INCOME FUNDS STATEMENT OF ADDITIONAL INFORMATION
THORNBURG INVESTMENT TRUST
(formerly Thornburg Income Trust)
STATEMENT OF ADDITIONAL INFORMATION
for
THORNBURG LIMITED TERM U.S. GOVERNMENT FUND ("Government Fund")
and
THORNBURG LIMITED TERM INCOME FUND ("Income Fund")
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Thornburg Limited Term U.S. Government Fund ("Government Fund") and
Thornburg Limited Term Income Fund ("Income Fund") are investment portfolios
established by Thornburg Investment Trust (the "Trust"). This Statement of
Additional Information relates to the investments proposed to be made by the
Funds, investment policies governing the Funds, the Funds' management, and
other issues of interest to a prospective purchaser of shares in the Funds.
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Funds' Prospectus. A copy of the Prospectus
may be obtained at no charge by writing to the distributor of the Funds'
shares, Thornburg Securities Corporation, at 119 East Marcy Street, Suite
202, Santa Fe, New Mexico 87501.
The Trust's name was "Thornburg Income Trust" until October 1, 1995.
The date of this Statement of Additional Information is February 1,
1996.
Table of Contents
Page
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . 1
INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . .20
Government Fund. . . . . . . . . . . . . . . . .20
Income Fund. . . . . . . . . . . . . . . . . . .23
YIELD COMPUTATION AND TOTAL RETURN:
Performance and Portfolio Information. . . . . .26
REPRESENTATIVE PERFORMANCE INFORMATION. . . . . . . .27
Government Fund (Classes A and C). . . . . . . .27
Income Fund (Classes A and C) . . . . . . . . .28
DISTRIBUTIONS, TAXES AND SHAREHOLDER ACCOUNTS
Distributions. . . . . . . . . . . . . . . . . .29
Federal Income Tax Considerations. . . . . . . .30
State and Local Income Tax Considerations. . . .32
Accounts of Shareholders . . . . . . . . . . . .32
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT
General. . . . . . . . . . . . . . . . . . . . .33
SERVICE AND DISTRIBUTION PLANS. . . . . . . . . . . .35
Service Plans - All Cases. . . . . . . . . . . .35
Class C Distribution Plan. . . . . . . . . . . .36
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . .37
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . .38
PURCHASE OF FUND SHARES
Discussion of Reduced Sales Charges - Class A
Shares. . . . . . . . . . . . . . . . . . . . . . . .41
REDEMPTION OF SHARES. . . . . . . . . . . . . . . . .45
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . .45
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . .45
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 45
INVESTMENT OBJECTIVES AND POLICIES
Introduction
This portion of the Statement of Additional Information includes
additional information which the prospective investor may wish to know
respecting types of investments each of the Funds may acquire or specific
techniques each of the Funds may utilize in pursuing its investment
objectives. Although certain investments are subject to purchase by both
Funds, there are certain investments or techniques which are available only
to one Fund or the other.
Determining Portfolio Average Maturity - Government Fund and Income Fund
For purposes of each Fund's investment policy, an instrument will be
treated as having a maturity earlier than its stated maturity date if the
instrument has technical features (such as put or demand features) or a
variable rate of interest which, in the judgment of the Fund's investment
adviser, will result in the instrument being valued in the market as though
it has an earlier maturity.
In addition, each Fund may estimate the expected maturities of certain
securities it purchases in connection with achieving its investment
objectives. Certain obligations such as Treasury Bills and Notes have stated
maturities. However, certain obligations a Fund may acquire, such as GNMA
certificates, are interests in pools of mortgages or other loans having
varying maturities.
Due to prepayments of the underlying mortgage instruments or other
loans, such asset-backed securities do not have a known actual maturity (the
stated maturity date of collateralized mortgage obligations is, in effect,
the maximum maturity date). In order to determine whether such a security is
a permissible investment for a Fund (and assuming the security otherwise
qualifies for purchase by the Fund), the security's remaining term will be
deemed equivalent to the estimated average life of the underlying mortgages
at the time of purchase of the security by the Fund. Average life will be
estimated by the Fund based on its Adviser's evaluation of likely prepayment
rates after taking into account current interest rates, current conditions in
the relevant housing markets and such other factors as it deems appropriate.
There can be no assurance that the average life as estimated will be the
actual average life.
For example, the mortgage instruments in the pools underlying
mortgage-backed securities have original maturities ranging from 8 to 40
years. The maximum original maturity of the mortgage instruments underlying
such a security may, in some cases, be as short as 12 years. The average
life of such a security at the time of purchase by a Fund is likely to be
substantially less than the maximum original maturity of the mortgage
instruments underlying the security because of prepayments of the mortgage
instruments, the passage of time from the issuance of the security until its
purchase by a Fund and, in some cases, the wide dispersion of the original
maturity dates of the underlying mortgage instruments.
Certain securities which have variable or floating interest rates or
demand or put features may nonetheless be deemed to have remaining actual
lives which are less than their stated nominal lives. In addition, certain
asset-backed securities which have variable or floating interest rates may be
deemed to have remaining lives which are less than the stated maturity dates
of the underlying mortgages.
Purchase of Certificates of Deposit - Government Fund and Income Fund
In addition to the other securities each Fund may purchase, each Fund is
authorized to purchase bank certificates of deposit under certain
circumstances. The Government Fund may under certain market conditions
invest up to 20% of its assets in (i) time certificates of deposit maturing
in one year or less after the date of acquisition which are issued by United
States banks having assets of $1,000,000,000 or more, and (ii) time
certificates of deposit insured as to principal by the Federal Deposit
Insurance Corporation. If any certificate of deposit (whether or not insured
in whole or in part) is nonnegotiable, and it matures in more than 7 days, it
will be considered illiquid, and subject to the Government Fund's fundamental
investment restriction that no more than 10% of the Fund's net assets will be
placed in illiquid investments.
The Income Fund may invest in certificates of deposit of large domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of one billion U.S.
dollars), including foreign branches of domestic banks, and certificates of
deposit of smaller banks as described below. Although the Income Fund
recognizes that the size of a bank is important, this fact alone is no
necessarily indicative of its creditworthiness. Investment in certificates
of deposit issued by foreign banks or foreign branches of domestic banks
involves investment risks that are different in some respects from those
associated with investment in certificates of deposit issued by domestic
banks. (See "Foreign Securities" below). The Income Fund may also invest in
certificates of deposit issued by banks and savings and loan institutions
which had at the time of their most recent annual financial statements total
assets of less than one billion dollars, provided that (i) the principal
amounts of such certificates of deposit are insured by an agency of the U.S.
Government, (ii) at no time will the Fund hold more that $100,000 principal
amount of certificates of deposit of any one such bank, and (iii) at the time
of acquisition, no more than 10% of the Fund's assets (taken at current
value) are invested in certificates of deposit of such banks having total
assets not in excess of one billion dollars.
Asset-Backed Securities - Government Fund and Income Fund
Each of the Funds may invest in asset-backed securities, which are
interests in pools in loans, described in the Prospectus. The Government
Fund only may purchase such securities or participations therein if they are
U.S. Government obligations described in the Prospectus.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
If otherwise consistent with its investment restrictions and the
Prospectus, each Fund may invest in mortgage-backed securities, which are
interests in pools of 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 as further
described below. A Fund also may invest in debt securities which are secured
with collateral consisting of mortgage -backed securities (see
"Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate or return upon
reinvestment of the prepayments. Additionally, the potential for prepayments
in a declining interest rate environment will tend to limit to some degree
the increase in net asset value of the Fund because the value of the
mortgage-backed securities held by the Fund may not appreciate as rapidly as
the price of non-callable debt securities. During periods of increasing
interest rates, prepayments likely will be reduced, and the value of the
mortgage-backed securities will decline.
Interests in pools of mortgage-backed 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 mortgage loans, net of any fees paid to the issuer or insurer of such
securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, or upon 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.
These guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
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) mortgages from a list of
approved seller/servicers which include state and federally-chartered savings
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 is a
corporate instrumentality of the United States Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal
Home Loan Banks. 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 PC's 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 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. Such pools
may be purchased by the Income Fund, but will not be purchased by the
Government Fund. 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 Income Fund's investment
quality standards. There can be no assurance that the private insurer or
guarantors can meet their obligations under the insurance policies or
guarantee arrangements. The Income Fund may buy mortgage-related securities
without insurance or guarantees, if through an examination of the loan
experience and practices of the originators/servicers and poolers, the
Advisor determines that the securities meet the Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Collateralized Mortgage Obligations ("CMO's")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMO's 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.
CMO's 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. CMO's 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 unanticipated early return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds). Proceeds of the Bond offering are
used to purchase 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 CMO's, 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 CMO's 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 PC's, payments
of principal and interest on the CMO's 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 CMO's 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 CMO's 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 CMO's is
actually repaid is likely to be such that each class of bonds will be retired
in advance of its scheduled 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 CMO's are
identical to those of FHLMC PC's. FHLMC has the right to substitute
collateral in the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities
may include alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to maturity may
differ from customary long-term fixed rate mortgages. Neither Fund will
purchase mortgage-backed securities or any other assets which, in the opinion
of the Adviser, are illiquid and exceed, as a percentage of the Fund's
assets, the percentage limitations on the Fund's investment in securities
which are not readily marketable, as discussed below. The Adviser will,
consistent with the Funds' respective investment objectives, policies and
quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgage-backed securities
are now being applied to a broad range of assets. Through the use of trusts
and special purpose corporations, various types of assets, including
automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in structures similar to the CMO pattern.
Consistent with the Funds' respective investment objectives and policies,
each Fund may invest in these and other types of asset-backed securities that
may be developed in the future. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile Receivables ("CARS"). CARS
represent undivided fractional interests in a trust whose assets consist of
a pool of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interests on CARS are passed through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of bankruptcy laws and of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. There is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
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, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool assets, to ensure that the receipt of payment
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of
the assets in the pool by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Income Fund, as a possible purchaser of such securities,
will not pay any additional or separate fees for credit support. The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The Income Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to
make required payments on the securities and to pay related administrative
expenses. The residual in an asset-backed security pass-through structure
represents the interest in any excess cash flow remaining after making the
foregoing payments. The amount of the residual will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses
and the actual prepayment experience on the underlying assets. Asset-backed
security residuals not registered under the Securities Act of 1933 may be
subject to certain restrictions on transferability. In addition, there may
be no liquid market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such
developments may require the Fund to dispose of any then existing holdings of
such securities.
Repurchase Agreements - Government Fund and Income Fund
Either Fund may enter into repurchase agreements with member banks of
the Federal Reserve System or any domestic broker-dealer which is recognized
as a reporting government securities dealer if the creditworthiness of the
bank or broker-dealer has been determined by the Adviser to be at least as
high as that of other obligations the Fund may purchase or at least equal to
that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or S&P. These transactions may not provide a Fund with
collateral marked-to-market during the term of the commitment.
A repurchase agreement, which provides a means for the Fund to earn
income on funds for periods as short as overnight, is an arrangement under
which the Fund purchases a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
The repurchase price may be higher than the purchase price, the difference
being interest at a stated rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated to
the interest rate on the Obligation. Obligations will be held by the Fund's
custodian or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligations subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the
seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Delays may involve loss
of interest or decline in the price of the Obligation. If the court
characterized the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of
the seller. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with
any unsecured debt obligation purchased for the Fund, the Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the Obligation, in which case
the Fund may incur a loss if the proceeds to the Fund of the sale to a third
party are less than the repurchase price. However, if the market value
(including interest) of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that
the market value (including interest) of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is
possible that the Fund will be unsuccessful in seeking to impose on the
seller a contractual obligation to deliver additional securities.
When Issued Securities - Government Fund and Income Fund
Either Fund may purchase securities offered on a "when-issued" or
"forward delivery" basis. When so offered, the price, which is generally
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued or forward delivery
securities take place at a later date. During the period between purchase
and settlement, no payment is made by the purchaser to the issuer and no
interest on the when-issued or forward delivery security accrues to the
purchaser. To the extent that assets of the Fund are not invested prior to
the settlement of a purchase of securities, the Fund will earn no income;
however, it is intended that the Fund will be fully invested to the extent
practicable and subject to the Fund's investment policies. While when-issued
or forward delivery securities may be sold prior to the settlement date, it
is intended that the Fund will purchase such securities with the purpose of
actually acquiring them unless sale appears desirable for investment reasons.
At the time the Fund makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
market value of when-issued or forward delivery securities may be more or
less than the purchase price. The Fund does not believe that its net asset
value or income will be adversely affected by its purchase of securities on
a when-issued or forward delivery basis. The Fund will establish a
segregated account for commitments for when-issued or forward delivery
securities as described above.
Reverse Repurchase Agreements - Government Fund and Income Fund
Either Fund may enter into reverse repurchase agreements by transferring
securities to another person in return for proceeds equal to a percentage of
the value of the securities, subject to its agreement to repurchase the
securities from the other person for an amount equal to the proceeds plus an
interest amount. Neither Fund will enter into any such transaction if, as a
result, more than 5% of the Fund's total assets would then be subject to
reverse repurchase agreements. See the "Investment Restrictions" applicable
to each Fund, below.
Dollar Roll Transactions - Government Fund and Income Fund
Either Fund may enter into "dollar roll" transactions, which consist of
the sale by the Fund to a bank or broker-dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment
to purchase from the counterparty similar, but not identical, securities at
a future date at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is
the holder. The Fund receives a fee from the counterparty as consideration
for entering into the commitment to purchase. Dollar rolls may be renewed
over a period of several months with a new purchase and repurchase price
fixed and a cash settlement made at each renewal without physical delivery of
securities. Moreover, the transaction may be preceded by a firm commitment
agreement pursuant to which the Fund agrees to buy a security on a future
date.
Dollar rolls are treated for purposes of the Investment Company Act of
1940 (the "1940 Act") as borrowings of the Fund entering into the transaction
because they involve the sale of a security coupled with an agreement to
repurchase, and are subject to the investment restrictions applicable to any
borrowings made by the Fund. Like all borrowings, a dollar roll involves
costs to the borrowing Fund. For example, while the Fund receives a fee as
consideration for agreeing to repurchase the security, the Fund forgoes the
right to receive all principal and interest payments while the counterparty
holds the security. These payments to the counterparty may exceed the fee
received by the Fund, thereby effectively charging the Fund interest on its
borrowing. Further, although the Fund can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the
actual amount of prepayment could increase or decrease the cost of the Fund's
borrowing.
Dollar rolls involve potential risks of loss which are different from
those related to the securities underlying the transactions. For example, if
the counterparty becomes insolvent, the Fund's right to purchase from the
counterparty may be restricted. Additionally, the value of such securities
may change adversely before the Fund is able to purchase them. Similarly,
the Fund may be required to purchase securities in connection with a dollar
roll at a higher price than may otherwise be available on the open market.
Since, as noted above, the counterparty is required to deliver a similar, but
not identical security to the Fund, the security which the Fund is required
to buy under the dollar roll may be worth less than an identical security.
Finally, there can be no assurance that the Fund's use of the cash that it
receives from a dollar roll will provide a return that exceeds borrowing
costs.
The Trustees of the Funds have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Funds will engage in such transactions only with banks
and broker-dealers selected pursuant to such guidelines.
Lending of Portfolio Securities - Government Fund and Income Fund
The Fund may seek to increase its income by lending portfolio
securities. Under present regulatory policies, including those of the Board
of Governors of the Federal Reserve System and the Securities and Exchange
Commission, such loans may be made to member firms of the New York Stock
Exchange, and would be required to be secured continuously by collateral in
cash, cash equivalents or U.S. Treasury bills maintained on a current basis
at an amount at least equal to the market value and accrued interest of the
securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned on no more than five days' notice. During the
existence of a loan, the Fund would continue to receive the equivalent of the
interest paid by the issuer on the securities loaned and would also receive
compensation based on investment of the collateral. As with other extensions
of credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
the loans would be made only to firms deemed by the Adviser to be of good
standing, and when, in the judgment of the Adviser, the consideration which
can be earned currently from securities loans of this type justifies the
attendant risk.
Other Investment Strategies - Income Fund
The Income Fund may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such
as interest rates, currency exchange rates, and broad or specific equity
market movements), to manage the effective maturity or duration of
fixed-income securities or portfolios, or to enhance potential gain. Such
strategies are used by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new investments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Income Fund
may purchase and sell exchange-listed and over-the-counter put and call
options on securities, financial futures, equity and fixed-income indices and
other financial instruments, purchase and sell financial futures contracts,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or
to be purchased for the Income Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of the Fund's assets will be
committed to Strategic Transactions entered into for purposes not related to
bona fide hedging or risk management. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to
the extent the Adviser's view as to certain market movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. Use of put and call options may
result in losses to the Income Fund, force the sales of portfolio securities
at inopportune times or for prices higher than (in the case of put options)
or lower than (in the case of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the
Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number
of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of
the Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without
incurring substantial losses, if at all. Although the contemplated use of
these futures contracts and options thereon should tend to minimize the risk
of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited
to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possible income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
General Characteristics of Options - Income Fund
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument as to which the options relate. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of Income Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Income Fund's purchase of a put option on
a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell the
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price. The
Fund's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. An American-style put or call option may be exercised at any
time during the option period while a European-style put or call options may
be exercised only upon expiration or during a fixed period prior thereto.
The Income Fund is authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties
to such options. The discussion below uses the OCC as a paradigm, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options
and Eurodollar instruments are cash settled for the net amount, if any, to
the extent the option is "in-the-money" (i.e., where the value of the
underlying instrument exceeds, in the case of a call option, or is less than,
in the case of a put option, the exercise price of the option) at the time
the option is exercised. Frequently, rather than taking or making delivery
of the underlying instrument through the process of exercising the option,
listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
The Income Fund's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (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 including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options,
which generally have standardized terms and performance mechanics, all the
terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guaranties and security, are set by negotiation of
the parties. The Income Fund will only enter into OTC options that have a
buy-back provision permitting the Fund to require the Counterparty to buy
back the option at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails
to make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered into with the Income Fund or fails to
make a cash settlement payment due in accordance with the terms of that
option, the Fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess
the creditworthiness of each Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Fund will engage in OTC
option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank in New York as "primary dealers,"
broker dealers, domestic or foreign banks or other financial institutions
which have received a short-term credit rating of "A-1" from Standard &
Poor's Corporation or "P-1" from Moody's Investor Services or have been
determined by the Adviser to have an equivalent credit rating. The staff of
the SEC currently takes the position that the amount of the Fund's
obligation pursuant to an OTC option is illiquid, and is subject to the
Income Fund's limitation on investing no more than 15% its assets in illiquid
instruments.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease
in the value of the underlying securities or instruments in its portfolio or
will increase the Fund's income. The sale of put options can also provide
income.
The Income Fund may purchase and sell call options on U.S. Treasury and
agency securities, foreign sovereign debt, mortgage-backed securities,
corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and related futures
on such securities other than futures on individual corporate debt and
individual equity securities. All calls sold by the Fund must be "covered"
or must meet the asset segregation requirements described below as long as
the call is outstanding (i.e., the Fund must own the securities or futures
contract subject to the call). Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security and may require
the Fund to hold a security which it might otherwise have sold.
The Income Fund may purchase and sell put options that relate to U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) or futures on such securities other than futures
on individual corporate debt and individual equity securities. The Fund will
not sell put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential obligations under
its hedging, duration management, risk management, and other Strategic
Transactions other than those with respect to futures and options thereon.
In selling put options, there is a risk that the Fund may be required to buy
the underlying security at a disadvantageous price above the market price.
General Characteristics of Futures - Income Fund
The Income Fund may purchase and sell financial futures contracts or
purchase put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar
to options on securities except that an option on a futures contract gives
the purchaser the right in return for the premium paid to assume a position
in a futures contract.
The Income Fund's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading
Commission and will be entered into only for bona fide hedging, risk
management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option
thereon requires the Fund to deposit with a financial intermediary as
security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 5% of the face amount of
the contract, but may be higher in some circumstances. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a
daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the
Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position will be offset
prior to settlement and that delivery will not occur.
The Income Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the Fund's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
the purchase, the segregation requirements with respect to futures and
options thereon are described below.
Options on Securities Indices and Other Financial Indices - Income Fund
The Income Fund also may purchase and sell call and put options on
securities indices and other financial indices and, in so doing can achieve
many of the same objectives it would achieve through the sale or purchase of
options on individual securities or other instruments. Options on securities
indices and other financial indices are similar to options on a security or
other instrument except that, rather than settling by physical delivery of
the underlying instrument, they settle by cash settlement (i.e., an option on
an index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an option on an index depends on price movements
in the instruments making up the market, market segment, industry or other
composite on which the underlying index is based rather than price movements
in individual securities, as is the case with respect to options on
securities.
Currency Transactions - Income Fund
The Income Fund may engage in currency transactions with Counterparties
in order to hedge the value of currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell ( with delivery generally required) 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. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below.
The Income Fund's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or
portfolio positions. Transactions hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund, which
will generally arise in connection with the purchase or sale of its portfolio
securities. Position hedging is entering into a currency transaction with
respect to portfolio security positions denominated or generally quoted in
that currency.
The Income Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended to
wholly or partially offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held
in its portfolio that are denominated or generally quoted in or currently
convertible into such currency other than with respect to proxy hedging as
described below.
The Income Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in
which the Fund expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Income Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to
which the Fund's portfolio is exposed is difficult to hedge or to hedge
against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency whose changes in value are generally considered to be
linked to a currency or currencies in which some or all of the Fund's
portfolio securities are or are expected to be denominated, and to buy U.S.
dollars. The amount of the contract would not exceed the value of the Fund's
securities denominated in linked currencies. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in Austrian schillings and
the Adviser believes that the value of schillings will decline against the
U.S. dollar, the Adviser may enter into a contract to sell D-marks and buy
dollars. Hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, there is the risk
that the perceived linkage between various currencies may not be present or
may not be present during the particular time that the Fund is engaging in
proxy hedging. If the Fund enters into a currency hedging transaction, the
Fund will comply with the asset segregation requirements described below.
Risks of Currency Transactions - Income Fund
Currency transactions are subject to risks different from other
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales
of currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions
imposed by governments. These can result in losses to the Income Fund if it
is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
ineffective, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur
at a bank based in the issuing nation. Trading options on currency futures
is relatively new, and the ability to establish and close out positions on
such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions - Income Fund
The Income Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and any combination of
futures, options and currency transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of
the Fund to do so. A combined transaction will usually contain elements of
risk that are present in each of its component transactions. Although
combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase such risks or hinder achievement
of the portfolio management objective.
Swaps, Caps, Floors and Collars - Income Fund
Among the Strategic Transactions into which the Income Fund may enter
are interest rate, currency and index swaps and the purchase or sale or
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a
later date. The Income Fund intends to use these transactions as hedges and
not as speculative investments and will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. An interest rate swap is an
agreement between two parties to exchange payments that are based on
specified interest rates and a notional amount. The exchange takes place
over a specified period of time. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the
relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. Although swaps can take a variety of forms, typically one
party pays fixed and receives floating rate payments and the other party
receives fixed and pays floating rate payments. An interest rate cap is an
agreement between two parties over a specified period of time where one party
makes payments to the other party equal to the difference between the current
level of an interest rate index and the level of the cap, if the specified
interest rate index increases above the level of the cap. An interest rate
floor is similar except the payments are the difference between the current
level of an interest rate index and the level of the floor if the specified
interest rate index decreases below the level of the floor. An interest rate
collar is the simultaneous execution of a cap and floor agreement on a
particular interest rate index. The purchase of a cap entitles the purchaser
to receive payments on a notional principal amount from the party selling
such cap to the extent that a specified index exceeds a predetermined
interest rate or amount. Purchase of a floor entitles the purchaser to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate or amount. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of interest rates or
values.
The Income Fund may enter into swaps, caps, floors or collars on either
an asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities, and will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors and collars are entered into
for good faith hedging purposes, the Adviser and the Fund believes such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing
restrictions. The Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the
unsecured long term debt rating of the Counterparty combined with any credit
enhancements, satisfies the credit criteria established by the Trustees. If
there is a default by the Counterparty, the Fund 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 agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments - Income Fund
The Income Fund 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 Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in the LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
Risks of Strategic Transactions Outside the United States - Income Fund
When constructed outside the United States, Strategic Transactions may
not be regulated as rigorously as in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions
also could be adversely affected by: (i) other complex foreign political,
legal and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
non-business 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) lower trading volume and liquidity.
Use of Segregated and Other Special Accounts - Income Fund
Some transactions which the Income Fund may enter into, including many
Strategic Transactions, require that the Income Fund segregate liquid high
grade debt assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Transactions which require segregation include
reverse repurchase agreements, dollar rolls, undertakings by the Fund to
purchase when-issued securities, the Fund's sales of put or call options, the
Fund's sales of futures contracts, currency hedging transactions (including
forward currency contracts, currency futures and currency swaps) and swaps,
floors and collars to the extent of the Fund's uncovered obligation under the
transaction. In general, either the full amount of any obligation by the
Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or an
amount of cash or liquid high grade debt securities at least equal to the
current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them.
For example, a call option written by the Fund will require the Fund to hold
the securities without additional consideration or to segregate liquid
high-grade assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require
the Fund to own portfolio securities which correlate with the index or to
segregate liquid high grade debt assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by
the Fund requires the Fund to segregate liquid, high grade assets equal to
the exercise price.
Except when the Income Fund enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Fund to buy
or sell currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Fund's obligations, or to segregate liquid high grade debt assets equal to
the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, OCC issued and exchange listed
index options, swaps, caps, floors and collars will generally provide for
cash settlement. As a result, with respect to these instruments the Fund
will only segregate an amount of assets equal to its accrued net obligations,
as there is no requirement for payment or delivery of amounts in excess of
the net amount. These amounts will equal 100% of the exercise price in the
case of a put, or the in-the-money amount in the case of a call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. Other OCC issued and exchange listed options sold by
the Fund, other than those above, generally settle with physical delivery,
and the Fund will segregate an amount of assets equal to the full value of
the option. OTC options settling with physical delivery, if any, will be
treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Income Fund
must deposit initial margin and possible daily variation margin in addition
to segregating assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such assets may consist of cash, cash
equivalents, or high grade liquid debt instruments.
With respect to swaps, the Income Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high
grade securities having a value equal to the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to the Fund's
net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if
the strike price of that option is the same or higher than the strike price
of a put option sold by the Fund. Moreover, instead of segregating assets if
the Fund held a futures or forward contract, it could purchase a put option
on the same futures or forward contract with a strike price as high or higher
than the price of the contract held. Other Strategic Transactions may also
be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required. If it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
The Income Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Taxes."
Foreign Securities - Income Fund
The Income Fund may invest in securities of foreign issuers. Investing
in foreign issuers involves certain special considerations, including those
set forth below, which are not typically associated with investing in United
States issuers. As foreign companies are not generally subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may
be less publicly available information about a foreign company than a
domestic company. Volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater
than in the United States. There is generally less government supervision
and regulation of brokers and listed companies than in the United States.
Mail service between the United States 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. Securities issued or guaranteed by foreign national
governments, their agencies, instrumentalities, or political subdivisions,
may or may not be supported by the full faith and credit and taxing power of
the foreign government. The Fund's ability and decisions to purchase and
sell portfolio securities may be affected by laws or regulations relating to
the convertability and repatriation of assets. Further, it may be more
difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect United States investments in those
countries. In addition, it may be more difficult to obtain and enforce a
judgment against a foreign issuer. Foreign securities may be subject to
foreign government taxes which will reduce the yield on such securities. A
shareholder of the Income Fund will not 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 Fund.
Trustees' Power to Change Objectives and Policies
Any objective and policies stated above may be changed by the Trustees
of the Trust without a vote of the shareholders, unless identified as a
fundamental objective or policy.
INVESTMENT LIMITATIONS
The following restrictions, if identified as "fundamental" with respect
to a Fund, may not be changed without approval of a majority of the
outstanding voting securities of the Fund which, under the 1940 Act and the
rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% of the shares of the Fund present at a meeting if
the holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (2) more than 50% of the outstanding shares
of the Fund. Any restriction, limitation or policy which is not identified
as fundamental may be changed by the Trustees.
Government Fund Investment Limitations
As a matter of fundamental investment policy, the Government Fund will
not:
(1) Invest more than 20% of the Fund's total assets in securities
other than obligations issued or guaranteed by the United States Government
or its agencies, instrumentalities and authorities, generally described (but
not limited) under the heading "Types of Obligations the Fund May Acquire",
and then only in the nongovernmental obligations described in the Prospectus;
(2) Purchase any security if, as a result, more than 5% of its total
assets would be invested in securities of any one issuer, excluding
obligations of, or guaranteed by, the United States government, its agencies,
instrumentalities and authorities;
(3) Borrow money, except (a) as a temporary measure, and then only
in amounts not exceeding 5% of the value of the Fund's total assets or (b)
from banks, provided that immediately after any such borrowing all borrowings
of the Fund do not exceed 10% of the Fund's total assets. The exceptions to
this restriction are not for investment leverage purposes but are solely for
extraordinary or emergency purchases or to facilitate management of the
Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments is deemed to be disadvantageous. The
Fund will not purchase securities while borrowings are outstanding. For
purposes of this restriction (i) the security arrangements described in
restriction (4) below will not be considered as borrowing money, and (ii)
reverse repurchase agreements will be considered as borrowing money;
(4) Mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. Arrangements to segregate assets with the Fund's
custodian with respect to when-issued and delayed delivery transactions, and
reverse repurchase agreements, and deposits made in connection with futures
contracts, will not be considered a mortgage, pledge or hypothecation of
assets;
(5) Underwrite any issue of securities, except to the extent that,
in connection with the disposition of portfolio securities, it may be deemed
to be an underwriter under federal securities laws;
(6) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in obligations of the U.S.
Government or its agencies, relating to real estate mortgages as described
generally under the heading "Types of Obligations the Fund May Acquire";
(7) Purchase or sell commodities or commodity futures contracts or
oil, gas or other mineral exploration or development programs. Investment in
futures contracts respecting securities and in options on these futures
contracts will not be considered investment in commodity futures contracts;
(8) Make loans, except through (a) the purchase of debt obligations
in accordance with the Fund's investment objectives and policies; (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions; and (c) loans of securities;
(9) Purchase any security on margin, except for such short-term
credits as are necessary for the clearance of transactions. For purposes of
this restriction, the Fund's entry into futures contracts will not be
considered the purchase of securities on margin;
(10) Make short sales of securities;
(11) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years excluding obligations of, or guaranteed
by, the United States government, its agencies, instrumentalities and
authorities;
(12) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933. The Fund has no present intention to purchase any
such restricted securities;
(13) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities or more than 10%
of any class of securities of any such issuer to be held by the Fund;
(14) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
(15) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a result,
more than 25% of the Fund's total assets would be invested in any one
industry;
(16) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those officers and
Trustees of the Fund, or those officers and directors of the Adviser, who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities;
(17) Enter into any reverse repurchase agreement if, as a result
thereof, more than 5% of its total assets would be subject to its obligations
under reverse purchase agreements at any time;
(18) Purchase or sell any futures contract if, as a result thereof,
the sum of the amount of margin deposits on the Fund's existing futures
positions and the amount of premiums paid for related options would exceed 5%
of the Fund's total assets;
(19) Purchase any put or call option not related to a futures
contract;
(20) Purchase the securities of any issuer if as a result more than
10% of the value of the Fund's net assets would be invested in securities
which are considered illiquid because they are subject to legal or
contractual restrictions on resale ("restricted securities") or because no
market quotations are readily available; or enter into a repurchase agreement
maturing in more than seven days, if as a result such repurchase agreements
together with restricted securities and securities for which there are no
readily available market quotations would constitute more than 10% of the
Fund's net assets; or
(21) Issue senior securities, as defined under the Investment
Company Act of 1940, except that the Fund may enter into repurchase
agreements and reverse repurchase agreements, lend its portfolio securities,
borrow, and enter into when-issued and delayed delivery transactions as
described above under "INVESTMENT OBJECTIVES AND POLICIES" and as limited by
the foregoing investment limitations.
Whenever an investment policy or restriction states a minimum or maximum
percentage of the Government Fund's assets which may be invested in any
security or other assets, it is intended that the minimum or maximum
percentage limitations will be determined immediately after and as a result
of the Fund's acquisition of the security or asset. Accordingly, any later
increase or decrease in the relative percentage of value represented by the
asset or security resulting from changes in asset values will not be
considered a violation of these restrictions.
Although the Government Fund has the right to pledge, mortgage or
hypothecate its assets subject to the restrictions described above, in order
to comply with certain state statutes on investment restrictions, the Fund
will not, as a matter of operating policy (which policy may be changed by the
Trustees without shareholder approval), mortgage, pledge or hypothecate its
portfolio securities to the extent that at any time the percentage of pledged
securities will exceed 10% of its total assets.
Income Fund Investment Limitations
As a matter of fundamental policy, the Income Fund may not:
(1) with respect to 75% of its total assets taken at market value,
purchase more than 10% of the voting securities of any one issuer or invest
more than 5% of the value of its total assets in the securities of any one
issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies;
(2) borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements; provided that the Fund maintains asset coverage of 300% for all
borrowings;
(3) purchase or sell real estate (except that the Fund 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 Fund
reserves freedom of action to hold and sell real estate acquired as a result
of the Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
(4) 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 Fund;
(5) make loans to any other person, except (a) loans of portfolio
securities, and (b) to the extent that 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;
(6) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for shares of the
separate classes of a fund or series of the Trust provided that collateral
arrangements with respect to currency-related contracts, futures contracts,
options, or other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of senior securities
for purposes of this restriction;
(7) 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 or 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 the parents).
As a matter of nonfundamental policy the Income Fund may not:
(a) purchase or retain securities of any open-end investment
company, or securities of any closed-end investment company except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchases, or except when such purchase, though not
made in the open market, is part of a plan of merger, consolidation,
reorganization or acquisition of assets. The Fund will not acquire any
security issued by another investment company ( the "acquired company") if
the Fund thereby would own (i) more than 3% of the total outstanding voting
securities of the acquired company, or (ii) securities issued by the acquired
company having an aggregate value exceeding 5% of the Fund's total assets, or
(iii) securities issued by investment companies having an aggregate value
exceeding 10% of the Fund's total assets;
(b) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Fund or a member, officer, director or trustee of the investment adviser
of the Fund if one or more of such individuals owns beneficially more than
one-half of one percent (1/2%) of the outstanding shares or securities or
both (taken at market value) of such issuer and such shares or securities
together own beneficially more than 5% of such shares or securities or both;
(d) purchase securities on margin or make short sales, 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 Fund may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities;
(e) invest more than 15% of its net assets in the aggregate in
securities which are not readily marketable, the disposition of which is
restricted under Federal securities laws, and in repurchase agreements not
terminable within 7 days provided the Fund will not invest more than 5% of
its total assets in restricted securities;
(f) purchase securities of any issuers with a record of less than
three years of continuous operations, including predecessors, except U.S.
Government securities, securities of such issuers which are rated by at least
one nationally recognized statistical rating organization, municipal
obligations and obligations issued or guaranteed by any foreign government or
its agencies or instrumentalities, if such purchase would cause the
investments of the Fund in all such issuers to exceed 5% of the total assets
of the Fund taken at market value;
(g) purchase more than 10% of the voting securities of any one
issuer, except securities issued by the U.S. Government, its agencies or
instrumentalities;
(h) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the fund at any time do
not exceed 20% of its net assets; or sell put options in securities if, as a
result, the aggregate value of the obligations underlying such put options
would exceed 50% of the Fund's net assets;
(i) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial margin
with respect to all futures contracts entered into on behalf of the Fund and
the premiums paid for options on futures contracts does not exceed 5% of the
fair market value of the Fund'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;
(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own or invest
in such interests);
(k) borrow money except as a temporary measure, and then not in
excess of 5% of its total assets (taken at market value) unless the borrowing
is from banks, in which case the percentage limitation is 10%; reverse
repurchase agreements and dollar rolls will be considered borrowings for this
purpose, and will be further subject to total asset coverage of 300% for such
agreements;
(l) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of the Fund's
total net assets or more than 2% of its net assets in warrants that are not
listed on the New York or American Stock Exchanges or on an exchange with
comparable listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value); or
(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund'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 Fund has no current intention of making loans of
portfolio securities that would amount to greater than 5% of the Fund's total
assets;
(n) purchase or sell real estate limited partnership interests.
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 Income Fund's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
YIELD AND RETURN COMPUTATION
Performance and Portfolio Information
The yield and return of a Fund or any Fund class may, from time to time,
be quoted in reports, sales literature and advertisements published by the
Fund, the Distributor, or investment dealers offering the Fund. Any such
quotation must include a standardized calculation which computes yield for a
30-day or one month period by dividing net investment income per share
during the period by the maximum offering price on the last day of the
period. The standardized calculation will include the effect of semiannual
compounding and will reflect amortization of premiums for those bonds which
have a market value in excess of par. New schedules based on market value
will be computed each month for amortizing premiums. With respect to
mortgage-backed securities or other receivables-backed obligations, the Fund
will amortize the discount on premium on the outstanding principal balance,
based upon the cost of the security, over the remaining term of the security.
Gains or losses attributable to actual monthly paydowns on mortgage-backed
obligations will be reflected as increases or decreases to interest income
during the period when such gains or losses are realized. Provided that any
such quotation is also accompanied by the standardized calculation referred
to above, a Fund may also quote non-standardized performance data for a
specified period by dividing the net investment income per share for that
period by either the Fund's average public offering price per share for that
same period or the offering price per share on the first or last day of the
period, and multiplying the result by 365 divided by the number of days in
the specified period. For purposes of this non-standardized calculation, net
investment income will include accrued interest income plus or minus any
amortized purchase discount or premium less all accrued expenses. The
primary differences between the results obtained using the standardized
performance measure and any non-standardized performance measure will be
caused by the following factors: (1) The non-standardized calculation may
cover periods other than the 30-day or one month period required by the
standardized calculation; (2) The non-standardized calculation may reflect
amortization of premium based upon historical cost rather than market value;
(3) The non-standardized calculation may reflect the average offering price
per share for the period or the beginning offering price per share for the
period, whereas the standardized calculation always will reflect the maximum
offering price per share on the last day of the period; (4) The
non-standardized calculation may reflect an offering price per share other
than the maximum offering price, provided that any time the Fund's return is
quoted in reports, sales literature or advertisements using a public offering
price which is less than the Fund's maximum public offering price, the return
computed by using the Fund's maximum public offering price also will be
quoted in the same price; (5) The non-standardized return quotation may
include the effective return obtained by compounding the monthly dividends.
Any performance quotation also must include average annual total return
quotation for the one, 5 and 10 year period ended on the date of the most
recent balance sheet included in the registration statement, computed by
finding the average annual compounded rates of return over such periods that
would equate the initial amount invested at the maximum public offering price
to the ending redeemable value. To the extent that a Fund has been in
operation less than one, 5 or 10 years, the time period during which the fund
has been in operation will be substituted for any one, 5 or 10 year period
for which a total return quotation is not obtainable.
Any quoted performance should not be considered a representation of the
performance in the future since the performance is not fixed. Actual
performance will depend not only the type, quality and maturities of the
investments held by the Fund and changes in interest rates on such
investments, but also on changes in the Fund's expenses during the period.
In addition, a change in the Fund's net asset value will affect its
performance.
From time to time, in advertisements and other types of literature, the
performance of a Fund may be compared to other groups of mutual funds. This
comparative performance may be expressed as a ranking prepared by Lipper
Analytical Services, Inc. or other widely recognized independent services
which monitor the performance of mutual funds. These performance analyses
ordinarily will include the reinvestment of dividends and capital gains
distributions, but do not take sales charges into consideration and are
prepared without regard to tax consequences. Performance rankings and
ratings reported periodically in national financial publications such as
MONEY magazine, FORBES and BARRON's also may be used.
A Fund also may illustrate performance or the characteristics of its
investment portfolio through graphs, tabular data or other displays which
describe (i) the average portfolio maturity of the Fund's portfolio
securities relative to the maturities of other investments, (ii) the
relationship of yield and maturity of the Fund to the yield and maturity of
other investments (either as a comparison or through use of standard bench
marks or indices such as the Treasury yield curve), (iii) changes in the
Fund's share price or net asset value in some cases relative to changes in
the value of other investments, and (iv) the relationship over time of
changes in the Fund's (or other investments') net asset value or price and
the Fund's (or other investments') investment return.
Yield and return information may be used in reviewing the performance of
the Fund's investments and for providing a basis for comparison with other
investment alternatives. However, each Fund's return fluctuates, unlike
certain bank deposits or other investments which pay a fixed return for a
stated period of time.
REPRESENTATIVE PERFORMANCE INFORMATION
GOVERNMENT FUND (Classes A and C)
THE FOLLOWING DATA FOR THE GOVERNMENT FUND REPRESENT PAST PERFORMANCE,
AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN A FUND WILL
FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
Yield Computations
Standardized Method of Computing Yield. The Government Fund's yields
for Class A shares and Class C shares, computed for the one-month period
ended September 30, 1995 in accordance with the standardized calculation
described above, were 5.38% and 5.60% for Class A shares and Class C shares,
respectively. This method of computing performance does not take into
account changes in net asset value.
Non-standardized Method of Computing Yield. The Government Fund's
yields for Class A shares and Class C shares, computed for the 7-day period
ended September 30, 1995 in accordance with a non-standardized method, were
5.98% and 5.64% for Class A shares and Class C shares, respectively. This
non-standardized method of computation differs from the standardized method
of computing yield in that the non-standardized yield is computed for a 7-day
period rather than a 30-day or one-month period, the yield reflects
amortization of premium based upon historical cost rather than market value,
and the non-standardized yield is computed by compounding dividends monthly
rather than semiannually. This method of computing performance does not take
into account changes in net asset value.
AVERAGE ANNUAL TOTAL RETURN
The Government Fund's total returns for Class A shares and Class C
shares, computed in accordance with the total return calculation described
above are displayed in the table below for the periods shown ending
September 30, 1995. The Government Fund commenced sales of its Class A
shares on November 6, 1987, and commenced sales of Class C shares on
September 1, 1994. "Total return," unlike the standardized yield and
non-standardized yield figures shown above, takes into account changes in net
asset value over the described periods. The Class A total return figures
assume the deduction of the maximum sales commission of 2.50% on Class A
shares. The Class C data relate to Class C shares sold before October 2,
1995. Class C shares sold on or after October 2, 1995 are subject to a
contingent deferred sales charge of .50% if redeemed within one year of
purchase. These data also assume and reinvestment of all dividends at net
asset value.
1 Year 5 Years 10 Years Since Inception
Class A 6.92% ____% N/A 7.25% (11/6/87)
Class C 9.07% N/A N/A 7.87% (09/1/94)
Total return figures are average annual total returns for the periods shown.
INCOME FUND (Classes A and C)
THE FOLLOWING DATA FOR THE INCOME FUND REPRESENT PAST PERFORMANCE, AND
THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN A FUND WILL
FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
Yield Computations
Standardized Method of Computing Yield. The Income Fund's yields for
Class A shares and Class C shares, computed for the one-month period ended
September 30, 1995 in accordance with the standardized calculation described
above, were 6.32% and 6.00% for Class A shares and Class C shares,
respectively. This method of computing performance does not take into
account changes in net asset value.
Non-standardized Method of Computing Yield. The Income Fund's yields
for Class A shares and Class C shares, computed for the 7-day period ended
September 30, 1995 in accordance with its non-standardized method, were 6.29%
and 5.95% for Class A shares and Class C shares, respectively. This
non-standardized method of computation differs from the standardized method
of computing yield in that the non-standardized yield is computed for a 7-day
period rather than a 30-day or one-month period, the yield reflects
amortization of premium based upon historical cost rather than market value,
and the non-standardized yield is computed by compounding dividends monthly
rather than semiannually. This method of computing performance does not take
into account changes in net asset value.
AVERAGE ANNUAL TOTAL RETURN
The Income Fund's total returns for Class A shares and Class C shares,
computed in accordance with the total return calculation described above are
displayed in the table below for the periods shown ending September 30, 1995.
The Income Fund commenced sales of its Class A shares on October 1, 1992, and
commenced sales of Class C shares on September 1, 1994. "Total return,"
unlike the standardized yield and non-standardized yield figures shown above,
takes into account changes in net asset value over the described periods.
The Class A total return figures assume the deduction of the maximum sales
commission of 2.50% on Class A shares. The Class C data relate to Class C
shares sold before October 2, 1995. Class C shares sold on or after October
2, 1995 are subject to a contingent deferred sales charge of .50% if redeemed
within one year of purchase. These data also assume reinvestment of all
dividends at net asset value.
1 Year 5 Years 10 Years Since Inception
Class A 6.49% N/A N/A 5.16% (10/1/92)
Class C 8.87 N/A N/A 7.47% (09/1/94)
Total return figures are average annual total returns for the periods shown.
DISTRIBUTIONS, TAXES AND SHAREHOLDER ACCOUNTS
Distributions
All of the net income of each Fund is declared daily as a dividend on
shares for which the Fund has received payment. Net income of each Fund
consists of all interest income accrued on that Fund's portfolio assets less
all expenses of the Fund. Expenses of each Fund are accrued each day.
Dividends are paid monthly and are reinvested in additional shares of the
Fund at the net asset value per share at the close of business on the
dividend payment date, or at the shareholder's option, paid in cash. Net
realized capital gains, if any, will be distributed annually and reinvested
in additional shares of each Fund at the net asset value per share at the
close of business on the distribution date, or at the shareholder's option,
paid in cash.
Federal Income Tax Considerations
Each Fund has elected and intends to qualify for treatment as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986 (the "Code"). Distributions representing net interest and net
short-term capital gains will be taxable as ordinary income to the recipient
shareholders, whether the distributions are actually taken in cash or are
reinvested by the recipient shareholders in additional shares. Fund
distributions will not be eligible for the dividends received deduction for
corporations. Distributions of net long-term capital gains, if any, will be
treated as long-term capital gains to the distributee shareholders, whether
the distributions are actually taken as cash or are reinvested by the
recipient shareholders in additional shares.
Redemption or resale of shares will be a taxable transaction for federal
income tax purposes and the shareholder will recognize gain or loss in an
amount equal to the difference between the shareholder's basis in the shares
and the amount realized by the shareholder on the redemption or resale.
Assuming that the shareholder holds the shares as a capital asset, the gain
or loss will be a capital gain or loss and will be long-term if the shares
were held for more than six months. Effective for sales charges incurred
after October 3, 1989 if the shareholder disposes of shares within 90 days
after purchasing them, and later acquires shares for which the sales charge
is eliminated or reduced pursuant to a reinvestment right, then the original
sales charge to the extent of the reduction is not included in the basis of
the shares sold for determining gain or loss. Instead, the reduction is
included in determining the basis of the reinvested shares.
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should distributions reduce the net asset value below
a shareholder's cost basis, such distribution would nevertheless be taxable
to the shareholder as ordinary income or capital gain as described above,
even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax
implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then
receive a partial return of capital upon the distribution, which will
nevertheless be taxable to them.
If a Fund holds zero coupon securities or other securities which are
issued at discount, a portion of the difference between the issue price and
the face amount of zero coupon securities ("original issue discount") will be
treated as ordinary income if the Fund holds securities with original issue
discount each year, although no current payments will be received by the Fund
with respect to that income. This original issue discount will comprise a
part of that investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain its qualification as a
regulated investment company and to avoid federal income tax on the Fund.
Taxable shareholders of the Fund will be subject to income tax on original
issue discount, whether or not they elect to receive their distributions in
cash.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a mutual fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on a disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts
and options, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Income Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.
The Code imposes a nondeductible 4% excise tax on regulated investment
companies which do not distribute to shareholders by the end of each calendar
year the sum of (i) 98% of the company's net ordinary income realized in the
year, (ii) 98% of the company's net capital gain income for the 12-month
period ending on October 31 of that year, and (iii) the excess of (A) the sum
of the amounts in (i) and (ii) for the prior calendar year plus all amounts
from earlier years which are not treated as having been distributed under
this provision, over (B) actual distributions for the preceding calendar
years. The effect of this excise tax will be to cause each Fund to
distribute substantially all of its income during the calendar year in which
the income is earned. Shareholders will be taxed on the full amount of the
distribution declared by their Fund for each such year, including declared
distributions not actually paid until January 31 of the next calendar year.
Each shareholder will be notified annually by their Fund as to the
amount and characterization of distributions paid to or reinvested by the
shareholder for the preceding taxable year. The Fund may be required to
withhold federal income tax at a rate of 31% from distributions otherwise
payable to a shareholder if (i) the shareholder has failed to furnish the
Fund with his taxpayer identification number, (ii) the Fund is notified that
the shareholder's number is incorrect, (iii) the Internal Revenue Service
notifies the Fund that the shareholder has failed properly to report certain
income, or (iv) when required to do so, the shareholder fails to certify
under penalty of perjury that he is not subject to this withholding.
If in any year the Fund fails to qualify for the treatment conferred by
Subchapter M of the Code, the Fund would be taxed as a corporation on its
income. Distributions to the shareholders would be treated as ordinary
income to the extent of the Fund's earnings and profits, and would be treated
as nontaxable returns of capital to the extent of the shareholders'
respective bases in their shares. Further distributions would be treated as
amounts received on a sale or exchange or property. Additionally, if in any
year the Fund qualified as a regulated investment company but failed to
distribute all of its net income, the Fund would be taxable on the
undistributed portion of its net income. Although the Fund intends to
distribute all of its net income currently, it could have undistributed net
income if, for example, expenses of the Fund were reduced or disallowed on
audit.
The foregoing is a general and abbreviated summary of the provisions of
the Internal Revenue Code and Treasury Regulations presently in effect as
they directly govern the taxation of the Fund and its shareholders. For
complete provisions, reference should be made to the pertinent Code sections
and Treasury Regulations. The Code and Treasury Regulations are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Shareholders are advised to
consult their own tax advisers for more detailed information concerning the
federal and state taxation of the Fund and the income tax consequences to its
shareholders.
State and Local Income Tax Considerations
Each Fund is a series of Thornburg Investment Trust, which is organized
as a Massachusetts business trust. Under current Massachusetts law, the
Trust is not subject to Massachusetts income taxation during any fiscal year
in which the Fund qualifies as a regulated investment company. The income
tax treatment of the shareholders in the respective states will depend upon
the specific laws applicable in those states, and prospective investors are
urged to confer with their own tax advisers concerning their particular
situations.
Accounts of Shareholders
When an investor makes an initial investment in shares of a Fund, the
Transfer Agent will open an account on the books of the Fund, and the
investor will receive a confirmation of the opening of the account.
Thereafter, whenever a transaction, other than the reinvestment of interest
income, takes place in the account--such as a purchase of additional shares
or redemption of shares or a withdrawal of shares represented by
certificates--the investor will receive a confirmation statement giving
complete details of the transaction. Shareholders also will receive at least
quarterly statements setting forth all distributions of interest income and
other transactions in the account during the period and the balance of full
and fractional shares. The final statement for the year will provide
information for income tax purposes.
The monthly distributions of interest income, net of expenses, and the
annual distributions of net realized capital gains, if any, will be credited
to the accounts of shareholders in full and fractional shares of the Fund at
net asset value on the payment or distribution date, as the case may be.
Upon written notice to the Transfer Agent, a shareholder may elect to receive
monthly distributions of net interest income in cash. Such an election will
remain in effect until changed by written notice to the Transfer Agent, which
change may be made at any time in the sole discretion of the shareholder.
The issuance and delivery of certificates for shares is not required,
and shareholders may be relieved of the responsibility of safekeeping. Upon
written request to the Transfer Agent, a certificate will be issued for any
or all of the full shares credited to a shareholder's account, unless the
shareholder has elected the Fund's telephone redemption or systematic
withdrawal features, which are described in the Prospectus. Certificates
which have been issued to a shareholder may be returned at any time for
credit to his or her account. Shares so held will be redeemed as described
in the Prospectus under the caption "How to Redeem Fund Shares".
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT
General
Pursuant to the investment Advisory Agreement, Thornburg Management
Company, Inc., 119 East Marcy Street, Suite 202, Santa Fe, New Mexico 87501
("TMC"), will act as the investment adviser for, and will manage the
investment and reinvestment of the assets of, the Funds in accordance with
the Funds' respective investment objectives and policies, subject to the
general supervision and control of the Fund's Trustees.
TMC is investment adviser for Thornburg Limited Term Municipal Fund
National Portfolio and Thornburg Limited Term Municipal Fund California
Portfolio, which are fund series issued by Thornburg Limited Term Municipal
Fund, Inc. TMC also is investment adviser for Thornburg Intermediate
Municipal Fund, Thornburg New Mexico Intermediate Municipal Fund and
Thornburg Florida Intermediate Municipal Fund, series of Thornburg Investment
Trust which have aggregate net assets of approximately $383,336,000 as of
September 30, 1995. TMC is a sub-adviser for Daily Tax-Free Income Fund,
Inc., a registered investment company.
TMC will provide continuous professional investment supervision. In
addition to managing each Fund's investments, TMC will administer the Funds'
business affairs, provide office facilities and certain clerical, bookkeeping
and administrative services. Pursuant to the Investment Advisory Agreements,
the Funds will pay to TMC a monthly management fee at the annual rates
described in the table set forth below. The Income Fund also will pay
applicable sales tax, gross receipts tax or similar impositions thereon. All
fees and expenses are accrued daily and deducted before payment of dividends
to investors.
Net Assets Annual Rate
Government Fund 0 to $1 billion 0.50%
$1 billion to $2 billion 0.45%
over $2 billion 0.40%
Income Fund 0 to $500 million 0.625%
$500 million to $1 billion 0.575%
$1 billion to $1.5 billion 0.525%
$1.5 billion to $2 billion 0.475%
over $2 billion 0.400%
In addition to the fees of TMC, each Fund will pay all other costs and
expenses of its operations, as described in the Prospectus under the caption
"MANAGEMENT OF THE FUND-Expenses". Each Fund also will bear the expenses of
registering and qualifying the Fund and the shares for distribution under
federal and state securities laws, including legal fees. The management fee
will be reduced, or TMC will assume certain Fund expenses, in an amount
necessary to prevent each Fund's total expenses (including TMC's fee, but
excluding interest, taxes, brokerage and other amounts to the extent
permitted by applicable rules) from exceeding applicable State limitations on
expenses. Currently, the Trust believes the most restrictive expense ratio
limitation is 2% of the first $10 million in assets, 1.5% of the next $20
million, and 1% of assets in excess of $30 million.
Each Fund may pay up to 1/4 of 1% of its assets to TMC to reimburse it
for particular expenditures incurred by it in connection with certain
shareholder services and the distribution of the Fund's shares to investors.
The terms and conditions relating to these payments are described in detail
below under the heading "SERVICE AND DISTRIBUTION PLANS".
The Investment Advisory Agreement for each Fund has been approved by the
Trustees of the Funds, including a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Fund or TMC. Each
Agreement may be extended for successive 12-month periods, provided that the
continuation is approved at least annually by the Trustees, and by a majority
of the Trustees who are not "interested" within the meaning of the Investment
Company Act of 1940 or by a vote of the majority of the Fund's shares then
outstanding. The Agreement may be terminated by either party, at any time
without penalty, upon 60 days' written notice, and will terminate
automatically in the event of its assignment. Termination will not affect
the right of TMC to receive payments on any unpaid balance of the
compensation earned prior to termination. The Agreement further provides
that in the absence of willful misfeasance, bad faith or gross negligence on
the part of TMC, or of reckless disregard of its obligations and duties under
the Agreement, TMC will not be liable for any action or failure to act in
accordance with its duties thereunder.
For the three most recent fiscal periods ended September 30, 1993, 1994
and 1995 with respect to each Fund, the amounts paid to TMC by each Fund were
as follows:
1993 1994 1995
---- ---- ----
Government Fund $808,403 $977,258 $735,085
Income Fund N/A -0- $ 0
TMC has waived its rights to fees in the foregoing periods as follows:
1993 1994 1995
---- ---- ----
Government Fund -0- -0- $ 24,278
Income Fund $58,431 $135,344 $163,741
TMC may, (but is not obligated to) waive its rights to any portion of its
fees in the future, and may use any portion of its fee for purposes of
shareholder and administrative services and distribution of Fund shares.
During the fiscal year ended September 30, 1995, the Government Fund
reimbursed TMC in the amount of $15,637 for certain accounting expenses
incurred by TMC on behalf of that Fund.
H. Garrett Thornburg, Jr., President and a Trustee of the Fund, is also
Director and controlling stockholder of TMC.
SERVICE AND DISTRIBUTION PLANS
Service Plans - All Classes
Each of the Funds have adopted a plan and agreement of distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Service
Plan") which is applicable to Class A and Class C shares of each Fund. The
Plan permits each Fund to pay to TMC (in addition to the management fee and
reimbursements described above) an annual amount not exceeding .25 of 1% of
the Fund's assets to reimburse TMC for specific expenses incurred by it in
connection with certain shareholder services and the distribution of that
Fund's shares to investors. TMC may, but is not required to, expend
additional amounts from its own resources in excess of the currently
reimbursable amount of expenses. Reimbursable expenses include the payment
of amounts, including incentive compensation , to securities dealers and
other financial institutions, including banks (to the extent permissible
under the Glass-Steagall Act and other federal banking laws), for
administration and delivery of shareholder services. The nature and scope of
services provided by dealers and other entities likely will vary from entity
to entity, but may include, among other things, processing new account
applications, preparing and transmitting to the Transfer Agent computer
processable tapes of shareholder account transactions, and serving as a
source of information to customers concerning the Funds and transactions with
the Funds. The Service Plan does not provide for accrued but unpaid
reimbursements to be carried over and reimbursed to TMC in later years.
The Funds paid to TMC the amounts shown in the table below under the
Service Plan for the fiscal year ended September 30, 1995. All amounts
received by TMC under the Plan were paid principally as compensation to
securities dealers and other persons selling the Funds' shares for
administration and shareholder services referred to in the preceding
paragraph.
Class A Class C
------- -------
Government Fund $345,423 $ 3,739
Income Fund $ 52,571 $ 1,092
Class C Distribution Plan
Each Fund has adopted a plan and agreement of distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940, applicable only to the
Class C shares of that Fund ("Class C Distribution Plan"). The Class C
Distribution Plan provides for the Fund's payment to the Fund's principal
underwriter, Thornburg Securities Corporation ("TSC") on a monthly basis of
an annual distribution fee of .75% of the average daily net assets
attributable to the Fund's Class C shares.
The purpose of the Class C Distribution Plan is to compensate TSC for
its services in promoting the sale of Class C shares of the Fund. TSC
expects to pay compensation to dealers and others selling Class C shares from
amounts it receives under the Class C Distribution Plan. TSC also may incur
additional distribution-related expenses in connection with its promotion of
Class C shares sales, including payment of additional incentives to dealers,
advertising and other promotional activities and the hiring of other persons
to promote the sale of shares. Because the Class C Distribution Plan is a
compensation type plan, TSC can earn a profit on any year when Fund payments
exceed TSC's actual expenses. The Funds are not liable for any expenses
incurred by TSC in excess of the compensation it received from the Fund.
The Funds paid to TSC $7,479 (Government Fund) and $2,184 (Income Fund)
under the Class C Distribution Plan for the fiscal year ended September 30,
1995. Amounts received by TSC under the Class C Distribution Plan were paid
principally as compensation to securities dealers and other persons selling
the Funds' shares.
The Glass-Steagall Act prohibits certain banks from underwriting mutual
fund shares, but the Funds do not believe that this prohibition will apply to
the arrangements described in the Plans. However, no assurance can be given
that the Glass-Steagall Act will not be interpreted so as to prohibit these
arrangements. In that event, the Funds' ability to market their shares could
be impaired to a small extent. The Funds do not foresee that they will give
preference to banks or other depository institutions which receive payments
from TMC or TSC when selecting investments for the Funds.
Each Plan continues in effect for periods of 12 months each unless
terminated pursuant to its terms and may be continued from year to year
thereafter, provided that the continuance is approved at lease annually by a
vote of a majority of the Trustees, including a majority of the independent
Trustees cast in person at a meeting called for the purpose of voting on such
continuance. Each Plan also may be terminated at any time, without penalty,
if a majority of the independent Trustees or shareholders of a Fund class
vote to terminate the Plan for that class. So long as a Plan is in effect,
the selection and nomination of Trustees who are not "interested persons" of
a Fund shall be committed to the discretion of the Trustees who are not
"interested persons." The Plans may not be amended to increase materially
the amount of a Fund's payments thereunder without approval of the
shareholders of the affected classes. Under each Plan, the other party, or
the Funds, by a vote of a majority of the independent Trustees or of the
holders of a majority of the outstanding shares, may terminate the provisions
retaining the services of the other party under the Plan, without penalty.
The Trustees have the authority to approve continuance of the Plan without
similarly approving a continuance of the provisions retaining TMC or TSC
thereunder.
To the extent that a Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it will remain in effect as such,
so as to authorize the use of the Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment,
as defined by the 1940 Act and the rules thereunder. To the extent it
constitutes an agreement pursuant to a plan, it will terminate automatically
in the event of an "assignment." Upon termination, no further payments may
be made under the agreement except for amounts previously accrued by unpaid.
The Funds may continue to make payments pursuant to the Plan of the amounts
authorized to be paid, which may or may not be to TMC or TSC, as the case may
be, or the adoption of other similar arrangements, in each case by the Funds'
Trustees, including a majority of the independent Trustees by vote cast in
person at a meeting called for that purpose.
Information regarding the services rendered under the Plans and the
amounts paid therefor is provided to, and reviewed by, the Trustees on a
quarterly basis. In their quarterly review, the Trustees consider the
continued appropriateness of the Plans and the level of compensation provided
therein.
PORTFOLIO TRANSACTIONS
TMC, in effecting purchases and sales of portfolio securities for the
account of the Funds, will place orders in such manner as, in the opinion of
TMC, will offer the best price and market for the execution of each
transaction. Portfolio securities normally will be purchased directly from
an underwriter or in the over-the-counter market from the principal dealers
in such securities, unless it appears that a better price of execution may be
obtained elsewhere. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include the spread between the bid and asked price. Given the best
price and execution obtainable, it will be the practice of the Funds to
select dealers which, in addition, furnish research information including
credit analyses of issuers and statistical and other services to TMC. It is
not possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to TMC's own
research efforts, the receipt of research information is not expected
significantly to reduce TMC's expenses. In selecting among the firms
believed to meet the criteria for handling a particular transaction, TMC also
may give consideration to those firms which have sold or are selling shares
of the Funds. While TMC will be primarily responsible for the placement of
the Funds' business, the policies and practices of TMC in this regard must be
consistent with the foregoing and will at all times be subject to review by
the Trustees of the Funds.
TMC reserves the right to manage other investment companies and
investment accounts for other clients which may have investment objectives
similar to those of the Funds. Subject to applicable laws and regulations,
TMC will attempt to allocate equitably portfolio transactions among the Funds
and the portfolios of its other clients purchasing securities whenever
decisions are made to purchase or sell securities by a Fund and one or more
of such other clients simultaneously. In making such allocations the main
factors to be considered will be the respective investment objectives of the
Fund and such other clients, the size of investment commitments generally
held by the Fund and such other clients and opinions of the persons
responsible for recommending investments to the Fund and such other clients.
While this procedure could have a detrimental effect on the price or amount
of the securities available to the Fund from time to time, it is the opinion
of the Funds' Trustees that the benefits available from TMC's organization
will outweigh any disadvantage that may arise from exposure to simultaneous
transactions. The Funds' Trustees will review simultaneous transactions.
The Funds' portfolio turnover rates for the two most recent fiscal years
are as follows:
1994 1995
---- ----
Government Fund 78.62% 28.31%
Income Fund 83.96% 43.12%
MANAGEMENT AND HOLDERS OF SECURITIES
The management of the Funds, including general supervision of the duties
performed by TMC under the Investment Advisory Agreements, is the
responsibility of the Trustees of the Trust. There are four Trustees, one of
whom is an "interested person". The names of the Trustees and officers of
the Funds and their principal occupations and other affiliations during the
past five years are set forth below, with the Trustee who is an "interested
person" of the Fund indicated by an asterisk:
* H. GARRETT THORNBURG, JR., 49, Trustee, President: Director, Chairman
(since January of 1987) and Treasurer of Thornburg Limited Term Municipal
Fund, Inc. (a mutual fund investing in certain municipal securities) since
its inception in 1984; Chairman and Director of Thornburg Mortgage Advisory
Corporation since its formation in 1989; Chairman and Director of Thornburg
Mortgage Asset Corporation (real estate investment trust) since its formation
in 1993; Executive Vice President of Daily Tax Free Income Fund, Inc. (mutual
fund) since its formation in 1982 and a Director from 1982 to June 1993;
President and Director of TMC since its formation in 1982.
DAVID A. ATER, 49, Trustee: Principal in Ater & Ater Associates, Santa
Fe, New Mexico (developer, planner and broker of residential and commercial
real estate) since 1990; owner, developer and broker for various real estate
projects; Director of Thornburg Mortgage Asset Corporation (real estate
investment trust) since 1994.
J. BURCHENAL AULT, 69, Trustee: Independent Fund Raising Counsel, May
1986 to Present; Trustee, Woodrow Wilson International Center for Scholars;
Provost, St. John's College, Santa Fe, New Mexico, from 1986 through May
1991; Director of Thornburg Limited Term Municipal Fund, Inc. since its
formation in 1984; Director of Farrar, Strauss & Giroux, (publishers) since
1968.
FORREST S. SMITH, 64, Trustee: Attorney in private practice, Santa Fe,
New Mexico; shareholder, Catron, Catron & Sawtell (law firm), Santa Fe, New
Mexico, 1988 to present.
BRIAN J. MCMAHON, 40, Vice President, Assistant Secretary: President
(since January 1987), Thornburg Limited Term Municipal Fund, Inc., and Vice
President since its formation in 1984; Managing Director of TMC since
December 1985 and a Vice President since April 1984.
STEVEN J. BOHLIN, 36, Vice President and Treasurer: Vice President of
Thornburg Limited Term Municipal Fund, Inc. since November 1988 and Assistant
Vice President from 1985 to November 1988; Managing Director of TMC since
December 1990 and a Vice President since December 1988.
DAWN B. SHAPLAND, 48, Secretary and Assistant Treasurer: Secretary,
Thornburg Limited Term Municipal Fund, Inc. since its formation in 1984; Vice
President, Daily Tax Free Income Fund, Inc. since 1989. Managing Director of
TMC since 1985 and a Vice President since January 1984.
WILLIAM FRIES, 56, Vice President: Managing Director of TMC since May
1995 and Vice President of Thornburg Limited Term Municipal Fund, Inc. since
June 1995; Vice President of USAA Investment Management Company from 1982 to
1995.
KEN ZIESENHEIM, 41, Vice President: Managing Director of TMC since 1995
and Vice President of Thornburg Limited Term Municipal Fund, Inc. since 1995;
Senior Vice President of Financial Services, Raymond James & Associates, Inc.
from 1991 to 1995.
JOHN ARIOLA, 26, Assistant Vice President: Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Accountant,
Thornburg Investment Trust and Thornburg Limited Term Municipal Fund, Inc.
since June 1991; Associate of TMC since 1992; Staff Auditor, Inventory
Auditors, Albuquerque, New Mexico, June 1987 to June 1991.
SUSAN ROSSI, 34, Assistant Vice President: Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Associate of TMC
since June 1990.
GEORGE STRICKLAND, 32, Assistant Vice President: Assistant Vice
President of Thornburg Limited Term Municipal Fund, Inc. since July 1992;
Associate of TMC since July 1991; Investor Representative, Calvert Group,
Washington, D.C., 1989 to 1991.
JONATHAN ULLRICH, 26, Assistant Vice President: Assistant Vice
President of Thornburg Limited Term Municipal Fund, Inc. since July 1992;
Associate of TMC since September 1991; Student, Brown University, 1987 to
1991.
CHRISTINE E. THOMPSON, 29, Assistant Vice President: Assistant Vice
President of Thornburg Limited Term Municipal fund, Inc. since June 1993;
Associate of TMC since June 1992; Office Manager Town and Country Janitorial
Services, Inc., Greenland, N.H., September 1991 to February 1992; Salesperson
and later Department Manager, The Harvard Cooperative society, Cambridge,
Massachusetts, May 1990 to September 1991.
The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director and the
President of TSC, Executive Vice President of Daily Tax-Free Income Fund,
Inc., and a Chairman and Treasurer of Thornburg Limited Term Municipal Fund,
Inc.
The officers and Trustees affiliated with TMC will serve without any
compensation from the Funds. The Trust pays each Trustee who is not an
employee of TMC or an affiliated company a fee of $1,000 for each meeting of
the Trustees attended by the Trustee, pays an annual stipend of $1,000 to
each Trustee who serves on the Trust's audit committee, and reimburses all
Trustees for travel and out-of-pocket expenses incurred in connection with
attending such meetings.
As of November 1, 1995, the Government Fund had 11,706,260 shares
outstanding, and the Income Fund had 2,010,655 shares outstanding.
As of November 1, 1995, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the Funds:
Name Fund No. of Shares % of Fund
- ------------------ --------------- ------------- ---------
None Government Fund
Thornburg Management Company, Inc. Income Fund 115,635 5.75%
Profit Sharing Plan
119 East Marcy Street
Santa Fe, New Mexico 87501
As of the same date, officers and trustees of the Trust as a group,
together with family members, owned themselves or through affiliated persons
209,703 shares of the Income Fund, representing 10.43% of the Fund's issued
and outstanding shares on that date.
As of November 1, 1995, officers and Trustees of the Trust as a group
(together with family members) owned themselves or through affiliated persons
less than 1% of the outstanding shares of the Government Fund.
PURCHASE OF FUND SHARES
Discussion of Reduced Sales Charges - Class A Shares:
Procedures for purchases of Fund shares by investors, the pricing of
Fund shares for sale to investors, and the schedule of sale to the public are
described in the Prospectus under the caption "HOW TO PURCHASE FUND SHARES".
The Prospectus states that certain classes of investors, specified
below, may purchase Class A shares of the Funds at variations to the Public
Scale. The Trust may change or eliminate these variations at any time.
(1) Existing shareholders of a Fund may purchase shares upon the
reinvestment of dividends and capital gains distributions with no sales
charge. This practice is followed by many investment funds that charge sales
loads for new investments.
(2) Shareholders of a Fund who have redeemed all or any portion of
their investment in Class A shares of the Fund may purchase Class A shares
with no sales charge up to the maximum dollar amount of their shares redeemed
within 24 months of the redemption date, provided that the shareholder's
dealer or the shareholder must notify TSC or the Transfer Agent at the time
an order is placed that such a purchase would qualify for this variation to
the Public Scale. Investors also may purchase Class A shares of a Fund at no
charge in accordance with the preceding sentence, if they redeemed Class B
shares of the same Fund, paid the contingent deferred sales charge applicable
to the redeemed shares, and reinvest some or all of the proceeds within 24
months. Similar notifications must be made in writing by the dealer, the
broker, or the shareholder when the order is placed by mail. The sales
charge will not be eliminated if notification is not furnished at the time
of the order or a review of TSC's or the Transfer Agent's records fails to
confirm the investor's represented previous holdings.
(3) Persons may purchase Class A shares of a Fund at no sales charge if
they redeem Class A shares of the Fund or any other series of Thornburg
Investment Trust, or of any series of Thornburg Limited Term Municipal Fund,
Inc. and reinvest some or all of the proceeds within 24 months. The
shareholder's dealer or the shareholder must notify the Transfer Agent or TSC
at the time an order is placed that the purchase qualifies for this variation
to the Public Scale.
The special classes of shareholders in subsections (2) and (3) above
were created as a convenience for those shareholders who invest in a Fund and
subsequently make a decision to redeem all or part of their investment for a
temporary period. In some cases, the existence of this special class of
shareholders will act as further inducement for certain individuals to make
an initial investment in a Fund, particularly if those investors feel that
they might have a temporary need to redeem all or part of their investment in
the coming years. Shareholders who have previously invested in a Fund are
more familiar than the general public with the Fund, its investment
objectives, and its results. The costs to TSC of its marketing to these
individuals and maintaining the records of their prior investment are minimal
compared to the costs of marketing the Fund to the public at large.
(4) Officers, Trustees, directors and employees of the Trust, TMC, TSC,
the Custodian and Transfer Agent, and counsel to the Trust, while in such
capacities, and members of their families, may purchase shares of a Fund with
no sales charge, provided that they notify TSC or the Transfer Agent at the
time an order is placed that a purchase will qualify for variation from the
Public Scale. The sales charge will not be eliminated if the notification is
not furnished at the time of the order or a review of Fund records fails to
confirm that the investor's representation is correct. The reduced sales
charge to these persons is based upon the Trust's view that their familiarity
with and loyalty to the Fund will require less selling effort by the Fund,
such as a solicitation and detailed explanation of the conceptual structure
of the Fund, and less sales-related expenses, such as advertising expenses,
computer time, paper work, secretarial needs, postage and telephone costs
than are required for the sale of shares to the general public. Inclusion
of the families of these persons is based upon the Fund's view that the same
economies exist for sales of shares to family members.
(5) Employees of brokerage firms who are members in good standing with
the National Association of Securities Dealers, Inc. ("NASD"), employees of
financial planning firms who place orders for a Fund placed directly with the
Transfer Agent or TSC and through a broker/dealer who is a member in good
standing with the NASD, and employees of eligible non-NASD members which
accept orders from shares of the Fund on an agency basis and clear those
orders through a broker/dealer who is a member in good standing with NASD,
and their families, may purchase shares of the Fund for themselves with no
sales charge, provided that (i) the order must be through an NASD member firm
who has entered into a Selected Dealer Agreement with TSC to distribute
shares of the Fund, and (ii) the shareholder's broker/dealer or the
shareholder must notify TSC or the Transfer Agent at the time an order is
placed that the purchase would qualify for this variation to the Public
Scale. Similar notification must be made in writing by the dealer, the
broker, or the shareholder when such an order is placed by mail. The reduced
sales charge will not apply if the notification is not furnished at the time
of the order or a review of TSC's, the dealer's, the broker's or the Transfer
Agent's records fails to confirm that the investor's representation is
correct.
Because they sell the Funds' shares, these individuals tend to be much
more aware of the Fund than the general public. Any additional costs to TSC
of marketing to these individuals are minimal.
(6) Bank trust departments, companies with trust powers, and investment
advisers who receive compensation on a fee basis may purchase shares of the
Fund at no sales charge, provided that these persons notify TSC or the
Transfer Agent, at the time an order qualifying for this reduced charge is
placed, that such a purchase would qualify for this variation to the Public
Scale.
(7) Purchases of Class A shares of any Fund may be made at net asset
value provided that such purchases are placed through a broker that maintains
one or more omnibus accounts with the Fund and such purchases are made by (i)
investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (ii) clients of such investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment adviser or
financial planner on the books and records of the broker or agent; and (iii)
retirement and deferred compensation plans and trusts used to fund those
plans, including, but not limited to, those defined in Sections 401(a)
through 403(b) or 457 of the Internal Revenue Code and "rabbi trusts."
Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent.
(8) No sales charge will be payable at the time of purchase on
investments of $1 million or more made by a purchaser. A redemption fee will
be imposed on these investments in the event of a share redemption within 1
year following the share purchase at the rate of 1/2 of 1% of the value of
the shares redeemed. In determining whether a redemption fee is payable and
the amount of any fee, it is assumed that shares not subject to the charge
are the first redeemed, followed by other shares held for the longest period
of time. The applicability of these fees will be unaffected by transfers of
registration. TSC or TMC intend to pay a commission of up to 1/2 of 1% to
dealers who place orders of $1 million or more for a single purchaser.
(9) Certain employee benefit plans and insurance company separate
accounts used to fund annuity contracts may purchase shares of the Funds at
no sales charge. TSC or TMC intend to pay a commission of up to 1/2 of 1% to
dealers who place orders for these plans.
(10) Charitable organizations or foundations, including trusts
established for the benefit of charitable organizations or foundations, may
purchase shares of the Funds at no sales charge. TSC or TMC intend to pay a
commission of up to 1/2 of 1% to dealers who place orders for these
purchasers.
These organizations may charge fees to clients for whose accounts they
purchase Shares of a Fund. Where the reduced sales charge applies,
notification is required at the time the order is received, and a review of
TSC's or Transfer Agent's record must confirm that the investor's
representation is correct.
(11) State and local governments, commercial banks, thrift
institutions, savings banks, and other related financial institutions may
purchase shares as follows:
Agency Commission
or Concession to Dealers
Total Sales Charge
% of % of % of
offering price net amount invested offering price
------------------ ------------------- --------------
Size of Purchase
- ----------------
$2,500 or more .50% .50% .50%
Where the reduced sales charge applies, notification is required and the
Transfer Agent's record must confirm that the investor's representation is
correct.
The investment decisions of the persons and organizations described in
the foregoing paragraphs tend to be made by informed advisers. Typically,
these organizations are better able than the general public to evaluate
quickly the appropriateness of a Fund's investment objectives and performance
in light of their goals. In certain cases, these organizations may approach
the Fund directly with no solicitation after reading performance data in
trade publications. Consequently, costs of marketing to these persons and
organizations likely will be minimal.
(12) In any case where the Fund acquires substantially all of the
assets of a registered investment company in exchange for the Fund's shares,
no sales charge will be imposed. Such exchanges are preceded by the
distribution of materials to the shareholders at the acquired company, which
explain the transaction. The preparation and dissemination of these
materials and other information relating to such a transaction commonly are
paid for by TMC rather than the Fund or TSC.
(13) Such persons as are determined by the Trustees to have acquired
shares under special circumstances, not involving any sales expense to a Fund
or to TSC, may purchase shares of the Fund with no sales charge. This
variation from the Public Scale contemplates circumstances where a relatively
large sale can be made at no distribution cost to a large investor or a
number of smaller investors who are similarly situated. In the contemplated
circumstances, there would be no cost of distribution, or any costs would be
paid by TMC.
(14) Shares of a Fund may be sold at a reduced or no sales charge
pursuant to sponsored arrangements, which include programs under which an
organization makes recommendations to or permits group solicitation of its
employees, members or participants. Information on these arrangements is
available from TSC.
REDEMPTION OF SHARES
Procedures with respect to redemption of Fund shares are set forth in
the Prospectus under the caption "HOW TO REDEEM FUND SHARES". Each Fund may
suspend the right of redemption or delay payment more than seven days (a)
during any period when the New York Stock Exchange is closed (other than
customary weekend and holiday closings), (b) when trading in the markets the
Fund normally utilizes is restricted, or an emergency exists as determined by
the Securities and Exchange Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the shareholders of the
Fund.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Fund, Thornburg Securities
Corporation acts as the distributor of Fund shares. The Fund bears the
expenses of registering its shares with the Securities and Exchange
Commission and qualifying them or the Fund with state regulatory authorities.
In addition, the Fund will make payments to TMC and to TSC for certain
shareholder services and distribution of the Funds' shares, including amounts
paid to dealers for services and incentive compensation. See the discussion
under the heading "SERVICE AND DISTRIBUTION PLANS". Terms of continuation,
termination and assignment under the Distribution Agreement are similar to
those described above with regard to the Investment Advisory Agreement,
except that termination other than upon assignment requires 30 days' notice.
H. Garrett Thornburg, Jr., President, and a Trustee of the Funds, is
also Director and controlling stockholder of TSC.
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, has
been selected as the independent auditor of the Funds for the fiscal year
ended September 30, 1995. Shareholders will receive semiannual unaudited
financial statements and annual financial statements audited by the
independent auditor. The Funds' most recent Annual Reports may be obtained
at no charge by writing or calling Thornburg Management Company, Inc., 119
East Marcy Street, Suite 202, Santa Fe, New Mexico 87501, (800) 847-0200.
FINANCIAL STATEMENTS
The Funds' Statements of Assets and Liabilities including the Schedule
of Investments, as of September 30, 1995, Statements of Operations and
Statements of Changes in Net Assets for the two years in the period ended
September 30, 1995, Notes to Financial Statements, Financial Highlights, and
Independent Auditor's Report dated October 27, 1995 are incorporated herein
by reference from the Funds' Annual Reports to Shareholders.
