Portfolio
may invest in zero coupon bonds, deferred bonds and bonds on which the interest
is payable in kind ("PIK bonds"). Zero coupon and deferred interest bonds are
debt obligations, which are issued at a significant discount from face value.
The discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest payment date at a
rate of interest reflecting the market rate of the security at the time of
issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds do provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations, which
provide that the issuer may, at its option, pay interest on such bonds in cash
or in the form of additional debt obligations. Such investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of
such cash. Such investments may experience greater volatility in market value
than debt obligations, which make regular payments of interest. The Portfolio
will accrue income on such investments for tax and accounting purposes, which
are distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Portfolio's distribution obligations.
Equity Securities. The Portfolio may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
Foreign Securities. The Portfolio may invest in dollar-denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. For a discussion of the risks involved in
foreign securities, see this STATEMENT and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Depository Receipts. The Portfolio may invest in American Depository
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and other types of
depository receipts. ADRs are certificates by a U.S. depository (usually a bank)
and represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depository
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
For the purposes of the Portfolio's policy to invest a certain percentage of its
assets in foreign securities, the investments of the Portfolio in ADRs, GDRs and
other types of depository receipts are deemed to be investments in the
underlying securities.
ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a
depository which has an exclusive relationship with the issuer of the underlying
security. An unsponsored ADR may be issued by any number of U.S. depositories.
Under the terms of most sponsored arrangements, depositories agree to distribute
notices of shareholder meetings and voting instructions, and to provide
shareholder communications and other information to the ADR holders at the
request of the issuer of the deposited securities. The depository of an
unsponsored ADR, on the other hand, is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. The Portfolio may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United Sates can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Portfolio may purchase securities in local markets and direct delivery of
these shares to the local depositary of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Portfolio's custodian in five days. The Portfolio may also execute trades on
the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, information available to a
U.S. investor will be limited to the information the foreign issuer is required
to disclose in its country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in a foreign currency.
Emerging Markets. The Portfolio may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described below.
Company Debt. Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Portfolio's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments have occurred frequently over the history of certain emerging
markets and could adversely affect the Portfolio's assets should these
conditions recur.
Foreign currencies. Some emerging market countries may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
there is risk that certain emerging market countries may restrict the free
conversion of their currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which a Portfolio's portfolio securities are
denominated may have a detrimental impact on the Portfolio's net asset value.
Inflation. Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Liquidity; Trading Volume; Regulatory Oversight. The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore , there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited
trading volume in the securities of emerging market issuers compared to volume
of trading in the securities of U.S. issuers could cause prices to be erratic
for reasons apart from factors that affect the soundness and competitiveness of
the securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or
more emerging markets, as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Portfolio's securities in such
markets may not be readily available. The Portfolio may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
SEC. If market prices are not readily available, the Portfolio's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Directors.
Withholding. Income from securities held by the Portfolio could be
reduced by a withholding tax on the source or other taxes imposed by the
emerging market countries in which the Portfolio makes its investments. The
Portfolio's net asset value may also be affected by changes in the rates or
methods of taxation applicable to the Portfolio or to entities in which the
Portfolio has invested. The Sub-adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
Forward Contracts. The Portfolio may enter into contracts for the
purchase or sale of a specific currency at a future date at a price at the time
the contract is entered into (a "Forward Contract"), for hedging purposes (e.g.,
to protect its current or intended investments from fluctuations in currency
exchange rates) as well as for non-hedging purposes.
The Portfolio does not presently intend to hold Forward Contracts
entered into until maturity, at which time it would be required to deliver or
accept delivery of the underlying currency, but will seek in most instances to
close out positions in such Contracts by entering into offsetting transactions,
which will serve to fix the Portfolio's profit or loss based upon the value of
the Contracts at the time the offsetting transactions is executed.
The Portfolio will also enter into transactions in Forward Contracts
for other than hedging purposes, which presents greater profit potential but
also involves increased risk. For example, the Portfolio may purchase a given
foreign currency through a Forward Contract if, in the judgement of the
Sub-adviser, the value of such currency is expected to rise relative to the U.S.
dollar. Conversely, the Portfolio may sell the currency through a Forward
Contract if the Sub-adviser believes that its value will decline relative to the
dollar.
For an additional discussion of Forward Contracts see this Statement
and the Trust's Prospectus under "certain Risk Factors and Investment Methods."
Futures Contracts. The Portfolio may purchase and sell futures
contracts ("Future Contracts") on stock indices, foreign currencies, interest
rates or interest-rate related instruments, indices of foreign currencies or
commodities. The Portfolio also may purchase and sell Futures Contracts on
foreign or domestic fixed income securities or indices of such securities
including municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures Contracts call for settlement only on the expiration
date and cannot be exercised at any other time during their term.
Purchases or sales of stock index futures contracts are used to attempt
to protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipations of or during market decline to attempt to
offset the decrease in market value of the Portfolio's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or in part, by gains on the futures position.
When the Portfolio is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock index futures in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Portfolio intends to purchase. As
such purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Portfolio will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
The Portfolio may purchase and sell foreign currency futures contracts
for hedging purposes, to attempt to protect its current or intended investments
from fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the dollar cost of foreign-denominated securities, or increase the
dollar cost of foreign-denominated securities to be acquired, even if the value
of such securities in the currencies in which they are denominated remains
constant. The Portfolio may sell futures contracts on a foreign currency, for
example, where it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts.
Conversely, the Portfolio could protect against a rise in the dollar
cost of foreign-denominated securities to be acquired by purchasing futures
contracts on the relevant security, which could offset, in whole or in part, the
increased cost of such securities resulting from the rise in the dollar value of
the underlying currencies. Where the Portfolio purchases futures contracts under
such circumstances, however, and the prices of securities to be acquired instead
decline, the Portfolio will sustain losses on its futures position which could
reduce or eliminate the benefits of the reduced cost of portfolio securities to
be acquired.
For further information on Futures Contracts, see this Statement under
"Certain Risk Factors and Investment Methods."
Investment in Other Investment Companies. The Portfolio may invest in
other investment companies, including both open-end and closed-end companies.
Investments in closed-end investment companies may involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities.
Options. The Portfolio may invest in the following types of options, which
involves the risks described below under the caption "Risk Factors."
Options on Foreign Currencies. The Portfolio may purchase and write
options on foreign currencies for hedging and non-hedging purposes in a manner
similar to that in which Futures Contracts on foreign currencies, or Forward
Contracts, will be utilized. For example, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Portfolio may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effect of the adverse movements in exchange rates.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. Foreign currency
options written by the Portfolio will generally be covered in a manner similar
to the covering of other types of options.
Options of Futures Contracts. The Portfolio may also purchase and write
options to buy or sell those Futures Contracts in which it may invest as
described above under "Futures Contracts." Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
Options on Futures Contracts that are written or purchased by the
Portfolio on U.S. Exchanges are traded on the same contract market as the
underlying Futures Contract, and, like Futures Contracts, are subject to the
regulation by the CFTC and the performance guarantee of the exchange
clearinghouse. In addition, Options on Futures Contracts may be traded on
foreign exchanges. The Portfolio may cover the writing of call Options on
Futures Contracts (a) through purchases of the underlying Futures Contract, (b)
through ownership of the instrument, or instruments included in the index,
underlying the Futures Contract, or (c) through the holding of a call on the
same Futures Contract and in the same principal amount as the call written where
the exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the call
written if the Portfolio owns liquid and unencumbered assets equal to the
difference. The Portfolio may cover the writing of put Options on Futures
Contracts (a) through sales of the underlying Futures Contract, (b) through the
ownership of liquid and unencumbered assets equal to the value of the security
or index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held (i) is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
(ii) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call Options on
Futures Contracts may also be covered 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. Upon the exercise of a call Option on a Futures
Contract written by the Portfolio, the Portfolio will be required to sell the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Portfolio is exercised, the Portfolio will be required to purchase the
underlying Futures Contract which, if the Portfolio has covered its obligation
through the sale of such Contract, will close out its futures position.
Depending on the degree of correlation between changes in the value of
its portfolio securities and the changes in the value of its futures positions,
the Portfolio's losses from existing Options on Futures Contracts may to some
extent be reduced or increased by changes in the value of portfolio securities.
Options on Securities. The Portfolio may write (sell) covered put and call
options, and purchase put and call options, on securities.
A call option written by the Portfolio 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 for additional
cash consideration if the Portfolio owns liquid and unencumbered assets equal to
the amount of cash consideration) upon conversion or exchange of other
securities held in its portfolio. A call option 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 Portfolio owns liquid and unencumbered assets equal
to the difference. If the portfolio writes a put option it must segregate liquid
and unencumbered assets with a value equal to the exercise price, 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 or where the exercise price of the put held is
less than the exercise price of the put written if the Portfolio owns liquid and
unencumbered assets equal to the difference. Put and call options written by the
Portfolio may also be covered in such other manner as may be in accordance with
the requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations.
Effecting a closing transaction in the case of a written call option
will permit the Portfolio to write another call option on the underlying
security with either a different exercise price or expiration date or both, or
in the case of a written put option will permit the Portfolio to write another
put option to the extent that the Portfolio owns liquid and unencumbered assets.
Such transactions permit the Portfolio to generate additional premium income,
which will partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the
Portfolio, provided that another option on such security is not written. If the
Portfolio desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction in connection
with the option prior to or concurrent with the sale of the security.
The Portfolio may write options in connection with buy-and-write
transactions; that is, the Portfolio may purchase a security and then write a
call option against that security. The exercise price of the call option the
Portfolio determines to write will depend upon the expected price movement of
the underlying security. The exercise price of a call option may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will decline moderately
during the option period. Buy-and-write transactions using out-of-the-money call
options may be used when it is expected that the premiums received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in the
price of the underlying security alone. If the call options are exercised in
such transactions, the Portfolio's maximum gain will be the premium received by
it for writing the option, adjusted upwards or downwards by the difference
between the Portfolio's purchase price of the security and the exercise price,
less related transaction costs. If the options are not exercised and the price
of the underlying security declines, the amount of such decline will be offset
in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price or the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Portfolio's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Portfolio may elect to close the position or retain the option until it is
exercised, at which time the Portfolio will be required to take delivery of the
security at the exercise price; the Portfolio's return will be the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price, which could result in a loss.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Portfolio in the same market environments that call options are used in
equivalent buy-and-write transactions.
The Portfolio may also write combinations of put and call options on
the same security, known as "straddles" with the same exercise price and
expiration date. By writing a straddle, the Portfolio undertakes a simultaneous
obligation to sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently rises
sufficiently above the exercise price to cover the amount of the premium and
transaction costs, the call will likely be exercised and the Portfolio will be
required to sell the underlying security at a below market price. This loss may
be offset, however, in whole or in part, by the premiums received on the writing
of the two options. Conversely, if the price of the security declines by a
sufficient amount, the put will likely be exercised. The writing of straddles
will likely be effective, therefore, only where the price of the security
remains stable and neither the call nor the put is exercised. In those instances
where one of the options is exercised, the loss on the purchase or sale of the
underlying security may exceed the amount of the premiums received.
The writing of options on securities will not be undertaken by the
Portfolio solely for hedging purposes, and could involve certain risks which are
not present in the case of hedging transactions. Moreover, even where options
are written for hedging purposes, such transactions constitute only a partial
hedge against declines in the value of portfolio securities or against increases
in the value of securities to be acquired, up to the amount of the premium. The
Portfolio may also purchase options for hedging purposes or to increase its
return.
The Portfolio may also purchase call options to hedge against an
increase in the price of securities that the Portfolio anticipates purchasing in
the future. If such increase occurs, the call option will permit the Portfolio
to purchase the securities at the exercise price, or to close out the options at
a profit.
Options on Stock Indices. The Portfolio may write (sell) covered call
and put options and purchase call and put options on stock indices. The
Portfolio may cover written call options on stock indices by owning securities
whose price changes, in the opinion of the Sub-adviser, are expected to be
similar to those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or for
additional cash consideration if the Portfolio owns liquid and unencumbered
assets equal to the amount of cash consideration) upon conversion or exchange of
other securities in its portfolio. The Portfolio may also cover call options on
stock indices by holding a call on the same index 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 Portfolio own liquid and
unencumbered assets equal to the difference. If the Portfolio writes put options
on stock indices, it must segregate liquid and unencumbered assets with a value
equal to the exercise price, or hold a put on the same stock index and in the
same principal amount as the put written where the exercise price of the put
held (a) is equal to or greater than the exercise price of the put written or
(b) is less than the exercise price of the put written if the Portfolio owns
liquid and unencumbered assets equal to the difference. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The purchase of call options on stock indices may be used by the
Portfolio 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 for this purpose, the Portfolio will also bear the risk
of losing all or a portion of the premium paid it the value of the index does
not rise. The purchase of call options on stock indices when the Portfolio is
substantially fully invested is a form of leverage, up to the amount of the
premium and related transaction costs, and involves risks of loss and of
increased volatility similar to those involved in purchasing calls on securities
the Portfolio owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included. The composition of the index is changed periodically.
For an additional discussion of options, see this Statement under
"Certain Risk Factors and Investment Methods."
Special Risk Factors.
Risk of Imperfect Correlation of Hedging Instruments with the Portfolio's
Portfolio. The use of derivatives for "cross hedging" purposes (such as a
transaction in a Forward Contract on one currency to hedge exposure to a
different currency) may involve greater correlation risks. Consequently, the
Portfolio bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
It should be noted that stock index futures contracts or options based
upon a narrower index of securities, such as those of a particular industry
group, may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Portfolio enters into transactions
in options or futures on narrowly-based indices for hedging purposes, movements
in the value of the index should, if the hedge is successful, correlate closely
with the portion of the Portfolio's portfolio or the intended acquisitions being
hedged.
The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the derivative
and the price of the underlying index or obligation. The anticipated spread
between the prices may be distorted due to the difference in the nature of the
markets such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the derivatives markets. In this
regard, trading by speculators in derivatives has in the past occasionally
resulted in market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
The trading of Options on Futures Contracts also entails the risk that
changes in the value of the underlying Futures Contracts will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity date of the Futures
Contract or expiration date of the option approaches.
Further, with respect to options on securities, options on stock
indices, options on currencies and Options on Futures Contracts, the Portfolio
is subject to the risk of market movements between the time that the option is
exercised and the time of performance thereunder. This could increase the extent
of any loss suffered by the Portfolio in connection with such transactions.
In writing a covered call option on a security, index or futures
contract, the Portfolio also incurs the risk that changes in the value of the
instruments used to cover the position will not correlate closely with changes
in the value of the option or underlying index or instrument. For example, where
the Portfolio covers a call option written on a stock index through segregation
of securities, such securities may not match the composition of the index, and
the Portfolio may not be fully covered. As a result, the Portfolio could be
subject to risk of loss in the event of adverse market movements.
Risks of Non-Hedging Transactions. The Portfolio may enter transactions
in derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. Nevertheless, the method of
covering an option employed by the Portfolio may not fully protect it against
risk of loss and, in any event, the Portfolio could suffer losses on the option
position which might not be offset by corresponding portfolio gains. The
Portfolio may also enter into futures, Forward Contracts for non-hedging
purposes. For example, the Portfolio may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Portfolio will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures, Forward
Contracts may be leveraged, which could expose the Portfolio to greater risk of
loss than such purchases or sales. Entering into transactions in derivatives for
other than hedging purposes, therefore, could expose the Portfolio to
significant risk of loss if the prices, rates or values of the underlying
instruments or indices do not move in the direction or to the extent
anticipated.
With respect to the writing of straddles on securities, the Portfolio
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by providing
the Portfolio with two simultaneous premiums on the same security, but involve
additional risk, since the Portfolio may have an option exercised against it
regardless of whether the price of the security increases or decreases.
Risk of a Potential Lack of a Liquid Secondary Market. Prior to
exercise or expiration, a futures or option position can only be terminated by
entering into a closing purchase or sale transaction. In that event, it may not
be possible to close out a position held by the Portfolio, and the Portfolio
could be required to purchase or sell the instrument underlying an option, make
or receive a cash settlement or meet ongoing variation margin requirements.
Under such circumstances, if the Portfolio has insufficient cash available to
meet margin requirements, it will be necessary to liquidate portfolio securities
or other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse impact
on the Portfolio's ability effectively to hedge its portfolio, and could result
in trading losses.
The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions or to
recover excess variation margin payments.
Potential Bankruptcy of a Clearinghouse or Broker. When the Portfolio
enters into transactions in exchange-traded futures or options, it is exposed to
the risk of the potential bankruptcy of the relevant exchange clearinghouse or
the broker through which the Portfolio has effected the transaction. In that
event, the Portfolio might not be able to recover amounts deposited as margin,
or amounts owed to the Portfolio in connection with its transactions, for an
indefinite period of time, and could sustain losses of a portion or all of such
amounts. Moreover, the performance guarantee of an exchange clearinghouse
generally extends only to its members and the Portfolio could sustain losses,
notwithstanding such guarantee, in the event of the bankruptcy of its broker.
Trading and Position Limits. The exchanges on which futures and options
are traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument which
may be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers.) Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Sub-adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Portfolio.
Risks of Options on Futures Contracts. The amount of risk the Portfolio
assumes when it purchases an Option on a Futures Contract is the premium paid
for the option, plus related transaction costs. In order to profit from an
option purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an Option
on a Futures Contract is subject to the risks of commodity futures trading,
including the requirement of initial and variation margin payments, as well as
the additional risk that movements in the price of the option may not correlate
with movements in the price of the underlying security, index, currency or
Futures Contract.
Risks of Transactions in Foreign Currencies and Over-the-Counter
Derivatives and Other Transactions Not Conducted on U.S. Exchanges. Transactions
in Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are subject
to all of the correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of governmental
actions affecting trading in or the prices of currencies underlying such
contracts, which could restrict or eliminate trading and could have a
substantial adverse effect on the value of positions held by the Portfolio.
Further, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing
the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Portfolio makes investment and trading decisions in connection
with other transactions. Moreover, because the foreign currency market is a
global, 24-hour market, events could occur in that market which will not be
reflected in the forward, futures or options market until the following day,
thereby making it more difficult for the Portfolio to respond to such events in
a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or
foreign currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Portfolio in Futures Contracts
and exchange-traded options, on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) the SEC. To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into
with a financial institution willing to take the opposite side, as principal, of
the Portfolio's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not be possible to
enter into a desired transaction.
Further, over-the-counter transactions are not subject to the guarantee
of an exchange clearinghouse, and the Portfolio will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving as
its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or security,
thereby restricting the Portfolio's ability to enter into desired hedging
transactions.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded on
exchanges located in foreign countries. Such transactions may not be conducted
in the same manner as those entered into on U.S. exchanges, and may be subject
to different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection with
such transactions.
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 (the
"OCC"), thereby reducing the risk of counterparty default.
The purchase and sale of exchange-traded foreign currency options, is
subject to 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.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements with sellers who are member firms (or a subsidiary thereof) of the
New York Stock Exchange or members of the Federal Reserve System or recognized
primary U.S. Government securities dealers which the Sub-adviser has determined
to be creditworthy. The securities that the Portfolio purchases and holds
through its agent are U.S. Government securities. The repurchase price may be
higher than the purchase price, the difference being income to the Portfolio, or
the purchase price may be the same, with interest at a standard rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Government
securities.
The Portfolio only enters into repurchase agreements after the
Sub-adviser has determined that the seller is creditworthy, and the Sub-adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Portfolio has the right to make margin calls at any time if the value of the
securities falls below the agreed upon amount of collateral.
For an additional discussion of repurchase agreements, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Restricted Securities. The Portfolio may purchase securities that are
not registered under the Securities Act of 1933 ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities") and commercial paper
issued under Section 4(2) of the 1933 Act ("4(2) paper"). The Board of Trustees
has delegated to the Sub-adviser the daily function of determining and
monitoring the liquidity of Rule 144A securities and Section 4(2) paper. The
Board, however, retains oversight of the liquidity and availability of
information. Subject the Portfolio's limitation on investments in illiquid
investments, the Portfolio may also invest in restricted securities that may not
be sold under Rule 144A, which presents certain risks. In addition, the
Portfolio might have to sell these securities at less than fair value. Market
quotations for these securities will be less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
Additional information about restricted securities and their risks is
included in the Trust's prospectus under "Certain Risk factors and Investment
Methods."
Short Sales Against The Box. The Portfolio may make short sales
"against the box." If the Portfolio enters into a short sales against the box,
it is required to segregate securities equivalent in kind and amount to the
securities sold short (or securities convertible or exchangeable into such
securities) and is required to hold such securities while the short sale is
outstanding. The Portfolio will incur transaction costs, including interest, in
connection with opening, maintaining, and closing short sales against the box.
For further information about this practice, please refer to the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Short Term Instruments. The Portfolio may hold cash and invest in cash
equivalents, such as short-term U.S. Government Securities, commercial paper and
bank instruments.
Temporary Defensive Positions. During periods of unusual market
conditions when the Sub-adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Portfolio may be invested in cash
(including foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government securities and related repurchase agreements.
Warrants. The Portfolio may invest in warrants. The strike price of
warrants typically is much lower than the current market price of the underlying
securities, yet they are subject to similar price fluctuations, in absolute
terms. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss. Additional information regarding warrants is included
in this Statement and the Trust's Prospectus under "Certain Risk factors and
Investment Methods."
"When-Issued" Securities. The Portfolio may purchase securities on a
"when-issued," "forward commitment," or "delayed delivery basis." The commitment
to purchase a security for which payment will be made on a future date may be
deemed a separate security. While awaiting delivery of securities purchased on
such basis, the Portfolio will identify liquid and unencumbered assets equal to
its forward delivery commitment.
For more information about when-issued securities, please see this
Statement under "Certain Risk Factors and Investment Methods."
AST INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek high
current income while following sound investment practices. 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 AIM Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to provide a
well-diversified portfolio of stocks that will produce both capital growth and
current income.
Investment Policies:
The Portfolio, investing in both equity and debt securities, acquires
securities in the over-the-counter market and on national securities exchanges,
and acquires bonds in new offerings or in principal trades with broker-dealers.
Ordinarily, the Portfolio does not purchase securities with the intention of
engaging in short-term trading. However, any particular security will be sold,
and the proceeds reinvested, whenever such action is deemed prudent from the
viewpoint of the Portfolio's investment objective, regardless of the holding
period of that security.
Short-Term Investments. A portion of the Portfolio's assets may be held
in cash and high quality, short-term money market instruments such as
certificates of deposit, commercial paper, bankers' acceptances, short-term U.S.
Government obligations, taxable municipal securities, master notes, and
repurchase agreements, pending investment in portfolio securities, to meet
anticipated short-term cash needs such as dividend payments or redemptions of
shares, or for temporary defensive purposes. Such investments generally will be
"Eligible Securities" within the meaning of Rule 2a-7 under the 1940 Act, will
have maturities of 90 days or less, and will be held to maturity. The Portfolio
is not limited to investing in money market instruments that are "First Tier"
securities as defined in Rule 2a-7.
U.S. Government securities may take the form of participation interests
in, and may be evidenced by, deposit or safekeeping receipts. Participation
interests are pro rata interests in U.S. Government securities. The Portfolio
may acquire participation interests in pools of mortgages sold by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Banks. Instruments evidencing
deposit or safekeeping are documentary receipts for such original securities
held in custody by others.
U.S. Government securities, including those that are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. Some securities issued by federal
agencies or instrumentalities are only supported by the credit of the agency or
instrumentality (such as the Federal Home Loan Banks) while others have an
additional line of credit with the U.S. Treasury (such as FNMA). In the case of
securities not backed by the full faith and credit of the United States, the
Portfolio must look principally to the 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.
Debt Securities. Most debt securities purchased by the Portfolio will
be rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or BBB or
better by Standard & Poor's Ratings Services ("S&P") or, if unrated, deemed to
be of comparable quality by the Sub-Advisor, although the Portfolio may invest
to a limited extent in lower-rated securities. The fixed income securities in
which the Portfolio invests may include U.S. Government obligations,
mortgage-backed securities, asset-backed securities, bank obligations, corporate
debt obligations and unrated obligations, including those of foreign issuers.
The Portfolio may, in pursuit of its objective, invest up to 10% of its total
assets in debt securities rated lower than Baa by Moody's or BBB by S&P (or a
comparable rating of any other nationally recognized statistical rating
organizations "NRSROs") or unrated securities determined by the Sub-Advisor to
be of comparable quality ("junk bonds"). Junk bonds have speculative
characteristics that are likely to increase in number and significance with each
successive lower rating category. Additional information about lower-rated debt
securities and their risks is included in this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Real Estate Investment Trusts ("REITs"). To the extent consistent with
its investment objective and policies, the Portfolio may invest up to 25% of its
total assets and in equity and/or debt securities issued by REITs.
REITs are trusts that sell equity or debt securities to investors and
use the proceeds to invest in real estate or interests therein. A REIT may focus
on particular types of projects, such as apartment complexes, or geographic
regions, such as the Southeastern United States, or both.
To the extent that the Portfolio invests in REITs, it could conceivably
own real estate directly as a result of a default on the securities it owns. The
Portfolio, therefore, may be subject to certain risks associated with the direct
ownership of real estate, including difficulties in valuing and trading real
estate, declines in the value of real estate, environmental liability risks,
risks related to general and local economic conditions, adverse change in the
climate for real estate, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates.
In addition to the risks described above, equity REITs may be affected
by any 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.
Equity and mortgage REITs are dependent upon management skill, and are generally
not diversified and therefore are subject to the risk of financing single or a
limited number of projects. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation, and the possibility that
the REIT will fail to maintain its exemption from the 1940 Act. Changes in
interest rates may also affect the value of debt securities of REITs held by the
Portfolio. By investing in REITs indirectly through the Portfolio, a shareholder
will bear not only his/her proportionate share of the expenses of the Portfolio,
but also, indirectly, similar expenses of the REITs.
Lending Portfolio Securities. Consistent with applicable regulatory
requirements, the Portfolio may lend its portfolio securities. The Portfolio
would continue to receive the income on loaned securities and would, at the same
time, earn interest on the loan collateral or on the investment of the loan
collateral if it were cash. Lending securities entails a risk of loss to the
Funds if and to the extent that the market value of the securities loaned were
to increase and the lender did not increase the collateral accordingly. Other
risks and limitations of lending portfolio securities are discussed in this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Short Sales "Against the Box." As described in the Trust's Prospectus,
the Portfolio may make short sales against the box. To secure its obligation to
deliver the securities sold short, the Portfolio will deposit in escrow in a
separate account with its custodian an equal amount of the securities sold short
or securities convertible into or exchangeable for such securities. Since the
Portfolio ordinarily will want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the securities
sold short, the Portfolio will normally close out a short position covered by
convertible securities by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities that it already
holds.
The Portfolio will make a short sale, as a hedge, when it believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for such security. In such case, any future losses in the Portfolio's long
position should be reduced by a gain in the short position. Conversely, any gain
in the long position should be reduced by a loss in the short position. The
extent to which such gains or losses are reduced will depend upon the amount of
the security 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. In determining the number of
shares to be sold short against a Portfolio's position in a convertible
security, the anticipated fluctuation in the conversion premium is considered.
The Portfolio may also make short sales to generate additional income from the
investment of the cash proceeds of short sales.
Options, Futures and Currency Strategies. The Portfolio may use forward
contracts, futures contracts, options on securities, options on indices, options
on currencies, and options on futures contracts to attempt to hedge against the
overall level of investment and currency risk normally associated with the
Portfolio's investments. These instruments are often referred to as
"derivatives," which may be defined as financial instruments whose performance
is derived, at least in part, from the performance of another asset (such as a
security, currency or an index of securities).
General Risks of Options, Futures and Currency Strategies. The use by
the Portfolio of options, futures contracts and forward currency contracts
involves special considerations and risks. For example, there might be imperfect
correlation, or even no correlation, between the price movements or an
instrument (such as an option contract) and the price movements of the
investments being hedged. In these circumstances, if a "protective put" is used
to hedge a potential decline in a security and the security does decline in
price, the put option's increased value may not completely offset the loss in
the underlying security. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as changing
interest rates, market liquidity, and speculative or other pressures on the
markets in which the hedging instrument is traded.
The Portfolio will not enter into a hedging transaction if the
Sub-advisor determines that the cost of hedging will exceed the potential
benefit to the Portfolio.
Additional information on these instruments is included in this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods." Certain risks pertaining to particular strategies are described in the
sections that follow.
Cover. Transactions using forward contracts, futures contracts
and options (other than options purchased by a Portfolio) expose the Portfolio
to an obligation to another party. A Portfolio will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, forward contracts or futures contracts
or (2) cash or liquid assets with a value sufficient at all times to cover its
potential obligations not covered as provided in (1) above. The Portfolio will
comply with SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash or liquid securities.
Assets used as cover cannot be sold while the position in the
corresponding forward contract, futures contract or option is open, unless they
are replaced with other appropriate assets. If a large portion of a Portfolio's
assets is used for cover or otherwise set aside, it could affect portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
Writing Call Options. The Portfolio may write (sell) covered
call options on securities, futures contracts, forward contracts, indices and
currencies. Writing call options can serve as a limited hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option.
Writing Put Options. The Portfolio may write (sell) put
options on securities, futures contracts, forward contracts, indices and
currencies. The Portfolio would write a put option at an exercise price that,
reduced by the premium received on the option, reflects the lower price it is
willing to pay for the underlying security, contract or currency. The risk in
such a transaction would be that the market price of the underlying security,
contract or currency would decline below the exercise price less the premium
received.
Purchasing Put Options. The Portfolio may purchase put options
on securities, futures contracts, forward contracts, indices and currencies. The
Portfolio may enter into closing sale transactions with respect to such options,
exercise such option or permit such option to expire.
The Portfolio may also purchase put options on underlying securities,
contracts or currencies against which it has written other put options. For
example, where the Portfolio has written a put option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a put option with a different strike price and/or expiration date that
would eliminate some or all of the risk associated with the written put. Used in
combinations, these strategies are commonly referred to as "put spreads."
Likewise, the Portfolio may write call options on underlying securities,
contracts or currencies against which it has purchased protective put options.
This strategy is commonly referred to as a "collar."
Purchasing Call Options. The Portfolio may purchase covered
call options on securities, futures contracts, forward contracts, indices and
currencies. The Portfolio may enter into closing sale transactions with respect
to such options, exercise such options or permit such options to expire.
The Portfolio may also purchase call options on underlying securities,
contracts or currencies against which it has written other call options. For
example, where the Portfolio has written a call option on an underlying
security, rather than entering a closing transaction of the written option, it
may purchase a call option with a different strike price and/or expiration date
that would eliminate some or all of the risk associated with the written call.
Used in combinations, these strategies are commonly referred to as "call
spreads."
Options may be either listed on an exchange or traded in
over-the-counter ("OTC") markets. Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation) and have standardized strike prices and
expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. The Portfolio will not purchase an OTC option
unless it believes that daily valuations for such options are readily
obtainable. OTC options differ from exchange-traded options in that OTC options
are transacted with dealers directly and not through a clearing corporation
(which would guarantee performance). Consequently, there is a risk of
non-performance by the dealer. Since no exchange is involved, OTC options are
valued on the basis of an average of the last bid prices obtained from dealers,
unless a quotation from only one dealer is available, in which case only that
dealer's price will be used.
Index Options. The risks of investment in index options may be
greater than options on securities. Because index options are settled in cash,
when the Portfolio writes a call on an 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 writing a call index
option position by holding a diversified portfolio of securities 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 underlie the index and, as a result, bears a risk that the value
of the securities held will not be perfectly correlated with the value of the
index.
Limitations on Options. The Portfolio will not write options
it, immediately after such sale, the aggregate value of securities or
obligations underlying the outstanding options exceeds 20% of the Portfolio's
total assets. The Portfolio will not purchase options if, at the time of the
investment, the aggregate premiums paid for the options will exceed 5% of the
Portfolio's total assets.
Interest Rate, Currency and Stock Index Futures Contracts. The
Portfolio may enter into interest rate, currency or stock index futures
contracts (collectively, "Futures" or "Futures Contracts") and options on
Futures as a hedge against changes in prevailing levels of interest rates,
currency exchange rates or stock price levels, respectively, in order to
establish more definitely the effective return on securities or currencies held
or intended to be acquired by it. The Portfolio's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates,
and decreases in currency exchange rates and stock prices, and purchase of
Futures as an offset against the effect of expected declines in interest rates,
and increases in currency exchange rates or stock prices.
A Futures Contract is a two party agreement to buy or sell a specified
amount of a specified security or currency (or deliver a cash settlement price,
in the case of an index future) for a specified price at a designated date, time
and place. A stock index future provides for the delivery, at a designated date,
time and place, of an amount of cash equal to a specified dollar amount times
the difference between the stock index value at the close of trading on the
contract and the price agreed upon in the Futures Contract; no physical delivery
of stocks comprising the index is made.
The Portfolio will only enter into Futures Contracts that are traded on
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading thereon in the United States
are regulated under the Commodity Exchange Act and by the Commodity Futures
Trading Commission ("CFTC").
The Portfolio's Futures transactions will be entered into for hedging
purposes only; that is, Futures will be sold to protect against a decline in the
price of securities or currencies that the Portfolio owns, or Futures will be
purchased to protect the Portfolio against an increase in the price of
securities or currencies it has committed to purchase or expects to purchase.
If the Portfolio were unable to liquidate a Future or an option on
Futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio might be
required to maintain the position being hedged by the Future or option or to
maintain cash or securities in a segregated account.
Additional information on Futures, options on Futures, and their risks
is included in this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Forward Contracts. A forward contract is an obligation, usually
arranged with a commercial bank or other currency dealer, to purchase or sell a
currency against another currency at a future date and price as agreed upon by
the parties. The Portfolio either may accept or make delivery of the currency at
the maturity of the forward contract. The Portfolio may also, if its contra
party agrees prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Forward contracts are traded
over-the-counter, and not on organized commodities or securities exchanges. As a
result, it may be more difficult to value such contracts, and it may be
difficult to enter into closing transactions.
The cost to the Portfolio of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does
establish a rate of exchange in advance.
Additional information on forward contracts and their risks is included
in this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Delayed-Delivery Agreements. The Portfolio may purchase or sell
securities on a delayed-delivery basis. Delayed-delivery agreements involve
commitments by the Portfolio to dealers or issuers to acquire securities or
instruments at a specified future date beyond the customary same-day settlement
for such securities or instruments. These commitments may fix the payment price
and interest rate to be received on the investment. Delayed-delivery agreements
will not be used as a speculative or leverage technique. Rather, from time to
time, the Sub-Advisor can anticipate that cash for investment purposes will
result from, among other things, scheduled maturities of existing portfolio
instruments or from net sales of shares of the Portfolio. To assure that the
Portfolio will be as fully invested as possible in instruments meeting its
investment objective, the Portfolio may enter into delayed-delivery agreements,
but only to the extent of anticipated funds available for investment during a
period of not more than five business days. Until the settlement date, the
Portfolio will segregate liquid assets of a dollar value sufficient at all times
to make payment for the delayed-delivery securities. No more than 25% of the
Portfolio's total assets will be committed to delayed-delivery agreements and
when-issued securities, as described below. The delayed-delivery securities will
be recorded as an asset of the Portfolio. The purchase price of the
delayed-delivery securities is a liability of the Portfolio until settlement. If
cash is not available to the Portfolio at the time of settlement, the Portfolio
may be required to dispose of portfolio securities that it would otherwise hold
to maturity in order to meet its obligation to accept delivery under a
delayed-delivery agreement. Absent extraordinary circumstances, the Portfolio
will not sell or otherwise transfer delayed-delivery securities prior to
settlement.
Additional information about delayed-delivery agreements and their
risks is included in this Statement and in the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
When-Issued Securities. The Portfolio may purchase securities on a
"when-issued" basis; that is, the date for delivery of and payment for the
securities is not fixed at the date of purchase, but is set after the securities
are issued (normally within forty-five days after the date of the transaction).
The payment obligation and, if applicable, the interest rate that will be
received on the securities are fixed at the time the buyer enters into the
commitment. No additional when-issued commitments will be made if as a result
more than 25% of a Portfolio's total assets would become committed to purchases
of when-issued securities and delayed delivery agreements.
If the Portfolio purchases a when-issued security, it will direct the
its custodian bank to collateralize the when-issued commitment by segregating
liquid assets in the same fashion as required for a delayed-delivery agreement.
Such segregated liquid assets will likewise be marked-to-market, and the amount
segregated will be increased if necessary to maintain adequate coverage of the
when-issued commitments. To the extent assets are segregated, they will not be
available for new investments or to meet redemptions.
Securities purchased on a when-issued basis and the securities held by
the Portfolio are subject to changes in market value based upon the public's
perception of the creditworthiness of the issuer and, if applicable, changes in
the level of interest rates. Therefore, if the Portfolio is to remain
substantially fully invested at the same time that it has purchased securities
on a when-issued basis, there will be a possibility that the market value of the
Portfolio's assets will fluctuate to a greater degree. Furthermore, when the
time comes for the Portfolio to meet its obligations under when-issued
commitments, the Portfolio will do so by using then-available cash flow, by sale
of the segregated liquid assets, by sale of other securities or, although it
would not normally expect to do so, by directing the sale of the when-issued
securities themselves (which may have a market value greater or less than the
Portfolio's payment obligation).
Additional information about when-issued transactions and their risks
is included in this Statement and in the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Investments in Foreign Securities. The Portfolio may invest up to 20%
of its total assets in foreign securities. To the extent it invests in
securities denominated in foreign currencies, the Portfolio bears the risks of
changes in the exchange rates between U.S. currency and the foreign currency, as
well as the availability and status of foreign securities markets. The Portfolio
may invest in securities of foreign issuers that are in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), or other
securities representing underlying securities of foreign issuers, and such
investments are treated as foreign securities for purposes of percentage
limitations on investments in foreign securities.
Investments by the Portfolio in foreign securities, whether denominated
in U.S. currencies or foreign currencies, may entail risks that are greater than
those associated with domestic investments. The risks of investing in foreign
securities are discussed in detail in this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Foreign Exchange Transactions. The Portfolio has authority to deal in
foreign exchange between currencies of the different countries in which it will
invest either for the settlement of transactions or as a hedge against possible
variations in the foreign exchange rates between those currencies. This may be
accomplished through direct purchases or sales of foreign currency, purchases of
options on futures contracts with respect to foreign currency, and contractual
agreements to purchase or sell a specified currency at a specified future date
(up to one year) at a price set at the time of the contract. Such contractual
commitments may be forward contracts entered into directly with another party or
exchange traded futures contracts.
The Portfolio may purchase and sell options on futures contracts,
forward contracts or futures contracts that are denominated in a particular
foreign currency to hedge the risk of fluctuations in the value of another
currency. The Portfolio's dealings in foreign exchange will be limited to
hedging foreign currency exposure and may involve either specific transactions
or portfolio positions. Transaction hedging is the purchase or sale of foreign
currency with respect to specific receivables or payables of the Portfolio
accruing in connection with the purchase or sale of its portfolio securities,
the sale and redemption of shares of the Portfolio, or the payment of dividends
and distributions by the Portfolio. Position hedging is the purchase or sale of
foreign currency with respect to portfolio security positions (or underlying
portfolio security positions, such as in an ADR) denominated or quoted in a
foreign currency. The Portfolio will not speculate in foreign exchange, and will
not commit a larger percentage of its total assets to foreign exchange hedges
than the percentage of its total assets that it can invest in foreign
securities.
Additional information about the various foreign currency transactions
that the Portfolio may enter into and their risks is included in this Statement
and in the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Rule 144A Securities. The Portfolio may purchase privately placed
securities that are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 (the "1933 Act"). This Rule permits certain qualified
institutional buyers, such as the Portfolio, to trade in securities that have
not been registered under the 1933 Act. The Sub-advisor, under the guidelines
adopted by 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. The determination of whether a Rule 144A security is liquid 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 may
consider, as it deems appropriate under the circumstances, the (i) frequency of
trades and quotes, (ii) number of dealers and potential purchasers, (iii) dealer
undertakings to make a market, and (iv) nature of the security and of
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will also be monitored by the Sub-advisor 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 will be reviewed
to determine what, if any, action is required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Additional
information about illiquid and Rule 144A securities is included in the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Portfolio may engage in repurchase agreement
transactions involving the types of securities in which it is permitted to
invest. Repurchase agreements are agreements under which the purchaser (for
example, the Portfolio) acquires ownership of a security and the seller agrees,
at the time of the sale, to repurchase the security at a mutually agreed upon
time and price, thereby determining the yield during the purchaser's holding
period. The Portfolio may, however, enter into a "continuing contract" or "open"
repurchase agreement under which the seller is under a continuing obligation to
repurchase the underlying obligation from the Portfolio on demand and the
effective interest rate is negotiated on a daily basis. The underlying
securities that are subject to a repurchase agreement will be "marked-to-market"
on a daily basis so that the Sub-advisor can determine the value of the
securities in relation to the amount of the repurchase agreement.
Additional information about repurchase agreements and their risks is
included in the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Borrowings. The Portfolio may borrow money to a limited extent from
banks for temporary or emergency purposes subject to the limitations under the
1940 Act. The Portfolio will not purchase additional securities while any
borrowings are outstanding. Additional information about borrowing is included
in the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Other Investment Companies. The Portfolio may invest in other
investment companies to the extent permitted by the 1940 Act and rules and
regulations thereunder and exemptive orders granted by the SEC.
Investment Policy Which May Be Changed Without Shareholder Approval.
The following limitation is applicable to the AST AIM Balanced Portfolio. This
limitation is not a "fundamental" restriction, and may be changed by the
Trustees without shareholder approval. The Portfolio will not:
1. Invest for the purpose of exercising control or management.
AST American Century Strategic Balanced Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
capital growth and current income.
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 up to 10% of
its fixed income assets in high yield securities. There are no credit or
maturity restrictions on the fixed income securities in which the high yield
portion of the Portfolio may be invested. 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. For purposes of determining the weighted average
maturity of the fixed income portion of the Portfolio, the Sub-advisor will use
weighted average life as the measure of maturity for all mortgage-backed and
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
("transaction hedging"); (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 ("portfolio hedging"). It is anticipated that the
Portfolio will enter into portfolio hedges much less frequently than transaction
hedges.
As to transaction hedging, 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 portfolio hedging, 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. 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.
The precise matching of forward contracts in the amounts and values of
securities involved would not generally be possible since the future values of
such foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. Predicting short-term currency market movements is
extremely difficult, and the successful execution of short-term hedging strategy
is highly uncertain. The Sub-advisor does not intend to enter into such
contracts on a regular basis. Normally, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with respect to overall diversification strategies. However, the
Sub-advisor believes that it is important to have flexibility to enter into such
forward contracts when it determines that the Portfolio 's best interests may be
served.
Generally, the Portfolio will not enter into a forward contract with a
term of greater than one year. At the maturity of the forward contract, the
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Portfolio to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value
of the Portfolio's securities at the expiration of the forward contract.
Accordingly, it may be necessary for the Portfolio to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Portfolio is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency the Portfolio is obligated to deliver.
For an additional discussion of forward currency exchange contracts and certain
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Futures and Related Options. The Portfolio may enter into futures
contracts, options or options on futures contracts. The Portfolio may not,
however, enter into a futures transaction for speculative purposes. Generally,
futures transactions will be used to:
o protect against a decline in market value of the Portfolio's securities
(taking a short futures position), or
o protect against the risk of an increase in market value for securities in
which the Portfolio generally invests at a time when the Portfolio is not
fully-invested (taking a long futures position), or
o provide a temporary substitute for the purchase of an individual security
that may be purchased in an orderly fashion.
Some futures and options strategies, such as selling futures, buying puts and
writing calls, hedge the Portfolio's investments against price fluctuations.
Other strategies, such as buying futures, writing puts and buying calls, tend to
increase market exposure.
Although other techniques may be used to control the Portfolio's
exposure to market fluctuations, the use of futures contracts may be a more
effective means of hedging this exposure. While the Portfolio will pay brokerage
commissions in connection with opening and closing out futures positions, these
costs are lower than the transaction costs incurred in the purchase and sale of
the underlying securities.
For example, the "sale" of a future by the Portfolio means the
Portfolio becomes obligated to deliver the security (or securities, in the case
of an "index" future) at a specified price on a specified date. The "purchase"
of a future means the Portfolio becomes obligated to buy the security (or
securities) at a specified price on a specified date. The Portfolio may engage
in futures and options transactions based on securities indices that are
consistent with the Portfolio's investment objectives. Examples of indices that
may be used include the Bond Buyer Index of Municipal Bonds for fixed income
funds, or the S&P 500 Index for equity funds. The Portfolio also may engage in
futures and options transactions based on specific securities, such as U.S.
Treasury bonds or notes. Futures contracts are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
government agency.
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. The margin deposit is intended to assure completion of the
contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish margin deposit requirements that are higher than
the exchange minimums. 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 marking
the contract to market.
Futures and options prices can be volatile, and trading in these
markets involves certain risks, which are described in more detail in this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods." The Sub-advisor will seek to minimize these risks by limiting the
contracts entered into on behalf of the Portfolio to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
Options on Futures. By purchasing an option on a futures contract, the
Portfolio obtains the right, but not the obligation, to sell the futures
contract (a put option) or to buy the contract (a call option) at a fixed strike
price. The Portfolio can terminate its position in a put option by allowing it
to expire or by exercising the option. If the option is exercised, the Portfolio
completes the sale of the underlying instrument at the strike price. Purchasing
an option on a futures contract does not require the Portfolio to make margin
payments unless the option is exercised.
Although they do not currently intend to do so, the Portfolio may write
(or sell) call options that obligate it to sell (or deliver) the option's
underlying instrument upon exercise of the option. While the receipt of option
premiums would mitigate the effects of price declines, the Portfolio would give
up some ability to participate in a price increase on the underlying instrument.
If the Portfolio were to engage in options transactions, it would own the
futures contract at the time a call were written and would keep the contract
open until the obligation to deliver it pursuant to the call expired.
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.
Collateralized Mortgage Obligations. The Fund may buy collateralized
mortgage obligations ("CMOs"). The Fund 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 CMOs and the risks
involved therein, see the Company's Prospectus under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. The Fund may enter into repurchase agreements. The
Fund will limit repurchase agreement transactions to securities issued by the
U.S. government, its agencies and instrumentalities. For a further discussion of
repurchase agreements and the risks involved therein, see the Company'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 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 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.
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. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). 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.
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 by the Portfolio
to cover the position, or alternative cover (such as owning an offsetting
position) will be employed.
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 financial 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 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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
option, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Portfolio would be required to
distribute any such gain even though it would not receive proceeds from the sale
at the time the option, futures or forward position is entered into.
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"). 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). 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 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.
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."
The Portfolio may invest in the following:
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds,
which are 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.
Nondiversified Investment Company. Despite its nondiversified status
under the Investment Company Act, the Portfolio generally will not invest more
than 5% of its assets in any individual corporate issuer. However, the Portfolio
(1) 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) 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.
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.
The Portfolio will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
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. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). 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.
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 by the Portfolio to cover the position, or alternative cover (such as
owning an offsetting position) will be employed.
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 financial 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 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 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. Forward
foreign currency exchange contracts ("forwards") will generally have terms of
less than one year.
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.
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. 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 (taxable at a maximum rate of 20%)
or loss and 40% short-term capital gain or loss regardless of the holding period
of the instrument (or, in the case of foreign exchange contracts, entirely as
ordinary income or loss). 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. 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. Tax regulations could be issued limiting 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.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
option, futures contracts, or forward contracts may be deemed a "constructive
sale" of offsetting securities, which could result in a taxable gain from the
sale being distributed to shareholders. The Portfolio would be required to
distribute any such gain even though it would not receive proceeds from the sale
at the time the option, futures or forward position is entered into.
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 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.
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 (such as the 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). 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."
Time and Savings Deposits and Bankers' Acceptances. The Portfolio may
enter into time and savings deposits (including certificates of deposit) and may
purchase bankers' acceptances. The Portfolio may enter into 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. The Portfolio
may also purchase 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.
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. The Portfolio may invest up to 5% of its total
assets in foreign securities that are not publicly traded in the United States.
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 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. 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
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.
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 this Statement under
"Certain Risk Factors and Investment Methods."
Inverse Floaters. 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.
Loan Participations. The Portfolio may purchase participations in
commercial loans. Such indebtedness may be secured or unsecured. Loan
participations typically represent direct participation in a loan to a corporate
borrower, and generally are offered by banks or other financial institutions or
lending syndicates. When purchasing loan participations, the Portfolio assumes
the credit risk associated with the corporate borrower and may assume the credit
risk associated with an interposed bank or other financial intermediary. The
participation interests in which the Portfolio intends to invest may not be
rated by any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Portfolio has direct recourse against the corporate borrower,
the Portfolio may have to rely on the agent bank or other financial intermediary
to apply appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Portfolio were determined
to be subject to the claims of the agent bank's general creditors, the Portfolio
might incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the corporate borrower for payment of
principal and interest. If the Portfolio does not receive scheduled interest or
principal payments on such indebtedness, the Portfolio's share price and yield
could be adversely affected. Loans that are fully secured offer the Portfolio
more protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
The Portfolio may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, the Portfolio
bears a substantial risk of losing the entire amount invested.
The Portfolio limits the amount of its total assets that it will invest
in any one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, the Portfolio generally will treat
the corporate borrower as the "issuer" of indebtedness held by the Portfolio. In
the case of loan participations where a bank or other lending institution serves
as a financial intermediary between the Portfolio and the corporate borrower, if
the participation does not shift to the Portfolio the direct debtor-creditor
relationship with the corporate borrower, Securities and Exchange Commission
("SEC") interpretations require the Portfolio to treat both the lending bank or
other lending institution and the corporate borrower as "issuers" for the
purposes of determining whether the Portfolio has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict the Portfolio's ability to invest in indebtedness
related to a single financial intermediary, or a group of intermediaries engaged
in the same industry, even if the underlying borrowers represent many different
companies and industries.
Loan and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what the Sub-advisor believes to be a fair price. In
addition, valuation of illiquid indebtedness involves a greater degree of
judgment in determining the Portfolio's net asset value than if that value were
based on available market quotations, and could result in significant variations
in the Portfolio's daily share price. At the same time, some loan interests are
traded among certain financial institutions and accordingly may be deemed
liquid. As the market for different types of indebtedness develops, the
liquidity of these instruments is expected to improve. In addition, the
Portfolio currently intends to treat indebtedness for which there is no readily
available market as illiquid for purposes of the Portfolio's limitation on
illiquid investments. Investments in loan participations are considered to be
debt obligations for purposes of the Company's investment restriction relating
to the lending of funds or assets by the Portfolio.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Portfolio. For example, if a loan is foreclosed, the Portfolio could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, the
Portfolio could be held liable as co-lender. It is unclear whether loans and
other forms of direct indebtedness offer securities law protections against
fraud and misrepresentation. In the absence of definitive regulatory guidance,
the Portfolio relies on the Sub-advisor's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the
Portfolio.
Delayed Funding Loans and Revolving Credit Facilities. The Portfolio
may enter into, or acquire participations in, delayed funding loans and
revolving credit facilities. Delayed funding loans and revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term.
These commitments may have the effect of requiring the Portfolio to increase its
investment in a company at a time when it might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that the Portfolio is committed
to advance additional funds, it will at all times segregate liquid assets,
determined to be liquid by the Sub-advisor in accordance with procedures
established by the Board of Directors, in an amount sufficient to meet such
commitments. The Portfolio may invest in delayed funding loans and revolving
credit facilities with credit quality comparable to that of issuers of its
securities investments. Delayed funding loans and revolving credit facilities
may be subject to restrictions on transfer, and only limited opportunities may
exist to resell such instruments. As a result, the Portfolio may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. The Portfolio currently intend to treat delayed funding
loans and revolving credit facilities for which there is no readily available
market as illiquid for purposes of the Portfolio's limitation on illiquid
investments. Participation interests in revolving credit facilities will be
subject to the limitations discussed above under "Loan Participations." Delayed
funding loans and revolving credit facilities are considered to be debt
obligations for purposes of the Company's investment restriction relating to the
lending of funds or assets by the Portfolio.
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.
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.
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 this Statement under
"Certain Risk Factors and Investment Methods."
Inverse Floaters. 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.
Loan Participations. The Portfolio may purchase participations in
commercial loans. Such indebtedness may be secured or unsecured. Loan
participations typically represent direct participation in a loan to a corporate
borrower, and generally are offered by banks or other financial institutions or
lending syndicates. When purchasing loan participations, the Portfolio assumes
the credit risk associated with the corporate borrower and may assume the credit
risk associated with an interposed bank or other financial intermediary. The
participation interests in which the Portfolio intends to invest may not be
rated by any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Portfolio has direct recourse against the corporate borrower,
the Portfolio may have to rely on the agent bank or other financial intermediary
to apply appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Portfolio were determined
to be subject to the claims of the agent bank's general creditors, the Portfolio
might incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the corporate borrower for payment of
principal and interest. If the Portfolio does not receive scheduled interest or
principal payments on such indebtedness, the Portfolio's share price and yield
could be adversely affected. Loans that are fully secured offer the Portfolio
more protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the corporate borrower's
obligation, or that the collateral can be liquidated.
The Portfolio may invest in loan participations with credit quality
comparable to that of issuers of its securities investments. Indebtedness of
companies whose creditworthiness is poor involves substantially greater risks,
and may be highly speculative. Some companies may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Consequently,
when investing in indebtedness of companies with poor credit, the Portfolio
bears a substantial risk of losing the entire amount invested.
The Portfolio limits the amount of its total assets that it will invest
in any one issuer or in issuers within the same industry (see "Investment
Restrictions"). For purposes of these limits, the Portfolio generally will treat
the corporate borrower as the "issuer" of indebtedness held by the Portfolio. In
the case of loan participations where a bank or other lending institution serves
as a financial intermediary between the Portfolio and the corporate borrower, if
the participation does not shift to the Portfolio the direct debtor-creditor
relationship with the corporate borrower, Securities and Exchange Commission
("SEC") interpretations require the Portfolio to treat both the lending bank or
other lending institution and the corporate borrower as "issuers" for the
purposes of determining whether the Portfolio has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict the Portfolio's ability to invest in indebtedness
related to a single financial intermediary, or a group of intermediaries engaged
in the same industry, even if the underlying borrowers represent many different
companies and industries.
Loan and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what the Sub-advisor believes to be a fair price. In
addition, valuation of illiquid indebtedness involves a greater degree of
judgment in determining the Portfolio's net asset value than if that value were
based on available market quotations, and could result in significant variations
in the Portfolio's daily share price. At the same time, some loan interests are
traded among certain financial institutions and accordingly may be deemed
liquid. As the market for different types of indebtedness develops, the
liquidity of these instruments is expected to improve. In addition, the
Portfolio currently intends to treat indebtedness for which there is no readily
available market as illiquid for purposes of the Portfolio's limitation on
illiquid investments. Investments in loan participations are considered to be
debt obligations for purposes of the Company's investment restriction relating
to the lending of funds or assets by the Portfolio.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Portfolio. For example, if a loan is foreclosed, the Portfolio could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, the
Portfolio could be held liable as co-lender. It is unclear whether loans and
other forms of direct indebtedness offer securities law protections against
fraud and misrepresentation. In the absence of definitive regulatory guidance,
the Portfolio relies on the Sub-advisor's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the
Portfolio.
Delayed Funding Loans and Revolving Credit Facilities. The Portfolio
may enter into, or acquire participations in, delayed funding loans and
revolving credit facilities. Delayed funding loans and revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term.
These commitments may have the effect of requiring the Portfolio to increase its
investment in a company at a time when it might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that the Portfolio is committed
to advance additional funds, it will at all times segregate liquid assets,
determined to be liquid by the Sub-advisor in accordance with procedures
established by the Board of Directors, in an amount sufficient to meet such
commitments. The Portfolio may invest in delayed funding loans and revolving
credit facilities with credit quality comparable to that of issuers of its
securities investments. Delayed funding loans and revolving credit facilities
may be subject to restrictions on transfer, and only limited opportunities may
exist to resell such instruments. As a result, the Portfolio may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. The Portfolio currently intend to treat delayed funding
loans and revolving credit facilities for which there is no readily available
market as illiquid for purposes of the Portfolio's limitation on illiquid
investments. Participation interests in revolving credit facilities will be
subject to the limitations discussed above under "Loan Participations." Delayed
funding loans and revolving credit facilities are considered to be debt
obligations for purposes of the Company's investment restriction relating to the
lending of funds or assets by the Portfolio.
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 Money Market Portfolio:
Investment Objective: The investment objective of the Portfolio is to seek
high current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Portfolio will not invest in bank obligations for
which any affiliate of the Sub-advisor is the ultimate obligor or accepting
bank.
Asset-Backed Securities. 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.
<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 INVESCO Equity Income
Portfolio, the AST Federated High Yield Portfolio, the AST PIMCO Total Return
Bond Portfolio, the AST PIMCO Limited Maturity Bond Portfolio and the AST Money
Market Portfolio.
1. 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).
2. Portfolio will not invest in companies for the purpose of exercising control
or management.
3. 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.
4. A Portfolio will not issue senior securities.
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 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 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 may not make loans, except that the 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. 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 American Century
International Growth Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. The Portfolio may not make loans, except that the 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;
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. The Portfolio may not 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 permissable
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; 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 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 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 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 may not make loans, except that the 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.
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 may not make loans, except that the 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.
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 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. The Portfolio may not make loans, except that the 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; 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 American Century
Strategic Balanced Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. The Portfolio may not make loans, except that the 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.
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. The Portfolio may not 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 permissable
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; 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 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 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 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 may not make loans, except that the 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.
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 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 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 AIM International Equity
Portfolio, the AST MFS Global Equity Portfolio, the AST Janus Small-Cap Growth
Portfolio, the AST Kemper Small-Cap Growth Portfolio the AST Lord Abbett Small
Cap Value Portfolio, the AST Neuberger Berman Mid-Cap Growth Portfolio, the AST
Neuberger Berman Mid-Cap Value Portfolio, the AST Oppenheimer Large-Cap Growth
Portfolio, the AST MFS Growth Portfolio, the AST Marsico Capital Growth
Portfolio, the AST Bankers Trust Managed Index 500 Portfolio, the AST Cohen &
Steers Realty Portfolio, the AST American Century Income & Growth Portfolio, the
AST MFS Growth with Income Portfolio, and the AST AIM Balanced 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.
Special Risks Associated with Low-Rated and Comparable Unrated Securities:
Low-rated and comparable unrated securities, while generally offering
higher yields than investment-grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with such investments are discussed below. See the Appendix of this Statement
for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Portfolio might
incur additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of low-rated and comparable unrated securities and thus in a Portfolio's net
asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Portfolio's net asset
value. If a Portfolio experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of high-yield
securities (discussed below) a Portfolio may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a
Portfolio's asset base over which expenses could be allocated and could result
in a reduced rate of return for a Portfolio.
Payment Expectations. Low-rated and comparable unrated securities
typically contain redemption, call, or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Portfolio may have to replace the securities with a lower-yielding security,
which would result in a lower return for a Portfolio.
Issuers of lower-rated securities are often highly leveraged, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. Such issuers
may not have more traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by refinancing. The risk of
loss due to default in payment of interest or repayment of principal by such
issuers is significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the Sub-advisor's credit analysis than would be the case with
investments in investment-grade debt securities. The Sub-advisor may employ its
own credit research and analysis, which could include a study of existing debt,
capital structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Sub-advisor continually monitors the investments in a Portfolio
and evaluates whether to dispose of or to retain low-rated and comparable
unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. A Portfolio anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Portfolio's asset value and a Portfolio's ability to
dispose of particular securities, when necessary to meet a Portfolio's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing a
Portfolio. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder (buyer)
the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
When writing a call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, a Portfolio will realize a gain or loss from the sale of the
underlying security or currency.
Writing (Selling) Put Options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to buy, the
underlying security or currency at the exercise price during the option period
(American style) or at the expiration of the option (European style). So long as
the obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
Premium Received from Writing Call or Put Options. A Portfolio will
receive a premium from writing a put or call option, which increases such
Portfolio's return in the event the option expires unexercised or is closed out
at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Portfolio assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of the underlying
security or currency. A Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written. A Portfolio
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Portfolio.
Furthermore, effecting a closing transaction will permit the Portfolio
to write another call option on the underlying security or currency with either
a different exercise price or expiration date or both. If the Portfolio desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Portfolio will be able to
effect such closing transactions at a favorable price. If the Portfolio cannot
enter into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When the Portfolio writes a covered call
option, it runs the risk of not being able to participate in the appreciation of
the underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The
Portfolio will pay transaction costs in connection with the writing of options
to close out previously written options. Such transaction costs are normally
higher than those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a Portfolio
for the purpose of acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call options enables the
Portfolio to acquire the securities or currencies at the exercise price of the
call option plus the premium paid. At times the net cost of acquiring securities
or currencies in this manner may be less than the cost of acquiring the
securities or currencies directly. This technique may also be useful to a
Portfolio in purchasing a large block of securities or currencies that would be
more difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the
Portfolio is partially protected from any unexpected decline in the market price
of the underlying security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the premium paid for
the option.
Purchasing Put Options. A Portfolio may purchase a put option on an
underlying security or currency (a "protective put") owned by the Portfolio as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Portfolio, as the holder of the put option,
is able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
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." A Portfolio may or
may not 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 a 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.
Foreign Currency Contracts. 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 a 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 a Portfolio's other
assets. While when-issued securities may be sold prior to the settlement date,
the Portfolios generally will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
Mortgage-Backed Securities:
When a Portfolio owns a mortgage-backed security, 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.
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 Neuberger Berman Mid-Cap Value Portfolio (formerly, the Federated
Utility Income Portfolio) for the years ended December 31, 1997 and 1998 were
91% and 208% respectively. Neuberger Berman Management, Inc. became the
Portfolio's Sub-advisor on May 1, 1998, 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,
1997 was 54% and for the year ended December 31, 1998 was 263%. The Portfolio's
turnover rate increased in 1998 as the result of the Portfolio's increased use
of certain derivative instruments.
The annual rates of turnover for the AST Lord Abbett Small Cap Value
Portfolio, the AST Marsico Capital Growth Portfolio, the AST Bankers Trust
Managed Index 500 Portfolio, and the AST Cohen & Steers Realty Portfolio, which
were first publicly offered in December 1997 or January 1998, are not
anticipated to exceed 100%, 200%, 100%, and 150%, respectively, under normal
market conditions. The turnover rate for the AST Kemper Small-Cap Growth
Portfolio, which was first publicly offered on January 4, 1999, is not
anticipated to exceed 250% 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.
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, thirty-one 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.
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.
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.
The overall management of the business and affairs of the Trust is
vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust and persons or companies furnishing
services to the Trust, including the Trust's agreements with the Investment
Manager, Administrator, Custodian and Transfer and Shareholder Servicing Agent
and the agreements between the Investment Manager and each Sub-advisor. The
day-to-day operations of the Trust are delegated to the Trust's officers subject
always to the investment objectives and policies of the Trust and to the general
supervision of the Board of Trustees.
The Trustees and officers of the Trust and their principal occupations
are listed below. Unless otherwise indicated, the address of each Trustee and
executive officer is One Corporate Drive, Shelton, Connecticut 06484:
<TABLE>
<CAPTION>
Name, Office and Age Principal Occupation
<S> <C>
John Birch+ Chief Operating Officer:
Vice President (49) 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 (46) 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 (54) Skandia Insurance Company Ltd.
September 1986 to present
David E. A. Carson* Chairman
Trustee (65) People's Bank
850 Main Street
Bridgeport, Connecticut 06604
January 1999 to present
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 (51) (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 (36) 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 (74) 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. 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 (64) 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.
The Trustees and officers of the Trust who are affiliates with the
Investment Manager 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, 1998 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 $49,400 $77,875
Julian A. Lerner 47,900 76,375
Thomas M. O'Brien 49,400 77,875
F. Don Schwartz 49,400 77,875
</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").
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 fees payable by each Portfolio to the Investment
Manager are as follows. Investment Management fees are payable monthly and are
accrued daily for purposes of determining the net asset values of the
Portfolios.
AST Founders Passport Portfolio: An annual rate of 1.0% 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 AIM 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 Janus Overseas Growth Portfolio: An annual rate of 1.0% 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 MFS Global Equity 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 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.
AST Lord Abbett Small Cap Value Portfolio: An annual rate of 0.95% 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 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 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 T. Rowe Price Natural Resources Portfolio: An annual rate of .90% 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 MFS Growth Portfolio: An annual rate of .90% 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 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 Bankers Trust Managed Index 500 Portfolio: An annual rate of .60% of
the average daily net assets of the Portfolio
AST Cohen & Steers Realty Portfolio: An annual rate of 1.00% of the average
daily net assets of the Portfolio.
AST American Century Income & Growth Portfolio: An annual rate of .75% of
the average daily net assets of the Portfolio.
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 MFS Growth with Income Portfolio: An annual rate of .90% 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 AIM 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 American Century Strategic Balanced Portfolio: An annual rate of .85%
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 Bond Portfolio: An annual rate of .80% of
the average daily net assets of the Portfolio.
AST Federated High Yield 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 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.
The investment management fee paid for each of the past three fiscal years by
each Portfolio that was publicly offered prior to January 1999 was as follows:
<TABLE>
<CAPTION>
Investment Management Fees
---------------------------- --------------------------- ---------------------------
1996 1997 1998
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
AST Founders Passport 778,018 1,257,908 1,219,424
AST T. Rowe Price International Equity 3,011,378 4,640,262 4,652,136
AST AIM International Equity 2,771,876 3,428,762 4,130,785
AST Janus Overseas Growth 0 1,260,797 4,344,867
AST American Century International Growth 0 157,826 563,488
AST Janus Small-Cap Growth 1,240,016 2,219,824 2,287,914
AST Lord Abbett Small-Cap Value 0 0 201,415
AST T. Rowe Price Small Company Value 0 713,045 2,424,142
AST Neuberger Berman Mid-Cap Growth 683,999 1,259,790 1,781,639
AST Neuberger Berman Mid-Cap Value 764,844 886,649 1,715,060
AST T. Rowe Price Natural Resources 351,569 986,496 869,131
AST Oppenheimer Large-Cap Growth 117,917 1,501,894 2,694,595
AST Marsico Capital Growth 0 1,568 2,445,668
AST JanCap Growth 5,726,567 11,384,457 18,383,344
AST Banker Trust Managed Index 500 0 0 765,065
AST Cohen & Steers Realty 0 0 216,821
AST American Century Income & Growth 0 416,420 1,164,962
AST Lord Abbett Growth and Income 2,881,119 5,424,483 7,877,722
AST INVESCO Equity Income 1,883,792 3.565.372 5,340,931
AST AIM Balanced 1,828,306 2,387,734 2,860,309
AST American Century Strategic Balanced 0 115,602 431,573
AST T. Rowe Price Asset Allocation 727,787 1,413,730 2,280,871
AST T. Rowe Price International Bond 595,953 941,760 1,125,770
AST Federated High Yield 991,953 2,345,042 4,021,190
AST PIMCO Total Return Bond 1,895,849 2,979,876 4,772,121
AST PIMCO Limited Maturity Bond 1,239,854 1,649,461 2,060,437
AST Money Market 2,092,880 2,941,160 4,190,913
</TABLE>
The sub-advisory fee paid by the Investment Manager to the Sub-advisors for each
such Portfolio for each of the past three fiscal years was as follows:
<TABLE>
<CAPTION>
Sub-Advisory Fees
---------------------------- --------------------------- ---------------------------
1996 1997 1998
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
AST Founders Passport(1) 463,898 728,954 709,671
AST T. Rowe Price International Equity 1,532,137 2,320,131 2,221,182
AST AIM International Equity(2) 1,752,761 2,205,668 2,557,327
AST Janus Overseas Growth 0 793,793 2,646,039
AST American Century International Growth 0 110,478 394,441
AST Janus Small-Cap Growth(3) 859,376 1,469,059 1,510,669
AST Lord Abbett Small-Cap Value 0 0 105,944
AST T. Rowe Price Small Company Value 0 413,993 1,366,746
AST Neuberger Berman Mid-Cap Growth(4) 427,236 734,388 894,756
AST Neuberger Berman Mid-Cap Value(5) 374,935 425,687 915,253
AST T. Rowe Price Natural Resources 208,022 548,053 482,850
AST Oppenheimer Large-Cap Growth(6) 70,750 892,079 1,547,298
AST Marsico Capital Growth 0 784 1,222,834
AST JanCap Growth 3,451,651 6,261,619 10,017,653
AST Banker Trust Managed Index 500 0 0 216,767
AST Cohen & Steers Realty 0 0 130,090
AST American Century Income & Growth(7) 0 249,852 693,921
AST Lord Abbett Growth and Income 1,736,325 3,018,989 4,113,786
AST INVESCO Equity Income 979,103 1,763,840 2,592,435
AST AIM Balanced(8) 942,912 1,343,009 1,580,154
AST American Century Strategic Balanced 0 68,001 252,933
AST T. Rowe Price Asset Allocation 301,555 503,303 758,344
AST T. Rowe Price International Bond(9) 315,293 470,880 562,885
AST Federated High Yield 448,151 899,181 1,457,896
AST PIMCO Total Return Bond 804,173 1,221,106 1,910,431
AST PIMCO Limited Maturity Bond 551,613 709,408 867,476
AST Money Market 697,446 885,676 1,113,545
</TABLE>
(1) For fiscal year 1996, $325,763 was paid to Seligman Henderson Co.
("Seligman") , the prior Sub-advisor for the Portfolio and $138,135 was paid to
Founders Asset Management, Inc., the current Sub-advisor for the Portfolio. (2)
For fiscal year 1996, $1,338,724 was paid to Seligman, the prior Sub-advisor for
the Portfolio and $414,037 was paid to Putnam Investment Management, Inc.
("Putnam"), the Sub-advisor for the Portfolio until May 3, 1999. For fiscal
years 1997 and 1998, the entire fee noted above was paid to Putnam. (3) For
fiscal years 1996, 1997 and 1998, the entire fee noted above was paid to
Founders Asset Management LLC, the prior Sub-advisor for the Portfolio. (4) For
fiscal years 1996 and 1997, the entire fee noted above was paid to Berger
Associates, Inc. ("Berger"), the prior Sub-advisor for the Portfolio. For fiscal
year 1998, $313,389 was paid to Berger and $581,367 was paid to Neuberger Berman
Management, Inc., the current Sub-advisor for the Portfolio. (5) For fiscal
years 1996 and 1997, the entire fee noted above was paid to Federated Investment
Counseling ("Federated"), the prior Sub-advisor for the Portfolio. For fiscal
year 1998, $186,645 was paid to Federated and $728,608 was paid to Neuberger
Berman Management, Inc., the current Sub-advisor for the Portfolio. (6) For
fiscal years 1996 and 1997, the entire fee noted above was paid to Robertson,
Stephens & Company Investment Management, L.P. ("Robertson Stephens"), the prior
Sub-advisor for the Portfolio. For fiscal year 1998, $1,542,651 was paid to
Robertson Stephens and $4,657 was paid to OppenheimerFunds, Inc., the current
Sub-advisor for the Portfolio. (7) For fiscal years 1997 and 1998, the entire
fee noted above was paid to Putnam, the Sub-advisor for the Portfolio until May
3, 1999. (8) For fiscal year 1996, $691,855 was paid to Phoenix Investment
Counsel, Inc., the prior Sub-advisor for the Portfolio and $251,057 was paid to
Putnam, the Sub-advisor for the Portfolio until May 3, 1999. For fiscal years
1997 and 1998, the entire fee noted above was paid to Putnam. (9) For fiscal
year 1996, $103,905 was paid to Scudder, Stevens & Clark, Inc., the prior
Sub-advisor for the Portfolio and $211,388 was paid to Rowe Price-Fleming
International, Inc., the current Sub-advisor for the Portfolio.
The Investment Manager has agreed by the terms of the Management Agreements for
the following Portfolios of the Trust to reimburse the Portfolio for any fiscal
year in order to prevent Portfolio expenses (exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, determined by the Trust or the
Investment Manager, but inclusive of the management fee) from exceeding a
specified percentage of the Portfolio's average daily net assets, as follows:
AST Founders Passport Portfolio: 1.75%
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 AIM International Equity Portfolio: 1.75%
AST Janus Small-Cap Growth Portfolio: 1.30%
AST T. Rowe Price Natural Resources Portfolio: 1.35%
AST Oppenheimer Large-Cap Growth Portfolio: 1.45%
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 Lord Abbett Growth and Income Portfolio: 1.25%
AST INVESCO Equity Income Portfolio: 1.20%
AST AIM Balanced Portfolio: 1.25%
AST T. Rowe Price Asset Allocation Portfolio: 1.25%
AST T. Rowe Price International Bond Portfolio: 1.75%
AST Federated High Yield Portfolio: 1.15%
AST PIMCO Total Return Bond Portfolio: 1.05%
AST PIMCO Limited Maturity Bond Portfolio: 1.05%
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.
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 American Century International Growth Portfolio: 1.75%
AST Janus Overseas Growth Portfolio: 1.75%
AST MFS Global Equity Portfolio:
AST Kemper Small-Cap Growth Portfolio: 1.35%
AST Lord Abbett Small Cap Value Portfolio: 1.35%
AST T. Rowe Price Small Company Value Portfolio: 1.30%
AST Neuberger Berman Mid-Cap Value Portfolio: 1.25%
AST Neuberger Berman Mid-Cap Growth Portfolio: 1.25%
AST Marsico Capital Growth Portfolio: 1.35%
AST MFS Growth Portfolio:
AST American Century Income & Growth Portfolio: 1.25%
AST MFS Growth with Income Portfolio:
AST Bankers Trust Managed Index 500 Portfolio: .80%
AST Cohen & Steers Realty Portfolio: 1.45%
AST American Century Strategic Balanced Portfolio: 1.25%
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.
Sub-Advisory Agreements: The Investment Manager pays each Sub-advisor
for the performance of sub-advisory services out of its Investment Management
fee and at no additional cost to any Portfolio. 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:
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.
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.
A I M Capital Management, Inc. for the AST AIM International Equity
Portfolio: An annual rate equal to the following percentages of the combined
average daily net assets of the Portfolio and the series of American Skandia
Advisor Funds, Inc. that is managed by the Sub-Adviser and identified by the
Sub-adviser and the Investment Manager as being similar to the Portfolio : .55%
of the portion of the combined average daily net assets not in excess of $75
million; plus .45% of the portion in excess of $75 million
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.
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.
Massachusetts Financial Services for the AST MFS Global Equity Portfolio:
An annual rate of .425% of average daily net assets of the Portfolio.
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.
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.
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.
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.
Neuberger Berman Management, Incorporated for the AST 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.
Neuberger Berman Management, Incorporated for the AST 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.
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.
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.
Massachusetts Financial Services Company for the AST MFS Growth
Portfolio: An annual rate equal to the following percentages of the combined
average daily net assets of the Portfolio, the AST MFS Growth with Income
Portfolio and the domestic equity series of American Skandia Advisor Funds, Inc.
that is managed by Massachusetts Financial Services Company: .40% of the portion
of the combined average daily net assets not in excess of $300 million; plus
.375% of the portion over $300 million but not in excess of $600 million; plus
.35% of the portion over $600 million but not in excess of $900 million; plus
.325% of the portion over $900 million, but not over $1.5 billion; plus .25% of
the portion in excess of $1.5 billion.
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.
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.
Bankers Trust Company for the AST Bankers Trust Managed Index 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.
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.
American Century Investment Management, Inc. for the AST American Century
Income & Growth Portfolio: An annual rate of: .40 of 1% of the portion of the
average daily net assets of the Portfolio not in excess of $100 million; plus
.35 of 1% of the portion of the net assets over $100million.
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.
Massachusetts Financial Services Company for the AST MFS Growth with
Income Portfolio: An annual rate equal to the following percentages of the
combined average daily net assets of the Portfolio, the AST MFS Growth Portfolio
and the domestic equity series of American Skandia Advisor Funds, Inc. that is
managed by Massachusetts Financial Services Company: .40% of the portion of the
combined average daily net assets not in excess of $300 million; plus .375% of
the portion over $300 million but not in excess of $600 million; plus .35% of
the portion over $600 million but not in excess of $900 million; plus .325% of
the portion over $900 million, but not over $1.5 billion; plus .25% of the
portion in excess of $1.5 billion.
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.
A I M Capital Management, Inc. for the AST AIM 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.
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.
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 Bond Portfolio: An annual rate of .40% of the average daily net
assets of the Portfolio.
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.
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.
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.
Corporate Structure. Several of the Sub-advisors are controlled by other
parties as noted below:
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.
A I M Capital Management, Inc. is a wholly-owned subsidiary of A I M
Advisors, Inc., also a registered investment adviser. A I M Advisors, Inc. is
wholly owned by A I M Management Group Inc., a holding company engaged in the
financial services business and an indirect wholly-owned subsidiary of AMVESCAP
PLC. AMVESCAP PLC and its subsidiaries are an independent investment management
group engaged in institutional investment management and retail mutual fund
businesses in the United States, Europe and the Pacific Region.
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.
American Century Companies, Inc. ("ACC") is the parent of American Century
Investment Management, Inc.
Massachusetts Financial Services Company is a subsidiary of Sun Life of
Canada (US) Financial Services Holdings, Inc. whose ultimate parent is Sun Life
Assurance Co. of Canada.
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.
All of the voting stock of Neuberger Berman Management Inc. 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.
OppenheimerFunds, Inc. 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.
NationsBank, N.A., a national bank subsidiary of BankAmerica Corporation,
indirectly owns 50% of the voting control of Marsico Capital Management, LLC
("Marsico Capital"). Mr. Thomas F. Marsico and a company controlled by Mr.
Marsico own the remainder of Marsico Capital's voting interests.
Bankers Trust Company is a wholly-owned subsidiary of Bankers Trust New
York Corporation, a wholly-owned subsidiary of Deutschebank.
Martin Cohen and Robert H. Steers may be deemed "controlling persons" of
Cohen & Steers Capital Management, Inc. on the basis of their ownership of Cohen
& Steers' stock.
INVESCO Funds Group, Inc. is a subsidiary of AMVESCAP PLC.
Federated Investment Counseling, organized as a Delaware business trust
in 1989 is a wholly owned subsidiary of Federated Investors.
Pacific Investment Management Company ("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.
J.P. Morgan Investment Management, Inc is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated, a bank holding company organized under the laws of
Delaware.
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. 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.
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.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreement, the Trust has agreed to pay to
the Administrator the greater of certain percentages of the average daily net
assets of each Portfolio or certain specified minimum annual amounts calculated
for each Portfolio. Except for the AST Bankers Trust Managed Index 500
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) 0.0275% of the next
$200 million; (d) 0.02% of average daily net assets over $1 billion. The
percentages for the AST Bankers Trust Managed Index 500 Portfolio are: (a) 0.05%
of the first $200 million; (b) 0.03% of the next $200 million; (c) 0.0275 of the
next $200 million; (d) 0.02% of the next $400 million; and (e) 0.01% of average
daily net assets over $1 billion.
The minimum amount is $75,000 for each of the AST Janus Small-Cap
Growth Portfolio, the AST Lord Abbett Small Cap Value Portfolio, the AST T. Rowe
Price Small Company Value Portfolio, the AST Neuberger Berman Mid-Cap Growth
Portfolio, the AST Neuberger Berman Mid-Cap Value Portfolio, the AST T. Rowe
Price Natural Resources Portfolio, the AST Oppenheimer Large-Cap Growth
Portfolio, the AST Marsico Capital Growth Portfolio, the AST JanCap Growth
Portfolio, the AST Bankers Trust Managed Index 500 Portfolio, the AST Cohen &
Steers Realty Portfolio, the AST American Century Income & Growth Portfolio, the
AST Lord Abbett Growth and Income Portfolio, the AST INVESCO Equity Income
Portfolio, the AST AIM Balanced Portfolio, the AST American Century Strategic
Balanced Portfolio, the AST T. Rowe Price Asset Allocation Portfolio, the AST
Federated High Yield Portfolio, the AST PIMCO Total Return Bond Portfolio, the
AST PIMCO Limited Maturity Bond Portfolio and the AST Money Market Portfolio.
The minimum amount is $100,000 for the AST Founders Passport Portfolio, the AST
T. Rowe Price International Equity Portfolio, the AST AIM International Equity
Portfolio, the AST Janus Overseas Growth Portfolio, the AST American Century
International Growth Portfolio and the AST T. Rowe Price International Bond
Portfolio. The minimum amount for the fiscal year ending December 31, 1999 for
the AST Kemper Small-Cap 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."
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, 1996, 1997 and 1998, the Trust paid the
Administrator $3,330,687, $4,902,309 and $6,582,808 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. 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. 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, 1996, 1997 and
1998, aggregate brokerage commissions of $7,096,640, $7,265,436, and
$15,887,946, 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, 1997 and December 31, 1998
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 $29,579 and $26,497, respectively. For the year ended December
31, 1998, 4.18% of the total brokerage commissions paid by this Portfolio were
paid to the affiliated brokers, with respect to transactions representing 4.72%
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 $68,772 and
$71,751 for the years ended December 31, 1997 and 1998 respectively. For the
year ended December 31, 1998, 6.55% of the total brokerage commissions paid by
this Portfolio were paid to Robertson Stephens & Co., with respect to
transactions representing 6.69% of the total amount of the Portfolio's
transactions involving the payment of commissions. Brokerage commissions in the
amount of $82,199 were paid to Neuberger Berman, LLC, an affiliate of Neuberger
Berman Management Inc., by the AST Neuberger Berman Mid-Cap Growth Portfolio for
the period from May 1, 1998 (when Neuberger Berman Management Inc. became the
Portfolio's Sub-advisor) until December 31, 1998. For that period, 14.09% of the
total brokerage commissions paid by this Portfolio were paid to Neuberger
Berman, LLC, with respect to transactions representing 13.67% of the total
amount of the Portfolio's transactions involving the payment of commissions.
Brokerage commissions in the amount of $277,961 were paid to Neuberger Berman,
LLC, by the AST Neuberger Berman Mid-Cap Value Portfolio for the period from May
1, 1998 (when Neuberger Berman Management Inc. became the Portfolio's
Sub-advisor) until December 31, 1998. For that period, 27.01% of the total
brokerage commissions paid by this Portfolio were paid to Neuberger Berman, LLC,
with respect to transactions representing 25.96% of the total amount of the
Portfolio's transactions involving the payment of commissions. During the year
ended December 31, 1998, brokerage commissions were paid to J.P. Morgan
Securities Inc. and other affiliates of American Century Investment Management,
Inc. by the AST American Century International Growth Portfolio in the amount of
$91. For that year, .02% of the total brokerage commissions paid by this
Portfolio were paid to the affiliated brokers, with respect to transactions
representing .05% of the total amount of the Portfolio's transactions involving
the payment of commissions. During the year ended December 31, 1998, brokerage
commissions were paid to J.P. Morgan Securities Inc. and other affiliates of
American Century Investment Management, Inc. by the AST American Century
Strategic Balanced Portfolio in the amount of $3,265. For that year, 5.62% of
the total brokerage commissions paid by this Portfolio were paid to the
affiliated brokers, with respect to transactions representing 3.43% 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.
SALE OF SHARES: 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. 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."
DESCRIPTION OF SHARES OF THE TRUST: The Trust's Amended and Restated Declaration
of Trust dated [INSERT DATE], 1999, 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 have
no personal liability to any person in connection with the Trust property or
affairs of the Trust except for that arising from his bad faith, willful
misfeasance, gross negligence or reckless disregard of his duty to that person.
All persons must look solely to the Trust property for satisfaction of claims of
any nature arising in connection with the Trust's affairs. In general, 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 the
Trustee or officer acted in bad faith, or with willful misfeasance, gross
negligence or reckless disregard of his duties.
UNDERWRITER: The Trust is presently used for funding variable annuities and
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 sell its shares to qualified plans other than the
profit sharing plan covering employees of American Skandia Life Assurance
Corporation and its affiliates, 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.
TAX MATTERS: This discussion of federal income tax consequences applies to the
Participating Insurance Companies and qualified plans because these entities are
the shareholders of the Trust. 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 are 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 Statement, and is subject
to change by legislative or administrative action. A description of other 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 herein in the Prospectus is not intended as a
substitute for careful tax planning.
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.
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). 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. All total return figures reflect the deduction of a proportional
share of Portfolio expenses on an annual basis.
Each Portfolio's cumulative 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. 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 total return of each
Portfolio that had commenced operations as of June 30, 1999, 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 Since
Available One Year Three Years Five Years Ten Inception
for Sale Years
- --------------------------------------------- ------------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AST Founders Passport Portfolio(1) 05/02/95 10.92% 8.52% N/A N/A 7.86%
AST T. Rowe Price Internat'l Equity 01/04/94 14.03% 9.69% 7.12% N/A 7.12%
Portfolio
AST AIM Internat'l Equity Portfolio(2) 05/17/89 20.10% 15.88% 11.93% Insert% 12.46%
AST Janus Overseas Growth Portfolio 01/02/97 16.22% N/A N/A N/A 17.45%
AST American Century Internat'l Growth 01/02/97 18.68% N/A N/A N/A 16.88%
Portfolio
AST Janus Small-Cap Growth Portfolio(3) 01/04/94 3.49% 9.62% 13.62% N/A 13.62%
AST Lord Abbett Small Cap Value Portfolio 01/02/98 -0.10% N/A N/A N/A -0.10%
AST T. Rowe Price Small Company Value 01/02/97 -10.53% N/A N/A N/A 7.35%
Portfolio
AST Neuberger Berman Mid-Cap Growth 10/20/94 20.65% 17.87% N/A N/A 18.37%
Portfolio(4)
AST Neuberger Berman Mid-Cap Value 05/04/93 -2.33% 11.25% 10.08% N/A 10.31%
Portfolio(5)
AST T. Rowe Price Natural Resources 05/02/95 -11.83% 6.03% N/A N/A 7.95%
Portfolio
AST Oppenheimer Large-Cap Growth 05/02/96 27.34% N/A N/A N/A 19.45%
Portfolio(6)
AST Marsico Capital Growth Portfolio 12/22/97 41.59% N/A N/A N/A 40.69%
AST JanCap Growth Portfolio 11/06/92 68.26% 40.59% 29.63% N/A 26.80%
AST Bankers Trust Managed Index 500 01/02/98 27.90% N/A N/A N/A 27.81%
Portfolio
AST Cohen & Steers Realty Portfolio 01/02/98 -16.00% N/A N/A N/A -15.96%
AST American Century Income & Growth 01/02/97 12.27% N/A N/A N/A 17.18%
Portfolio(7)
AST Lord Abbett Growth and Income Portfolio 05/01/92 12.48% 18.23% 16.84% N/A 15.71%
AST INVESCO Equity Income Portfolio 01/04/94 13.34% 17.85% 15.74% N/A 15.74%
AST AIM Balanced Portfolio(8) 05/04/93 12.86% 14.08% 12.75% N/A 12.26%
AST American Century Strategic Balanced 01/02/97 21.29% N/A N/A N/A 17.28%
Portfolio
AST T. Rowe Price Asset Allocation Portfolio 01/04/94 18.36% 16.61% 14.24% N/A 14.24%
AST T. Rowe Price Internat'l Bond 05/03/94 14.72% 5.50% N/A N/A 5.13%
Portfolio(9)
AST Federated High Yield Portfolio 01/04/94 2.61% 9.80% 8.94% N/A 8.94%
AST PIMCO Total Return Bond Portfolio 01/04/94 9.46% 7.54% 7.58% N/A 7.58%
AST PIMCO Limited Maturity Bond Portfolio 05/02/95 5.72% 5.68% N/A N/A 5.94%
</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. From October 15, 1996 to May 3, 1999, Putnam Investment
Management, Inc. 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-advisors.
(3) 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.
(4) 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.
(5) 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.
(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 nearly all of which the Portfolio was sub-advised by the prior
Sub-advisor.
(7) Prior to May 4, 1999, Putnam Investment Management, Inc. 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.
(8) Prior to October 15, 1996, Phoenix Investment Counsel, Inc. served as
Sub-advisor to the Portfolio. From October 15, 1996 to May 3, 1999, Putnam
Investment Management 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-advisors.
(9) 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.
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. 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
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 AST Money Market Portfolio yield refers to the income generated by
an investment in the Portfolio over a seven-day period expressed as an annual
percentage rate. Such Portfolio also may calculate an effective yield by
compounding the base period return over a one-year period. The effective yield
will be slightly higher than the yield because of the compounding effect on this
assumed reinvestment.
The current yield and effective yield calculations for shares of the
AST Money Market Portfolio are illustrated for the seven-day period ended
December 31, 1998:
Current Yield Effective Yield
4.75% 4.86%
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.
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 AIM
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.
CUSTODIAN:
The custodian for all cash and securities holdings of the AST Founders
Passport Portfolio, AST T. Rowe Price International Equity Portfolio, AST AIM
International Equity Portfolio, AST Janus Overseas Growth Portfolio, AST
American Century International Growth Portfolio, AST MFS Global Equity Portfolio
and AST T. Rowe Price International Bond 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.
OTHER INFORMATION:
Principal Holders: As of July 12, 1999, more than 99% of each Portfolio
was owned of record by American Skandia Life Assurance Corporation ("ASLAC") on
behalf of the owners of variable insurance products issued by ASLAC. As of July
12, 1999, 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
July 12, 1999.
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, 1998, as well as Unaudited Financial
Statements for the period ending June 30, 1999. 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.
<PAGE>
APPENDIXES
APPENDIX A FINANCIAL STATEMENTS FOR AMERICAN SKANDIA TRUST
APPENDIX B DESCRIPTIONS OF CERTAIN DEBT SECURITIES RATINGS
<PAGE>
APPENDIX A FINANCIAL STATEMENTS FOR AMERICAN SKANDIA TRUST
<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
ITEM 23. Exhibits
<S> <C> <C> <C>
vi (a). (1) Declaration of Trust of Registrant.
vi (2) Amendment to Agreement and Declaration of Trust of Registrant.
vi (3) Amendment to Declaration of Trust of Registrant.
vi (b). By-laws of Registrant.
vi (c). Articles III and VI of the Registrant's Declaration of Trust and Article 11 of the Registrant's
By-laws.
vi (d). (1) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST Lord Abbett Growth and Income Portfolio.
vi (2) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST JanCap Growth Portfolio.
vi (3) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST Money Market.
vi (4) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST Federated High Yield Portfolio.
vi (5) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST T. Rowe Price Asset Allocation Portfolio.
vi (6) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST T. Rowe Price International Equity Portfolio.
vi (7) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST INVESCO Equity Income Portfolio.
vi (8) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for the AST PIMCO Total Return Portfolio.
vi (9) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for AST T. Rowe Price Natural Resources Portfolio.
vi (10) Investment Management Agreement between Registrant and American Skandia Life
Investment Management, Inc. for AST PIMCO Limited Maturity Bond Portfolio.
i (11) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST T. Rowe Price International Bond Portfolio.
ii (12) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Janus Overseas Growth Portfolio.
ii (13) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST T. Rowe Price Small Company Value Portfolio.
ii (14) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Founders Passport Portfolio.
ii (15) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST American Century International Growth Portfolio.
ii (16) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST American Century Strategic Balanced Portfolio.
x (17) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST American Century Income & Growth Portfolio.
x (18) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST AIM International Equity Portfolio.
x (19) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST AIM Balanced Portfolio.
v (20) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Lord Abbett Small Cap Value Portfolio.
v (21) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Cohen & Steers Realty Portfolio.
v (22) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Bankers Trust Enhanced 500 Portfolio.
v (23) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Marsico Capital Growth Portfolio.
vii (24) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Neuberger Berman Mid-Cap Value Portfolio.
vii (25) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Neuberger Berman Mid-Cap Growth Portfolio.
ix (26) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Janus Small-Cap Growth Portfolio.
ix (27) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Oppenheimer Large-Cap Growth Portfolio.
ix (28) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST Kemper Small-Cap Growth Portfolio.
(29) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST MFS Global Equity Portfolio.
(30) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST MFS Growth Portfolio.
(31) Investment Management Agreement between Registrant and American Skandia Investment
Services, Incorporated for the AST MFS Growth with Income Portfolio.
vii (32) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Lord,
Abbett & Co. for the AST Lord Abbett Growth and Income Portfolio.
vi (33) Sub-advisory Agreement between American Skandia Life Investment Management, Inc. and
Janus Capital Corporation for the AST JanCap Growth Portfolio.
vi (34) Sub-advisory Agreement between American Skandia Investment Services, Inc. and J.P.
Morgan Investment Management Inc. for the AST Money Market Portfolio.
vi (35) Sub-advisory Agreement between American Skandia Investment Services, Inc. and
Federated Investment Counseling for the AST Federated High Yield Portfolio.
vii (36) Sub-advisory Agreement between American Skandia Investment Services, Inc. and T. Rowe
Price Associates, Inc. for the AST T. Rowe Price Asset Allocation Portfolio.
vi (37) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Rowe
Price-Fleming International, Inc. for the AST T. Rowe Price International Equity
Portfolio.
vi (38) Sub-advisory Agreement between American Skandia Investment Services Inc. and Pacific
Investment Management Company for the AST PIMCO Total Return Portfolio.
vi (39) Sub-advisory Agreement between American Skandia Investment Services, Inc. and T. Rowe
Price Associates, Inc. for the AST T. Rowe Price Natural Resources Portfolio.
vi (40) Sub-advisory Agreement between American Skandia Investment Services, Inc. and Pacific
Investment Management Company for the AST PIMCO Limited Maturity Bond Portfolio.
i (41) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Rowe Price-Fleming International, Inc. for the AST T. Rowe Price International Bond
Portfolio.
ii (42) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Janus Capital Corporation for the AST Janus Overseas Growth Portfolio.
ii (43) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
T. Rowe Price Associates, Inc. for the AST T. Rowe Price Small Company Value Portfolio.
vii (44) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Founders Asset Management LLC for the AST Founders Passport Portfolio.
ii (45) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the AST American Century International Growth
Portfolio.
ii (46) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Investors Research Corporation for the AST American Century Strategic Balanced
Portfolio.
x (47) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
American Century Investment Management, Inc. for the AST American Century Income &
Growth Portfolio.
x (48) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
A I M Capital Management, Inc. for the AST AIM International Equity Portfolio.
x (49) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
A I M Capital Management, Inc. for the AST AIM Balanced Portfolio.
iv (50) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
INVESCO Trust Company for the AST INVESCO Equity Income Portfolio.
viii (51) Amendment to Sub-advisory Agreement between American Skandia Investment Services,
Incorporated, INVESCO Trust Company and INVESCO Funds Group, Inc. for the AST INVESCO
Equity Income Portfolio.
v (52) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Lord, Abbett & Co. for the AST Lord Abbett Small Cap Value Portfolio.
v (53) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Cohen & Steers Capital Management, Inc. for the AST Cohen & Steers Realty Portfolio.
(54) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Bankers Trust Company for the AST Bankers Trust Enhanced 500
Portfolio.
x (55) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Marsico Capital Management, LLC for the AST Marsico Capital Growth Portfolio.
vii (56) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Neuberger&Berman Management, Incorporated for the AST Neuberger Berman Mid-Cap Value
Portfolio.
vii (57) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Neuberger&Berman Management, Incorporated for the AST Neuberger Berman Mid-Cap Growth
Portfolio.
ix (58) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Janus Capital Corporation for the AST Janus Small-Cap Growth Portfolio.
ix (59) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
OppenheimerFunds, Inc. for the AST Oppenheimer Large-Cap Growth Portfolio.
ix (60) Sub-advisory Agreement between American Skandia Investment Services, Incorporated and
Scudder Kemper Investments, Inc. for the AST Kemper Small-Cap Growth Portfolio.
(61) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Massachusetts Financial Services Company for the AST Global Equity Portfolio.
(62) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Massachusetts Financial Services Company for the AST Growth Portfolio.
(63) Sub-advisory Agreement between American Skandia Investment Services, Incorporated
and Massachusetts Financial Services Company for the AST Growth with Income Portfolio.
vi (e). (1) Sales Agreement between Registrant and American Skandia Life Assurance Corporation.
ii (2) Sales Agreement between Registrant and Kemper Investors Life Insurance Company.
(f). None.
viii (g). (1) Amended and Restated Custody Agreement between Registrant and Morgan Stanley Trust
Company.
viii (2) Foreign Custody Manager Delegation Amendment
vi (3) Amended Custodian Agreement between Registrant and Provident National Bank.
viii (4) Amendment to Custodian Services Agreement between Registrant and PNC Bank, N.A.
vi (5) Amended Transfer Agency Agreement between Registrant and Provident Financial
Processing Corporation.
vi (h). (1) Amended Administration Agreement between Registrant and Provident Financial Processing
Corporation.
iii (2) Service Agreement between American Skandia Investment Services, Incorporated and
Kemper Investors Life Insurance Company.
(i). Consent of Counsel for the Registrant.
(j). Independent Auditors' Consent.
(k). None.
vi (l). Certificate re: initial $100,000 capital.
(m) None.
(n). Financial Data Schedules.
(o). None.
- --------------------------
</TABLE>
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.
ix Filed as an Exhibit to Post-Effective Amendment No. 28 to Registration
Statement, which Amendment was filed via EDGAR on December 28, 1998,
and is incorporated herein by reference.
x Filed as an Exhibit to Post-Effective Amendment No. 30 to Registration
Statement, which Amendment was filed via EDGAR on April 28, 1999, and
is incorporated herein by reference.
ITEM 24. Persons Controlled By or Under Common Control with Registrant
Registrant does not control any person within the meaning of the
Investment Company Act of 1940. Registrant may be deemed to be under common
control with its investment manager and its affiliates because a controlling
interest in Registrant is held of record by American Skandia Life Assurance
Corporation. See Registrant's Statement of Additional Information under
"Organization and Management of the Trust" and "Other Information."
ITEM 25. Indemnification
Article VIII of the Registrant's Declaration of Trust provides as
follows:
The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers,
employees, agents or trustees of another organization in which it has any
interest as a shareholder, creditor or otherwise) against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with which
he may be threatened, while in office or thereafter, by reason of his being or
having been such a trustee, officer, employee or agent, except with respect to
any matter as to which he shall have been adjudicated to be liable to the Trust
or its Shareholders by reason of having acted in bad faith, willful misfeasance,
gross negligence or reckless disregard of his duties; provided, however, that as
to any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless approved as in the best interests of
the Trust, after notice that it involves such indemnification, by at least a
majority of the disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the matter) upon a
determination, based upon a review of readily available facts, that (i) such
person acted in good faith in the reasonable belief that his or her action was
in the best interests of the Trust and (ii) is not liable to the Trust or the
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duties; or the trust shall have received a written opinion
from independent legal counsel approved by the Trustees to the effect that (x)
if the matter of good faith and reasonable belief as to the best interests of
the Trust, had been adjudicated, it would have been adjudicated in favor of such
person, or (y) based upon a review of readily available facts such trustee,
officer, employee or agent did not engage in willful misfeasance, gross
negligence or reckless disregard of duty. The rights accruing to any Person
under these provisions shall not exclude any other right to which he may be
lawfully entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in connection
with indemnification under this Section 5.2, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust in the
event it is subsequently determined that he is not entitled to such
indemnification and, provided further, that the Trust shall have obtained
protection, satisfactory in the sole judgement of the disinterested Trustees
acting on the matter (provided that a majority of the disinterested Trustees
then in office act on the matter), against losses arising out of such advance
payments or such Trustees , or independent legal counsel, in a written opinion,
shall have determined, based upon a review of readily available facts that there
is reason to believe that such person will be found to be entitled to such
indemnification.
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 AST JanCap 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 26. 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 9 1999, 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 27. 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.
<TABLE>
<CAPTION>
The following individuals, all of whom have as their principal business
address, One Corporate Drive, Shelton, Connecticut 06484, are the current
officers and/or directors of ASM, Inc.:
<S> <C>
Jan R. Carendi 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
Patricia J. Abram Senior Vice President and National Sales Manager, Variable Life
Kimberly A. Bradshaw Vice President & National Accounts Manager/Qualified Plans
Robert Brinkman Senior Vice President & National Sales Manager
Y.K. Chan Senior Vice President & Chief Information Officer
Lucinda C. Ciccarello Vice President, Mutual Funds
Ian Kennedy Senior Vice President, Customer Service
T. Richard Kennedy General Counsel
Lawrence Kudlow Senior Vice President & Chief Economist
N. David Kuperstock Vice President, Product Development & Director
McCann, Eileen S. Vice President, Key Accounts Marketing
David R. Monroe Senior Vice President, Treasurer & Corporate Controller
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 Executive Vice President, National Sales Manager & Director
Leslie S. Sutherland Vice President & National Key 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, Chief Operating Officer, Finance and Business
Operations & Director
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 28. 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 The Chase
Manhattan Bank, 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 29. Management Services
None.
ITEM 30. Undertakings
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Shelton and State
of Connecticut, on the 4th day of August, 1999.
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 8/4/99
Jan R. Carendi Executive Officer)
and Trustee
/s/ Gordon Boronow* Vice President 8/4/99
Gordon C. Boronow and Trustee
/s/ Eric C. Freed Secretary 8/4/99
Eric C. Freed
/s/ Richard G. Davy, Jr. Treasurer (Chief 8/4/99
Richard G. Davy, Jr. Financial and Accounting
Officer)
/s/ David E. A. Carson* Trustee 8/4/99
David E. A. Carson
/s/ Julian A. Lerner* Trustee 8/4/99
Julian A. Lerner
/s/ Thomas M. Mazzaferro* Trustee 8/4/99
Thomas M. Mazzaferro
/s/ Thomas M. O'Brien* Trustee 8/4/99
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 8/4/99
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. 31
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>
(d)(29) Investment Management Agreement between American Skandia Trust and
American Skandia Investment Services, Incorporated for the AST MFS
Global Equity Portfolio.
(d)(30) Investment Management Agreement between American Skandia Trust and
American Skandia Investment Services, Incorporated for the AST MFS
Growth Portfolio.
(d)(31) Investment Management Agreement between American Skandia Trust and
American Skandia Investment Services, Incorporated for the AST MFS
Growth with Income Portfolio.
(d)(54) Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Bankers Trust Company for the AST Bankers Trust
Enhanced 500 Portfolio.
(d)(61) Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Massachusetts Financial Services Company for the AST
MFS Global Equity Portfolio.
(d)(62) Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Massachusetts Financial Services Company for the AST
MFS Growth Portfolio.
(d)(63) Sub-advisory Agreement between American Skandia Investment Services,
Incorporated and Massachusetts Financial Services Company for the AST
MFS Growth with Income Portfolio.
10 Consent of Counsel for the Registrant
11 Independent Auditor's Consent
</TABLE>
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
AMERICAN SKANDIA TRUST
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Bankers Trust Company (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 is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") and the
Sub-Adviser is a "bank" as defined under 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 Bankers Trust Enhanced
500 Portfolio (the "Portfolio"), one series of the Trust, under the terms of a
management agreement, dated January 1, 1998, 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. Any records maintained hereunder shall be
the property of the Portfolio and surrendered promptly upon request.
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), (3) and (4)) 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 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 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
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 Sub-Adviser 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
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
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). 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 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 most recent balance sheet;
(b) 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
(c) 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, 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, or is exempt from registration, 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.
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. 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.
11. Other Activities of the Sub-Adviser. The Investment Manager agrees that the
Sub-Adviser and any of its partners or employees, and persons affiliated with
the Sub-Adviser or with any such partner 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 partners, affiliates or
employees may purchase or sell for the Sub-Adviser or such partner'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: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Adviser: Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street
New York, New York 10006
Attention: Lawrence S. Lafer
Vice President
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 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 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.
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 June 4, 1999.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:
___________________________________ ______________________________________
John Birch
Senior Vice President
& Chief Operating Officer
Date: ____________________________ Date: ____________________________
Attest: ____________________________ Attest: ____________________________
<PAGE>
American Skandia Trust
Bankers Trust Enhanced 500 Portfolio
Sub-Advisory Agreement
EXHIBIT A
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 over
$300 million.
To be filed by future amendment
To be filed by future amendment
To be filed by future amendment
Stradley Ronan Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
Telephone (215) 564-8000
Fax (215) 564-8120
Direct Dial: (215) 564-8042
August 4, 1999
American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Re: American Skandia Trust Form N-1A
Post-effective Amendment No. 31 to the Registration Statement under
the Securities Act of 1933
Amendment No. 33 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
Legal Opinion-Securities Act of 1933
Ladies and Gentlemen:
We have examined the Declaration of Trust, as amended and
restated (the "Declaration"), of American Skandia Trust (the "Fund"), a business
trust organized under the laws of the Commonwealth of Massachusetts, the By-Laws
of the Fund and the resolutions adopted by the Fund's Board of Directors
organizing the business of the Fund, all as amended to date, and the various
pertinent proceedings we deem material. We have also examined the Registration
Statements filed by the Fund with the U.S. Securities and Exchange commission
(the "Commission") under the Investment Company Act of 1940 (the "Investment
Company Act") and the Securities Act of 1933 (the "Securities Act"), all as
amended to date, as well as other items we deem material to this opinion. As to
various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Fund, public
officials and others.
The Fund is authorized by its Articles to issue an unlimited
number of shares of beneficial interest ("shares") in the Fund with a par value
of $.001 per share. The Fund currently issues shares of twenty eight (28) series
and proposes to issue shares of three (3) additional series when the
above-captioned post-effective amendment to the Registration Statement ("the
Post effective Amendment") becomes effective. The Declaration authorizes the
Trustees to designate one or more series of the Fund and allocates, or
authorizes the Trustees to allocate, shares to each such series. The Declaration
also empowers the Trustees to designate any additional series and allocate
shares to such series.
The Fund has filed with the Commission a Registration
Statement under the Securities Act, which Registration Statement is deemed to
register an indefinite number of shares of the Fund pursuant to the provisions
of Rule 24f-2 under the Investment Company Act. You have further advised us that
the Fund has filed, and each year hereafter will timely file, a Notice pursuant
to Rule 24f-2 perfecting the registration of the shares sold by the Fund during
each fiscal year during which such registration of an indefinite number of
shares remains in effect.
You have also informed us that the shares of the Fund have
been, and will continue to be, sold in accordance with the Fund's usual method
of distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in accordance
with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long
as the Fund remains a valid and subsisting business trust under the laws of the
Commonwealth of Massachusetts, and the registration of an indefinite number of
shares of the Fund remains effective, the authorized shares of the Fund when
issued for the consideration set by the Board of Trustees pursuant to the
Declaration, and subject to compliance with Rule 24f-2, will be legally
outstanding, fully-paid, and non-assessable shares, and the holders of such
shares will have all the rights provided for with respect to such holding by the
Declaration and the laws of the Commonwealth of Massachusetts.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement of the Fund, covering the registration of the shares
of the Fund under the Securities Act and the applications, registration
statements or notice filings, and amendments thereto (including the
Post-Effective amendment), filed in accordance with the securities laws of the
several states in which shares of the Fund are offered, and we further consent
to reference in the registration statement of the Fund to the fact that this
opinion concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/Robert K. Fulton
Robert K. Fulton
To be filed by future amendment
