STEIN ROE MORTGAGE SECURITIES FUND, VARIABLE SERIES
Supplement to Prospectus dated May 1, 2000
Effective June 1, 2000, the Fund's Board of Trustees approved changes to the
Fund's investment strategy and the individuals managing the Fund's investment
portfolio. The sections "The Funds - Stein Roe Mortgage Securities Fund,
Variable Series - Primary Investment Strategies" and "Trust Management and
Organization - Portfolio Managers" are changed in their entirety as follows:
PRIMARY INVESTMENT STRATEGY
Under normal market conditions, the Fund invests at least 65% of its total
assets in the following types of securities:
o Mortgage securities and mortgage-related (home equity, home improvement
and manufactured housing) asset-backed securities;
o U.S. government securities, including U.S. treasuries and securities of
various U.S. government agencies;
o Agency pass-throughs;
o Agency and whole-loan collateralized mortgage obligations (CMOs); and
o Commercial mortgage-backed securities.
The Fund has wide flexibility to vary its allocation among different types of
mortgage securities, U.S. government securities and the securities of
non-governmental issuers based on the portfolio managers' judgment of which
types of securities will outperform the others. In selecting investments for the
Fund, Stein Roe considers a security's expected income together with its
potential to rise or fall in price.
To select investments for the Fund, the portfolio managers looks for securities
within these sectors that balance the potential for the highest yield and
relative value with the prospects for incremental capital appreciation. The
portfolio managers usually focus on securities rated AA or higher. However, the
Fund may invest in securities rated investment grade (BBB) or higher. The Fund
also may invest in unrated securities if Stein Roe believes the security is
comparable in quality to a security that is rated at least investment grade.
TYPES OF MORTGAGE SECURITIES
Mortgage securities represent ownership interests in large, diversified pools of
individual home mortgage loans. Sponsors pool together mortgages of similar
rates and terms and offer them as a security to investors. The monthly payments
of principal and interest made by homeowners are in turn passed through to the
mortgage investor.
The Fund invests in three major sectors of the mortgage securities universe.
Most mortgage securities are pooled together and structured as pass-throughs.
Monthly payments of principal and interest from the underlying mortgage loans
backing the pool are collected by a service and "passed-through" regularly to
the investor. Pass-throughs can have a fixed or an adjustable rate. The majority
of pass-through securities are issued by three agencies: Ginnie Mae, Fannie Mae
and Freddie Mac.
Collateralized mortgage obligations (CMOs) are backed by either agency or whole
loan pass-throughs, which carry either fixed or adjustable rate interest rates.
Tailored to meet investor demand, CMOs redirect principal and interest flows,
thereby shifting prepayment risk to investors that are most suited to bear such
risk. Typically, principal prepayments are paid sequentially to separate
"tranches," which create mortgage securities of short-, medium- and long-term
maturities. The Fund may buy CMOs of any maturity tranch, depending upon the
portfolio managers' judgment regarding which tranch at the time offers the best
relative value.
Asset-backed securities are securities backed by various types of loans such as
credit card, auto and home-equity loans. The Fund generally invests in
"mortgage-related" asset-backed securities, which are backed by residential
first and second lien home equity, home improvement and manufactured housing
loans.
Commercial mortgage-backed securities are secured by loans to office buildings,
multi-family apartment buildings and shopping centers. These loans usually
contain prepayment penalties which provide protection from refinancing in a
declining interest rate environment.
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PORTFOLIO MANAGERS
STEIN ROE MORTGAGE SECURITIES FUND, VARIABLE SERIES. Leslie W. Finnemore, a
senior vice president of Stein Roe, is a co-manager of the Fund as of June,
2000. Ms. Finnemore has served as manager or co-manager of various other
taxable income funds for Stein Roe and its affiliate, Colonial, since 1987.
Michael Bissonnette, a senior vice president of Stein Roe, is a co-manager of
the Fund as of June, 2000. Mr. Bisonnette also serves as a manager or co-manager
of various other taxable income funds for Stein Roe and its affiliate, Colonial,
since June, 1999. Mr. Bissonnette was a portfolio manager at APAM, Inc. from
June, 1998 to June, 1999 and a portfolio manager at Caxton Corporation from
July, 1996 to June, 1998. From June, 1993 to June, 1996, Mr. Bissonnette served
as a portfolio manager of fixed-income funds and a vice president of Colonial.
June 1, 2000
ANN-36/575B-0500
