Registration Nos. 33-16005
811-5252
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 15 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 16 [X]
(Check appropriate box or boxes.)
COVA SERIES TRUST
--------------------------------
(Exact name of registrant as specified in charter)
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (800) 831-5433
Jeffery K. Hoelzel, Esq.
Senior Vice President and Secretary
Cova Series Trust
One Tower Lane, Suite 3000
Oakbrook Terrace, Illinois 60181-4644
(Name and Address of Agent For Service)
Copy to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective:
-X- immediately upon filing pursuant to paragraph (b)
--- on (date) pursuant to paragraph (b)
--- 60 days after filing pursuant to paragraph (a)(1)
--- on (date) pursuant to paragraph (a)(1)
--- 75 days after filing pursuant to paragraph (a)(2)
--- on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
--- this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Investment Company Act
Rule 24f-2 and the Rule 24f-2 Notice for Registrant's fiscal year 1995 was filed
on February 28, 1996.
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CROSS REFERENCE SHEET
(as required by Rule 495)
Item No. Location
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PART A
Item 1. Cover Page......................... Cover Page
Item 2. Synopsis........................... Not Applicable
Item 3. Condensed Financial Information.... Financial Highlights
Item 4. General Description of Registrant.. The Trust; Investment Objectives
and Policies of the Portfolios;
Investment Practices
Item 5. Management of the Fund............. Management of the Trust
Item 6. Capital Stock and Other Securities. Description of the Trust
Item 7. Purchase of Securities Being
Offered........................ Description of the Trust
Item 8. Redemption or Repurchase........... Description of the Trust
Item 9. Pending Legal Proceedings.......... Not Applicable
PART B
Item 10. Cover Page......................... Cover Page
Item 11. Table of Contents.................. Table of Contents
Item 12. General Information and History.... Not Applicable
Item 13. Investment Objectives and Policies. Investment Objectives and Policies
Item 14. Management of the Fund............. Officers and Trustees
Item 15. Control Persons and Principal
Holders of Securities.......... Officers and Trustees
Item 16. Investment Advisory and Other
Services....................... Investment Advisory Agreement
Item 17. Brokerage Allocation and
Other Practices................ Portfolio Transactions
Item 18. Capital Stock and Other Securities. Description of the Trust (Part A)
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered....... Net Asset Values (Part A)
Item 20. Tax Status......................... Tax Status (Part A)
Item 21. Underwriters....................... Distribution and Redemption of
Shares (Part A)
Item 22. Calculation of Performance Data.... Performance Data
Item 23. Financial Statements............... Financial Statements (Part B)
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PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
EXPLANATORY NOTE
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This Registration Statement contains eleven Portfolios of Cova Series Trust.
Three versions of Prospectuses have been created from this Registration
Statement. The distribution system for each version of the Prospectus is
different. One version of the Prospectus contains all Portfolios except for the
Large Cap Stock Portfolio. One version contains all Portfolios except for the
High Yield Portfolio. The third version of the Prospectus contains the
following eight Portfolios: Money Market Portfolio, Quality Income Portfolio,
Stock Index Portfolio, Quality Bond Portfolio, Small Cap Stock Portfolio, Large
Cap Stock Portfolio, Select Equity Portfolio and International Equity Portfolio.
These Prospectuses have been filed with the Commission pursuant to Rule 497
under the Securities Act of 1933.
The Registrant undertakes to update this Explanatory Note each time a
Post-Effective Amendment is filed.
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PART A
The Prospectuses for each Portfolio of the Trust are incorporated into Part
A of this Post-Effective Amendment No. 15, by reference to the Prospectuses for
each Portfolio of the Trust as filed electronically on July 1, 1996 and August
1, 1996, pursuant to Rule 497(e) (File No. 33-16005).
Cova Series Trust
Supplement dated October __, 1996
To Prospectus Dated May 1, 1996
(As Amended June 28, 1996)
This Supplement contains financial highlights and notes thereto for the period
ended June 30, 1996, with respect to the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio of the Trust. With the filing of
this Supplement, the date of the Prospectus is changed to October __, 1996.
Financial Highlights
COVA SERIES TRUST
QUALITY BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.126
Net realized and unrealized loss on investments (0.130)
Total from investment operations (0.004)
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.124)
Distributions from net realized gain 0.000
Total distributions (0.124)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.872
- ---------------------------------------------------------- ---------------
TOTAL RETURN (0.06%)
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,502
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.65%**
Net investment income 5.70%**
PORTFOLIO TURNOVER RATE: 67.58%
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.39%**
Ratio of Net Investment Income to Average Net Assets: 4.96%**
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COVA SERIES TRUST
SMALL CAP STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.026
Net realized and unrealized gain on investments 0.460
Total from investment operations 0.486
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.026)
Distributions from net realized gain 0.000
Total distributions (0.026)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.460
- ---------------------------------------------------------- ---------------
TOTAL RETURN 4.86%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,754
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.95%**
Net investment income 1.00%**
PORTFOLIO TURNOVER RATE: 31.50%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0336
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.82%**
Ratio of Net Investment Income to Average Net Assets: 0.13%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
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COVA SERIES TRUST
LARGE CAP STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.047
Net realized and unrealized gain on investments 0.190
Total from investment operations 0.237
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.046)
Distributions from net realized gain 0.000
Total distributions (0.046)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.191
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TOTAL RETURN 2.36%
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RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 15,504
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.75%**
Net investment income 1.94%**
PORTFOLIO TURNOVER RATE: 11.23%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0306
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.34%**
Ratio of Net Investment Income to Average Net Assets: 1.35%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
</TABLE>
COVA SERIES TRUST
SELECT EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.042
Net realized and unrealized loss on investments (0.110)
Total from investment operations (0.068)
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.042)
Distributions from net realized gain 0.000
Total distributions (0.042)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 9.890
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TOTAL RETURN (0.68%)
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 5,624
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.85%**
Net investment income 1.74%**
PORTFOLIO TURNOVER RATE: 65.22%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0375
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 1.59%**
Ratio of Net Investment Income to Average Net Assets: 1.00%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
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COVA SERIES TRUST
INTERNATIONAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.089
Net realized and unrealized gain on investments 0.300
Total from investment operations 0.389
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.055)
Distributions from net realized gain 0.000
Total distributions (0.055)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.334
- ---------------------------------------------------------- ---------------
TOTAL RETURN 3.85%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 7,252
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.95%**
Net investment income 4.40%**
PORTFOLIO TURNOVER RATE: 33.07%
- ---------------------------------------------------------- ---------------
AVERAGE COMMISSION RATE PAID (2): $ 0.0063
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 2.66%**
Ratio of Net Investment Income to Average Net Assets: 2.69%**
(2) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold during the period for which commissions were charged.
</TABLE>
COVA SERIES TRUST
BOND DEBENTURE PORTFOLIO
FINANCIAL HIGHLIGHTS
For the Period Ended June 30, 1996 (UNAUDITED)*
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.000
- ---------------------------------------------------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.085
Net realized and unrealized gain on investments 0.220
Total from investment operations 0.305
---------------------------------------------------- ---------------
DISTRIBUTIONS:
Dividends from net investment income (0.083)
Distributions from net realized gain 0.000
Total distributions (0.083)
---------------------------------------------------- ---------------
NET ASSET VALUE, END OF PERIOD $ 10.222
- ---------------------------------------------------------- ---------------
TOTAL RETURN 3.03%
- ---------------------------------------------------------- ---------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------- ---------------
Net Assets, end of period (000) $ 1,934
RATIOS TO AVERAGE NET ASSETS (1)
- ---------------------------------------------------------- ---------------
Expenses 0.85%**
Net investment income 7.50%**
PORTFOLIO TURNOVER RATE: 67.49%
- ---------------------------------------------------------- ---------------
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* Fund commenced investment operations on April 2, 1996
** Annualized
(1) If certain expenses had not been assumed by Cova Life and/or the Adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets: 2.75%**
Ratio of Net Investment Income to Average Net Assets: 5.60%**
</TABLE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
COVA SERIES TRUST
ONE TOWER LANE, SUITE 3000
OAKBROOK TERRACE, ILLINOIS 60181-4644
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR COVA SERIES TRUST, DATED OCTOBER __,
1996, (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT
CHARGE BY CALLING (800) 831-LIFE, OR WRITING COVA FINANCIAL SERVICES LIFE
INSURANCE COMPANY AT ONE TOWER LANE, SUITE 3000, OAKBROOK TERRACE, ILLINOIS
60181-4644.
The Prospectus and this Statement of Additional Information omit certain of the
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. These items may be obtained from the
Commission upon payment of the fee prescribed, or inspected at the Commission's
office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED OCTOBER __, 1996.
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
INVESTMENT LIMITATIONS
DESCRIPTION OF SECURITIES RATINGS
OFFICERS AND TRUSTEES
SUBSTANTIAL SHAREHOLDERS
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
CUSTODIAN
PERFORMANCE DATA
LEGAL COUNSEL AND INDEPENDENT AUDITORS
INVESTMENT ADVISORY AGREEMENT
PORTFOLIO TRANSACTIONS
FINANCIAL STATEMENTS
INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained in
the Prospectus.
ADDITIONAL INFORMATION - INVESTMENT OBJECTIVES AND POLICIES OF PORTFOLIOS
MANAGED BY J.P. MORGAN INVESTMENT MANAGEMENT INC.
QUALITY BOND PORTFOLIO. The Quality Bond Portfolio is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
See "Quality and Diversification Requirements." The Portfolio's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the
Portfolio will fluctuate, the Portfolio attempts to conserve the value of its
investments to the extent consistent with its objective.
The Portfolio attempts to achieve its investment objective by investing in
high grade corporate and government debt obligations and related securities of
domestic and foreign issuers described in the Prospectus and this Statement of
Additional Information.
INVESTMENT PROCESS
Duration/yield curve management: The Sub-Adviser's duration decision begins
with an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors the
Sub-Adviser studies in regard to interest rates include economic growth and
inflation, capital flows and monetary policy. Based on this analysis, the
Sub-Adviser forms a view of the most likely changes in the level and shape of
the yield curve -- as well as the timing of those changes -- and sets the
Portfolio's duration and maturity structure accordingly. The Sub-Adviser
typically limits the overall duration of the Portfolio to a range between one
year shorter and one year longer than that of the Salomon Brothers Broad
Investment Grade Bond Index, the benchmark index.
Sector allocations: Sector allocations are driven by the Sub-Adviser's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, the Sub-Adviser utilizes market and
credit analysis to assess whether the current risk-adjusted yield spreads of
various sectors are likely to widen or narrow. The Sub-Adviser then overweights
(underweights) those sectors its analysis indicates offer the most (least)
relative value, basing the speed and magnitude of these shifts on valuation
considerations.
Security selection: Securities are selected by the portfolio manager, with
substantial input from the Sub-Adviser's fixed income analysts and traders.
Using quantitative analysis as well as traditional valuation methods, the
Sub-Adviser's applied research analysts aim to optimize security selection
within the bounds of the Portfolio's investment objective. In addition, credit
analysts -- supported by the Sub-Adviser's equity analysts -- assess the
creditworthiness of issuers and counterparties. A dedicated trading desk
contributes to security selection by tracking new issuance, monitoring dealer
inventories, and identifying attractively priced bonds. The traders also handle
all transactions for the Portfolio.
SELECT EQUITY PORTFOLIO AND LARGE CAP STOCK PORTFOLIO. The investment
objective of each Portfolio is long-term growth of capital and income.
In normal circumstances, at least 65% of each Portfolio's net assets will
be invested in equity securities consisting of common stocks and other
securities with equity characteristics comprised of preferred stock, warrants,
rights, convertible securities, trust certificates, limited partnership
interests and equity participations (collectively, "Equity Securities"). Each
Portfolio's primary equity investments are the common stock of large and medium
sized U.S. corporations and, to a limited extent, similar securities of foreign
corporations.
INVESTMENT PROCESS
Fundamental research: The Sub-Adviser's domestic equity analysts, each an
industry specialist, follow 700 predominantly large- and medium-sized U.S.
companies -- 500 of which form the universe for each Portfolio's investments.
Their research goal is to forecast normalized, longer term earnings and
dividends for the most attractive companies among those they cover. In doing
this, they may work in concert with the Sub-Adviser's international equity
analysts in order to gain a broader perspective for evaluating industries and
companies in today's global economy.
Systematic valuation: The analysts' forecasts are converted into comparable
expected returns by a dividend discount model, which calculates those expected
returns by comparing a company's current stock price with the "fair value" price
forecasted by its estimated long term earnings power. Within each sector,
companies are ranked by their expected return and grouped into quintiles: those
with the highest expected returns (Quintile 1) are deemed the most undervalued
relative to their long-term earnings power, while those with the lowest expected
returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is constructed
using disciplined buy and sell rules. The specific names selected reflect the
portfolio manager's judgment concerning the soundness of the underlying
forecasts, the likelihood that the perceived misvaluation will be corrected
within a reasonable time frame and the magnitude of the risks versus the
rewards. Portfolio sector weightings are held close to those of the S&P 500
Index, reflecting the Sub-Adviser's belief that its research has the potential
to add value at the individual stock level, but not at the sector level. Sector
neutrality is also seen as a way to help protect the portfolio from
macroeconomic risks, and -- together with diversification -- represents an
important element of the Sub-Adviser's risk control strategy. A dedicated
trading desk handles all transactions for the Portfolio.
SMALL CAP STOCK PORTFOLIO. This Portfolio is designed for investors who are
willing to assume the somewhat higher risk of investing in small companies in
order to seek a higher return over time than might be expected from a portfolio
of stocks of large companies. The Portfolio's investment objective is to provide
a high total return from a portfolio of Equity Securities of small companies.
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small U.S. companies included in the Russell
2000 Index, which is composed of 2000 common stocks of U.S. companies with
market capitalizations ranging between $100 million and $1.5 billion.
INVESTMENT PROCESS
Fundamental Research: The Sub-Adviser's domestic equity analysts -- each an
industry specialist -- continuously monitor the small cap stocks in their
respective sectors with the aim of identifying companies that exhibit superior
financial strength and operating returns. Meetings with management and on-site
visits play a key role in shaping their assessments. Their research goal is to
forecast normalized, long-term earnings and dividends for the most attractive
small cap companies among those they monitor -- a universe that generally
contains a total of 300-350 names. Because the Sub-Adviser's analysts follow
both the larger and smaller companies in their industries -- in essence,
covering their industries from top to bottom -- they are able to bring broad
perspective to the research they do on both.
Systematic valuation: The analysts' forecasts are converted into comparable
expected returns by the Sub-Adviser's dividend discount model, which calculates
those returns by comparing a company's current stock price with the "fair value"
price forecasted by its estimated long-term earnings power. Within each
industry, companies are ranked by their expected returns and grouped into
quintiles: those with the highest expected returns (Quintile 1) are deemed the
most undervalued relative to their long-term earnings power, while those with
the lowest expected returns (Quintile 5) are deemed the most overvalued.
Disciplined portfolio construction: A diversified portfolio is constructed
using disciplined buy and sell rules. Purchases are concentrated among the
stocks in the top two quintiles of the rankings: the specific names selected
reflect the portfolio manager's judgment concerning the soundness of the
underlying forecasts, the likelihood that the perceived misevaluation will soon
be corrected and the magnitude of the risks versus the rewards. Once a stock
falls into the third quintile -- because its price has risen or its fundamentals
have deteriorated -- it generally becomes a sale candidate. The portfolio
manager seeks to hold sector weightings close to those of the Russell 2000
Index, the Portfolio's benchmark, reflecting the Sub-Adviser's belief that its
research has the potential to add value at the individual stock level, but not
at the sector level. Sector neutrality is also seen as a way to help to protect
the portfolio from macroeconomic risks, and -- together with diversification --
represents an important element of the Sub-Adviser's investment strategy.
INTERNATIONAL EQUITY PORTFOLIO. This Portfolio is designed for investors
with a long-term investment horizon who want to diversify their portfolios by
investing in an actively managed portfolio of non-U.S. securities that seeks to
outperform the Morgan Stanley Capital International Europe, Australia and Far
East Index (the "EAFE Index"). The Portfolio's investment objective is to
provide a high total return from a portfolio of Equity Securities of foreign
corporations.
The Portfolio seeks to achieve its investment objective by investing
primarily in the Equity Securities of foreign corporations. Under normal
circumstances, the Portfolio expects to invest at least 65% of its total assets
in such securities. The Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of developed
foreign countries render investments in such countries inadvisable.
INVESTMENT PROCESS
Country allocation: The Sub-Adviser's country allocation decision begins
with a forecast of equity risk premiums, which provide a valuation signal by
measuring the relative attractiveness of stocks versus bonds. Using a
proprietary approach, the Sub-Adviser calculates this risk premium for each of
the nations in the Portfolio's universe, determines the extent of its deviation
- -- if any -- from its historical norm, and then ranks countries according to the
size of those deviations. Countries with high (low) rankings are overweighted
(underweighted) in comparisons to the EAFE Index to reflect the above-average
(below-average) attractiveness of their stock markets. In determining
weightings, the Sub-Adviser analyzes a variety of qualitative factors as well --
including the liquidity, earnings momentum and interest rate climate of the
market at hand. These qualitative assessments can change the magnitude but not
the direction of the country allocations called for by the risk premium
forecast. The Sub-Adviser places limits on the total size of the Portfolio's
country over- and under-weightings relative to the EAFE Index.
Stock selection: The Sub-Adviser's international equity analysts, each an
industry and country specialist, forecast normalized earnings and dividend
payouts for roughly 1,000 non-U.S. companies -- taking a long-term perspective
rather than the short time frame common to consensus estimates. These forecasts
are converted into comparable expected returns by a dividend discount model, and
then companies are ranked from most to least attractive by industry and country.
A diversified portfolio is constructed using disciplined buy and sell rules. The
portfolio manager's objective is to concentrate the purchases in the top third
of the rankings, and to keep sector weightings close to those of the EAFE Index,
the Portfolio's benchmark. Once a stock falls into the bottom third of the
rankings, it generally becomes a sales candidate. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in an undervalued company.
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the Portfolio's return. The Sub-Adviser's currency decisions are supported by a
proprietary tactical mode which forecasts currency movements based on an
analysis of four fundamental factors -- trade balance trends, purchasing power
parity, real short-term interest differentials and real bond yields -- plus a
technical factor designed to improve the timing of transactions. Combining the
output of this model with a subjective assessment of economic, political and
market factors, the Sub-Adviser's currency group recommends currency strategies
that are implemented in conjunction with the Portfolio's investment strategy.
MONEY MARKET INSTRUMENTS
As discussed in the Prospectus, each Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolios appears below. See "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Portfolios may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Portfolios may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, each Portfolio must look principally
to the federal agency issuing or guaranteeing the obligations for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitments.
Securities in which each Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, both of whose obligations
may be satisfied only by the individual credits of each issuing agency.
Securities which are backed by the full faith and credit of the United States
include obligations of the Government National Mortgage Association, the Farmers
Home Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Portfolios, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
BANK OBLIGATIONS. Each of the Portfolios, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which (for those Portfolios managed by J.P. Morgan Investment
Management Inc. except the International Equity Portfolio) have more than $2
billion in total assets and are organized under the laws of the United States or
any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees) with respect to the Portfolios managed by J.P. Morgan Investment
Management Inc. See "Foreign Investments." The Portfolios will not invest in
obligations for which J.P. Morgan Investment Management Inc., or any of its
affiliated persons, is the ultimate obligor or accepting bank. Each of the
Portfolios may also invest in obligations of international banking institutions
designated or supported by national governments to promote economic
reconstruction, development or trade between nations (e.g., the European
Investment Bank, the Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. Each of the Portfolios may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. The monies loaned to the borrower come
from accounts managed by a Sub-Adviser or its affiliates, pursuant to
arrangements with such accounts. Interest and principal payments are credited to
such accounts. The Sub-Adviser, or its affiliates, acting as a fiduciary on
behalf of its clients, has the right to increase or decrease the amount provided
to the borrower under an obligation. The borrower has the right to pay without
penalty all or any part of the principal amount then outstanding on an
obligation together with interest to the date of payment. Since these
obligations typically provide that the interest rate is tied to the Federal
Reserve commercial paper composite rate, the rate on master demand obligations
is subject to change. Repayment of a master demand obligation to participating
accounts depends on the ability of the borrower to pay the accrued interest and
principal of the obligations on demand which is continuously monitored by the
Sub-Adviser. Since master demand obligations typically are not rated by credit
rating agencies, the Portfolios may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Sub-Adviser to
have a credit quality which satisfies the Portfolio's quality restrictions. See
"Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolios to be liquid because they are payable upon demand. The Portfolios do
not have any specific percentage limitation on investments in master demand
obligations.
REPURCHASE AGREEMENTS. Each of the Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees of the Trust. In a repurchase agreement, a Portfolio
buys a security from a seller that has agreed to repurchase the same security at
a mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolios invest
in repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. The
Portfolios will always receive securities as collateral whose market value is,
and during the entire term of the agreement remains, at least equal to 100% of
the dollar amount invested by the Portfolios in each agreement plus accrued
interest, and the Portfolios will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Custodian. The Money Market Portfolio will be fully collateralized within the
meaning of paragraph (a)(3) of Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act"). If the seller defaults, a Portfolio might
incur a loss if the value of the collateral securing the repurchase agreement
declines and might incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon disposal of the collateral by a
Portfolio may be delayed or limited.
Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in the prospectus or this Statement of Additional
Information.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, certain of the Portfolios may invest in bonds
and other debt securities of domestic and foreign issuers to the extent
consistent with their investment objectives and policies. A description of these
investments appears in the prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which a Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
EQUITY INVESTMENTS
As discussed in the prospectus, certain of the Portfolios invest primarily in
Equity Securities. The Equity Securities in which these Portfolios invest
include those listed on any domestic or foreign securities exchange or traded in
the over-the-counter market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may be
purchased by these Portfolios appears in the prospectus and below. See "Quality
and Diversification Requirements."
EQUITY SECURITIES. The Equity Securities in which these Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which these Portfolios may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
COMMON STOCK WARRANTS
Certain of the Portfolios may invest in common stock warrants that entitle the
holder to buy common stock from the issuer of the warrant at a specific price
(the strike price) for a specific period of time. The market price of warrants
may be substantially lower than the current market price of the underlying
common stock, yet warrants are subject to similar price fluctuations. As a
result, warrants may be more volatile investments than the underlying common
stock.
Warrants generally do not entitle the holder to dividends or voting rights with
respect to the underlying common stock and do not represent any rights in the
assets of the issuer company. A warrant will expire worthless if it is not
exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
Each of the Portfolios may invest in foreign securities. The International
Equity Portfolio makes substantial investments in foreign countries. The Quality
Bond, Select Equity, Large Cap Stock, Small Cap Stock and Quality Income
Portfolios may invest in certain foreign securities. The Quality Bond Portfolio
may invest in U.S. and non-U.S. dollar-denominated fixed income securities of
foreign issuers. The Select Equity and Large Cap Stock Portfolios may invest in
equity securities of foreign corporations listed on a U.S. securities exchange.
The Small Cap Stock Portfolio may invest in equity securities of foreign issuers
that are listed on a national securities exchange or denominated or principally
traded in the U.S. dollar. The Quality Bond Portfolio, Select Equity Portfolio,
Large Cap Stock Portfolio and the Small Cap Stock Portfolio do not expect to
invest more than 25%, 5%, 5%, and 5%, respectively, of their total assets at the
time of purchase in securities of foreign issuers. All investments of the Money
Market Portfolio must be U.S. dollar-denominated. In the case of the Quality
Bond Portfolio, any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets.
Since investments in foreign securities may involve foreign currencies, the
value of a Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Certain of the Portfolios may enter
into forward commitments for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to manage
the Portfolios' currency exposure related to foreign investments. The Portfolios
will not enter into such commitments for speculative purposes.
For a description of the risks associated with investing in foreign securities,
see "Investment Practices" and "Risk Factors" in the Prospectus.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to a Portfolio until
settlement takes place. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction, reflect the value each day of such securities in determining its
net asset value and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, each Portfolio will maintain with the Custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such comments. On
delivery dates for such transactions, each Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account and/or
from cash flow. If a Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio obligation, incur a gain or loss due to market
fluctuation. It is the current policy of each Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may
be acquired by each of the Portfolios to the extent permitted under the 1940
Act. These limits require that, as determined immediately after a purchase is
made, (i) not more than 5% of the value of a Portfolio's total assets will be
invested in the securities of any one investment company, (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by a
Portfolio.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act it is also considered as a
borrowing of money by the Portfolio and, therefore, a form of leverage. The
Portfolios will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of the
proceeds is greater than the interest expense of the transaction. A Portfolio
will not invest the proceeds of a reverse repurchase agreement for a period
which exceeds the duration of the reverse repurchase agreement. A Portfolio may
not enter into reverse repurchase agreements exceeding in the aggregate
one-third of the market value of its total assets, less liabilities other than
the obligations created by reverse repurchase agreements. Each Portfolio will
establish and maintain with the Custodian a separate account with a segregated
portfolio of securities in an amount at least equal to its purchase obligations
under its reverse repurchase agreements.
MORTGAGE DOLLAR ROLL TRANSACTIONS. Certain of the Portfolios of the Trust
may engage in mortgage dollar roll transactions with respect to mortgage
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation, In
a mortgage dollar roll transaction, the Portfolio sells a mortgage backed
security and simultaneously agrees to repurchase a similar security on a
specified future date at an agreed upon price. During the roll period, the
Portfolio will not be entitled to receive any interest or principal paid on the
securities sold. The Portfolio is compensated for the lost interest on the
securities sold by the difference between the sales price and the lower price
for the future repurchase as well as by the interest earned on the reinvestment
of the sales proceeds. The Portfolio may also be compensated by receipt of a
commitment fee. When the Portfolio enters into a mortgage dollar roll
transaction, liquid assets in an amount sufficient to pay for the future
repurchase are segregated with the Custodian. Mortgage dollar roll transactions
are considered reverse repurchase agreements for purposes of the Portfolio's
investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and no Portfolio will make any loans in excess
of one year.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolios may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in the Prospectus.
As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a price
the Portfolio deems representative of their value, the value of the Portfolio's
net assets could be adversely affected. Where an illiquid security must be
registered under the Securities Act of 1933, as amended (the "1933 Act") before
it may be sold, a Portfolio may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Portfolios intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of these Portfolios is
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws, or with respect to the Money Market Portfolio, as
described below. Investments not subject to the limitations described above
could involve an increased risk to a Portfolio should an issuer, or a state or
its related entities, be unable to make interest or principal payments or should
the market value of such securities decline.
QUALITY BOND AND QUALITY INCOME PORTFOLIOS. These Portfolios invest
principally in a diversified portfolio of "high grade" and "investment grade"
securities. Investment grade debt is rated, on the date of investment, within
the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings. The
Quality Bond Portfolio may also invest up to 5% of its total assets in
securities which are "below investment grade." Such securities must be rated, on
the date of investment, Ba by Moody's or BB by Standard & Poor's. The Portfolios
may invest in debt securities which are not rated or other debt securities to
which these ratings are not applicable, if in the opinion of the Sub-Adviser,
such securities are of comparable quality to the rated securities discussed
above. In addition, at the time the Portfolios invest in any commercial paper,
bank obligation or repurchase agreement, the issuer must have outstanding debt
rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion.
CONVERTIBLE AND OTHER DEBT SECURITIES. Certain of the Portfolios may invest
in convertible debt securities, for which there are no specific quality
requirements. In addition, at the time a Portfolio invests in any commercial
paper, bank obligation or repurchase agreement, the issuer must have outstanding
debt rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, of ir no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion. At the
time the Portfolio invests in any other short-term debt securities, they must be
rated A or higher by Moody's or Standard & Poor's, or if unrated, the investment
must be of comparable quality in the Sub-Adviser's opinion.
In determining suitability of investment in a particular unrated security,
the Sub-Adviser takes into consideration asset and debt service coverage, the
purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
GNMA CERTIFICATES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Portfolio
will be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA guarantee
is backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee. The net asset value and return
of the Portfolio will, however, fluctuate depending on market conditions and
other factors.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life of
GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of 1% of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of 1% for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate holders
may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
LOWER GRADE SECURITIES
Certain of the Portfolios may invest in lower-grade income securities. (The High
Yield Portfolio may invest a substantial portion of its assets in medium and
lower grade corporate debt securities entailing certain risks. See "Special
Risks of High Yield Investing" in the Prospectus.) Such lower grade securities
are rated BB or B by S&P or Ba or B by Moody's and are commonly referred to as
"junk bonds." Investment in such securities involves special risks, as described
herein. Liquidity relates to the ability of the Portfolio to sell a security in
a timely manner at a price which reflects the value of that security. As
discussed below, the market for lower grade securities is considered generally
to be less liquid than the market for investment grade securities. The relative
illiquidity of some of the Portfolio's portfolio securities may adversely affect
the ability of the Portfolio to dispose of such securities in a timely manner
and at a price which reflects the value of such security in the Sub-Adviser's
judgment. The market for less liquid securities tends to be more volatile than
the market for more liquid securities and market values of relatively illiquid
securities may be more susceptible to change as a result of adverse publicity
and investor perceptions than are the market values of higher grade, more liquid
securities.
The Portfolio's net asset value will change with changes in the value of its
portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio's net asset value can be expected to change as general
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities can be expected to decline. Net asset value and market value
may be volatile due to the Portfolio's investment in lower grade and less liquid
securities. Volatility may be greater during periods of general economic
uncertainty.
The Portfolio's investments are valued pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Portfolio may
invest, during periods of reduced market liquidity and in the absence of readily
available market quotations for securities held in the Portfolio's portfolio,
the valuation of such securities becomes more difficult and judgment may play a
greater role in the valuation of the Portfolio's securities due to the reduced
availability of reliable objective data. To the extent that the Portfolio
invests in illiquid securities and securities which are restricted as to resale,
the Portfolio may incur additional risks and costs. Illiquid and certain
restricted securities are particularly difficult to dispose of.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and adversely
affect the market value of such securities. In addition, in such circumstances,
the ability of issuers of lower grade securities to repay principal and to pay
interest, to meet projected financial goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
lower grade securities in the Portfolio's portfolio and thus the Portfolio's net
asset value. The secondary market prices of lower grade securities are less
sensitive to changes in interest rates than are those for higher rated
securities, but are more sensitive to adverse economic changes or individual
issuer developments. Adverse publicity and investor perceptions, whether or not
based on rational analysis, may also affect the value and liquidity of lower
grade securities.
Yields on the Portfolio's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Portfolio's portfolio and thus in the net asset
value of the Portfolio. Net asset value and market value may be volatile due to
the Portfolio's investment in lower grade and less liquid securities. Volatility
may be greater during periods of general economic uncertainty. The Portfolio may
incur additional expenses to the extent it is required to seek recovery upon a
default in the payment of interest or a repayment of principal on its portfolio
holdings, and the Portfolio may be unable to obtain full recovery thereof. In
the event that an issuer of securities held by the Portfolio experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Portfolio may incur
additional expenses and may determine to invest additional capital with respect
to such issuer or the project or projects to which the Portfolio's portfolio
securities relate.
The Portfolio will rely on the Sub-Adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. In this evaluation, the
Sub-Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Sub-Adviser also may consider, although it does not rely primarily
on, the credit ratings of S&P and Moody's in evaluating fixed-income securities.
Such ratings evaluate only the safety of principal and interest payments, not
market value risk. Additionally, because the creditworthiness of an issuer may
change more rapidly than is able to be timely reflected in changes in credit
ratings, the Sub-Adviser continuously monitors the issuers of such securities
held in the Portfolio's portfolio. The Portfolio may, if deemed appropriate by
the Sub-Adviser, retain a security whose rating has been downgraded below B by
S&P or below B by Moody's, or whose rating has been withdrawn.
With respect to Portfolios which may invest in these unrated income securities,
achievement by the Portfolio of its investment objective may be more dependent
upon the Sub-Adviser's investment analysis than would be the case if the
Portfolio were investing exclusively in rated securities.
STRATEGIC TRANSACTIONS
As described in the Prospectus, certain Portfolios of the Trust may, but are 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 market movements) or to manage the effective maturity or
duration of a Portfolio's income securities. Such strategies are generally
accepted by modern portfolio managers and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, a Portfolio may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, 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 currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions are hedging transactions which may be used to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for a Portfolio's portfolio resulting from securities markets or
exchange rate fluctuations, to protect a Portfolio'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 a
Portfolio's portfolio, or to establish a position in the derivatives markets as
a temporary substitute for purchasing or selling particular securities.
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 a Portfolio to utilize these
Strategic Transactions successfully will depend on the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. A Portfolio 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 Sub-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 a
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or for prices other than current market values, limit the amount of
appreciation a Portfolio can realize on its investments or cause a Portfolio to
hold a security it might otherwise sell. The use of currency transactions can
result in a Portfolio 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 a Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of a Portfolio'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, a Portfolio might not be able
to close out a transaction without incurring substantial losses, if at all.
Although the use of futures and options transactions for hedging 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 possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. Income
earned or deemed to be earned, if any, by a Portfolio from its Strategic
Transactions will generally be taxable income of the Trust. See "Tax Status" in
the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. 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 Portfolio 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, a Portfolio'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 Portfolio the right to sell such 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. A Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio 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 such 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 option may be exercised only upon expiration or during a fixed
period prior thereto. As described in the Prospectus, certain Portfolios of the
Trust are 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, by which 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.
A Portfolio'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, guarantees and security, are set by negotiation of the parties. A
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolios expect generally to enter into OTC options that have
cash settlement provisions, although they are 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 a Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Sub-Adviser must assess the creditworthiness of
each such 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. A Portfolio will engage in OTC option transactions
only with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of "A-1" from Standard & Poor's Corporation or "P-1" from Moody's Investors
Service, Inc. or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
government securities purchased by a Portfolio, and portfolio securities
"covering" the amount of the Portfolio's obligation pursuant to an OTC option
sold by it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to each Portfolio's limitation on investing no more
than 10% of its assets in restricted securities.
If a Portfolio 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 a Portfolio's income. The sale of put options can also provide income.
A Portfolio may purchase and sell call options on securities, including
U.S. Treasury and agency securities, municipal obligations, 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 or securities
indices, currencies and futures contracts. All calls sold by a Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Portfolio will receive
the option premium to help protect it against loss, a call sold by a Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold. In selling calls on securities
not owned by the Portfolio, the Portfolio may be required to acquire the
underlying security at a disadvantageous price in order to satisfy its
obligations with respect to the call.
A Portfolio may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. A Portfolio will not sell put options if, as a result, more than 50%
of the Portfolio's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. Certain Portfolios of the Trust may
enter into financial futures contracts or purchase or sell put and call options
on such futures as a hedge against anticipated interest rate, currency, equity
or income 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 purchase of a futures contract creates a firm obligation by a
Portfolio, as purchaser, to take delivery from the seller of 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). The sale of a futures contract creates a firm obligation
by the Portfolio, as seller, to deliver to the buyer 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
and obligates the seller to deliver such option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in particular,
with the rules and regulations of the Commodity Futures Trading Commission.
Typically, maintaining a futures contract or selling an option thereon requires
the Portfolio 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 10% 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 Portfolio. If the Portfolio 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 can be offset prior to settlement at an advantageous price nor that
delivery will occur.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than bona fide hedging purposes 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 Portfolio'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 in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. A Portfolio 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. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings denominated in particular 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. A Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations of such Counterparties have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or (except for OTC currency options) are determined to be of equivalent
credit quality by the Sub-Adviser.
Dealings by the Portfolios 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. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Portfolio 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 cross hedging and proxy hedging as described
below.
A Portfolio may 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 Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio'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 Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. For
example, if the Sub-Adviser considers the Austrian schilling as being linked to
the German deutschemark (the "D-mark") and the Trust holds securities
denominated in schillings and the Sub-Adviser believes that the value of
schillings will decline against the U.S. dollar, the Sub-Adviser may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to a Portfolio 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 Portfolio is engaging in proxy hedging. If a Portfolio
enters into a currency hedging transaction, the Portfolio will comply with the
asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio 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 a Portfolio 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 useless, 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. Certain Portfolios of the Trust may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Sub-Adviser, it is in the best interest of
the Portfolio 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 Sub-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. Among the Strategic Transactions into
which certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their portfolios, to protect against
currency fluctuations, as a duration management technique or to protect against
any increase in the price of securities the Portfolio anticipates purchasing at
a later date. The Portfolios intend to use these transactions as hedges and not
as speculative investments and will not sell interest rate caps or floors where
they do not own securities or other instruments providing the income stream the
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cashflows on a notional amount of two or more currencies
based on the relative value differential among them. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. 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. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Portfolio 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 Portfolio 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
Sub-Adviser and the Portfolio believe such obligations do not constitute senior
securities under the Investment Company Act of 1940, as amended, and,
accordingly, will not treat them as being subject to its borrowing restrictions.
A Portfolio will not enter into any swap, cap, floor or collar transaction
unless, at the time of entering into such transaction, the unsecured long-term
debt of the Counterparty, combined with any credit enhancements, is rated at
least "A" by S&P or Moody's or has an equivalent equity rating from an NRSRO or
is determined to be of equivalent credit quality by the Sub-Adviser. If there is
a default by the Counterparty, the Portfolio may 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. Certain Portfolios of the Trust 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. A Portfolio might use Eurodollar futures contracts
and options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
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 guarantee, 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 a Portfolio'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. Many Strategic Transactions,
in addition to other requirements, require that the Portfolio segregate liquid
high-grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, 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 a
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade debt securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid high-grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by a Portfolio requires the Portfolio to
segregate liquid, high-grade assets equal to the exercise price.
Except when a Portfolio 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 Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that currency
or liquid securities denominated in that currency equal to the Portfolio's
obligations or to segregate liquid high-grade assets equal to the amount of the
Portfolio's obligation.
OTC options entered into by a Portfolio, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Portfolio sells these instruments it 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 non cash-settled put, the same as an OCC
guaranteed listed option sold by the Portfolio, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Portfolio sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Portfolio will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by the
Portfolio other than those above generally settle with physical delivery or with
an election of either physical delivery or cash settlement, and the Portfolio
will segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio 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,
liquid debt securities or other acceptable assets.
With respect to swaps, a Portfolio 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 a Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio 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, a Portfolio 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 Portfolio. Moreover, instead of segregating assets if the Portfolio
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. However, if it terminates
prior to such time, assets equal to any remaining obligation would need to be
segregated.
The Trust'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 "Tax Status" in the Prospectus.
GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS
The Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities or in various investment
grade debt obligations including mortgage pass-through certificates and
collateralized mortgage obligations. These securities may also include corporate
debt securities, some of which may be medium and lower grade quality. Lower
grade corporate debt securities are commonly known as "junk bonds" and involve a
significant degree of risk.
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
MONITORING PROCEDURES
The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has adopted
monitoring procedures which it believes are reasonably designed to assure a high
degree of correlation between the performance of the Portfolio and the S&P 500
Index. The procedures, which are reviewed and reconfirmed annually by the Board,
provide that in the event that the correlation between the performance of the
Portfolio and that of the S&P 500 Index falls below 95%, the Sub-Adviser will
promptly notify the Board which shall consider what action, if any, should be
taken.
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the holders
of a majority of the outstanding voting shares of each Portfolio affected (which
for this purpose and under the Investment Company Act of 1940 means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are present or represented by proxy and (ii) more than 50% of
the outstanding shares). A change in policy affecting only one Portfolio may be
effected with the approval of a majority of the outstanding shares of such
Portfolio.
QUALITY INCOME, HIGH YIELD, MONEY MARKET, GROWTH AND INCOME AND STOCK INDEX
PORTFOLIOS
Each of the Quality Income, High Yield, Money Market, Growth and Income and
Stock Index Portfolios of the Trust may not:
1. Borrow money which is in excess of one-third of the value of its total
assets taken at market value (including the amount borrowed) (except the Money
Market Portfolio which is limited to 10% of the value of its total assets) and
then only from banks as a temporary measure for extraordinary or emergency
purposes. This borrowing provision is not for investment leverage but solely to
facilitate management of the Portfolio by enabling the Trust to meet redemption
requests where the liquidation of the Portfolio's investment is deemed to be
inconvenient or disadvantageous. Monies used to pay interest on borrowed funds
will not be available for investment. The Portfolio will not make additional
investments while it has borrowings outstanding;
2. Underwrite securities of other issuers;
3. Invest 25% or more of a Portfolio's assets taken at market value in any
one industry. Investing in cash items (including bank time and demand deposits
such as certificates of deposit), U.S. Treasury bills or securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
instruments secured by those money market instruments, such as repurchase
agreements, will not be considered investments in any one industry;
4. Purchase or sell commodities, commodity contracts, foreign exchange or
real estate, or invest in oil, gas or other mineral development or exploration
programs, except as noted in connection with hedging transactions. (This does
not prohibit investment in the securities of corporations which own interests in
commodities, foreign exchange, real estate or oil, gas or other mineral
development or exploration programs);
5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;
6. Invest in securities of a company for the purpose of exercising control
or management;
7. Invest in securities issued by any other registered investment company;
8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;
9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b) borrowing
money in accordance with restrictions described above; (c) lending Portfolio
securities; (d) purchasing securities on a when-issued or delayed delivery
basis; (e) accommodating short sales; (f) implementing the hedging transactions
described above. If the asset coverage falls below 300%, when taking into
account items (a) through (e), the Portfolio may be required to liquidate
investments to be in compliance with the Investment Company Act of 1940;
10. Lend portfolio securities in excess of twenty-five percent (25%) of the
value of a Portfolio's assets. Any loans of a Portfolio's securities will be
made according to guidelines established by the Trustees, including maintenance
of collateral of the borrower at least equal at all times to the current market
value of the securities loaned;
11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in the
securities;
12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to repurchase
agreements under policies established by the Trustees or lend portfolio
securities pursuant to restriction 10 above;
13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and
14. Make short sales of securities or maintain a short position, unless not
more than 10% of the Portfolio's net assets (taken at current value) is held as
collateral for the sales at any one time, or unless at all times when a short
position is open the Portfolio owns an equal amount of the securities or
securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated account
by the Trust's custodian), for securities of the same issue as, and equal in
amount to, the securities sold short ("short sale against-the-box").
ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO
The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than 3
years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.
ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO
Rule 2a-7 under the Investment Company Act of 1940, which contains certain
requirements relating to the diversification, quality and maturity of a money
market fund's investments, was recently amended by the Securities and Exchange
Commission. The Board of Trustees of the Trust has modified its Rule 2a-7
procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies and
which therefore may be changed without shareholder approval, are as follows:
The Money Market Portfolio shall not acquire any instrument, including puts,
repurchase agreements and bank instruments, which, as measured at the time of
acquisition, would cause the Portfolio to:
1. invest, at any time, more than 5% of its total assets in the First Tier
Securities (as that term is defined in the Trust Prospectus) of a single issuer
(including puts written by, and repurchase agreements entered into with, such
issuer); except that the Portfolio may invest more than 5% of its total assets
in Government securities; and, for purposes of this calculation, entering into a
repurchase agreement shall be deemed to be an acquisition of the underlying
securities to the extent that the repurchase agreement is collateralized fully;
2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or
3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.
QUALITY BOND PORTFOLIO
The Quality Bond Portfolio of the Trust may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's total assets,
taken at cost at the time of such borrowing and except in connection with
reverse repurchase agreements permitted by Investment Restriction No. 8.
Mortgage, pledge, or hypothecate any assets except in connection with any such
borrowing in amounts up to 30% of the value of the Portfolio's net assets at the
time of such borrowing. The Portfolio will not purchase securities while
borrowings (including reverse repurchase agreements) exceed 5% of the
Portfolio's total assets. This borrowing provision facilitates the orderly sale
of portfolio securities, for example, in the event of abnormally heavy
redemption requests. This provision is not for investment purposes. Collateral
arrangements for premium and margin payments in connection with the
Portfolio's's hedging activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase debt obligations
secured by interests in real estate or issued by companies which invest in real
estate or interests therein including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the Portfolio's
hedging activities, unless at all times when a short position is open the
Portfolio owns an equal amount of such securities, provided that this
restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Portfolio is
permitted to incur pursuant to Investment Restriction No. 1 and except that the
Portfolio may enter into reverse repurchase agreements, provided that the
aggregate of senior securities, including reverse repurchase agreement, shall
not exceed one-third of the market value of the Portfolio's total assets, less
liabilities other than obligations created by reverse repurchase agreements. The
Portfolio's arrangements in connection with its hedging activities as described
in "Investment Objectives and Policies" shall not be considered senior
securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
SELECT EQUITY, LARGE CAP STOCK AND SMALL CAP STOCK PORTFOLIOS
Each of the Select Equity, Large Cap Stock and Small Cap Stock Portfolios
may not:
1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
2. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts not to exceed 10% of the value of the Portfolio's total
assets, taken at cost, at the time of such borrowing. Mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing and in
amounts not to exceed 10% of the value of the Portfolio's net assets at the time
of such borrowing. The Portfolio will not purchase securities while borrowings
exceed 5% of the Portfolio's total assets. This borrowing provision is included
to facilitate the orderly sale of portfolio securities, for example, in the
event of abnormally heavy redemption requests, and is not for investment
purposes. Collateral arrangements for premium and margin payments in connection
with the Portfolio's hedging activities are not deemed to be a pledge of assets;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to issues of the U.S. Government,
its agencies or instrumentalities and to permitted investments of up to 25% of
the Portfolio's total assets;
4. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, or commodity contracts, except for the
Portfolio's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral exploration or
development programs. However, the Portfolio may purchase securities or
commercial paper issued by companies which invest in real estate or interests
therein, including real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position, except in the course of the Portfolio's hedging
activities, provided that this restriction shall not be deemed to be applicable
to the purchase or sale of when-issued securities or delayed delivery
securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 2. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall not be
considered senior securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
INTERNATIONAL EQUITY PORTFOLIO
The International Equity Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency purposes
and then only in amounts up to 30% of the value of the Portfolio's net assets at
the time of borrowing, and except in connection with reverse repurchase
agreements and then only in amounts up to 33 1/3% of the value of the
Portfolio's net assets; or purchase securities while borrowings, including
reverse repurchase agreements, exceed 5% of the Portfolio's total assets. The
Portfolio will not mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 30% of the value
of the Portfolio's net assets at the time of such borrowing;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Portfolio's
total assets would be invested in securities or other obligations of any one
such issuer. This limitation shall not apply to securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Portfolio's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Portfolio owns more than 10% of the outstanding voting securities
of such issuer. This limitation shall not apply to permitted investments of up
to 25% of the Portfolio's total assets;
4. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase, the value of its investments in such industry would exceed 25% of the
value of the Portfolio's total assets. For purposes of industry concentration,
there is no percentage limitation with respect to investments in U.S. Government
securities;
5. Make loans, except through the purchase or holding of debt obligations
(including restricted securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Portfolio's
investment objective and policies, see "Investment Practices" in the Prospectus
and "Investment Objectives and Policies" in this Statement of Additional
Information;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real property, including limited partnership interests, commodities, or
commodity contracts, except for the Portfolio's interests in hedging and foreign
exchange activities as described under "Investment Practices" in the Prospectus;
or interests in oil, gas, mineral or other exploration or development programs
or leases. However, the Portfolio may purchase securities or commercial paper
issued by companies that invest in real estate or interests therein including
real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except to obtain such short-term credit
as necessary for the clearance of purchases and sales of securities, provided
that this restriction shall not be deemed to apply to the purchase or sale of
when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted by
the 1940 Act;
9. Act as an underwriter of securities, except insofar as the Portfolio may
be deemed to be an underwriter under the 1933 Act by virtue of disposing of
portfolio securities; or
10. Issue any senior security, except as appropriate to evidence
indebtedness which the Portfolio is permitted to incur pursuant to Investment
Restriction No. 1. The Portfolio's arrangements in connection with its hedging
activities as described in "Investment Practices" in the Prospectus shall not be
considered senior securities for purposes hereof.
BOND DEBENTURE PORTFOLIO
The Bond Debenture Portfolio of the Trust may not:
1. Sell short or buy on margin, although it may obtain short-term credit as
needed to clear purchases of securities;
2. Buy or sell put or call options, although it may buy, hold or sell
warrants acquired with debt securities;
3. Borrow in excess of 5% of the Portfolio's gross assets taken at cost or
market value whichever is lower at the time of borrowing, and then only as a
temporary measure for extraordinary or emergency purposes;
4. Act as an underwriter of securities issued by others, except where it
may be deemed to be an underwriter by selling a portfolio security requiring
registration under the Securities Act of 1933;
5. Invest knowingly more than 15% of its gross assets in illiquid
securities;
6. Make loans, except for (a) time or demand deposits with banks, (b)
purchasing commercial paper or publicly-offered debt securities at original
issue or otherwise, (c) short-term repurchase agreements with sellers of
securities the Portfolio has bought and (d) loans of portfolio securities to
registered broker-dealers if 100% secured by cash or cash equivalents, made in
full compliance with applicable regulations and which, in management's opinion,
do not expose the Portfolio to significant risks or impair its qualification for
pass-through tax treatment under the Internal Revenue Code;
7. Pledge, mortgage, or hypothecate its assets;
8. Buy or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein) or oil, gas or other mineral leases,
or commodities, or commodity contracts although it may buy securities of
companies that deal in such interests (however, the Portfolio may hold and sell
any of the aforementioned or any other property acquired through ownership of
other securities, although the Portfolio may not purchase securities for the
purpose of acquiring those interests);
9. Buy securities issued by any other open-end investment company (except
pursuant to a plan of merger, consolidation or acquisition of assets), although
it may invest up to 5% of its gross assets, taken at market value at the time of
investment, in closed-end investment companies, provided such purchase is made
in the open market and does not involve the payment of a fee or commission
greater than the customary broker's commission;
10. Invest more than 5% of its gross assets, taken at market value at the
time of investment in securities of companies with less than three years'
continuous operation, including predecessor companies;
11. With respect to 75% of its gross assets, buy the securities of any
issuer if the purchase causes it (a) to have more than 5% of its gross assets
invested in the securities of such issuer (except obligations of the United
States, its agencies or instrumentalities) or (b) to own more than 10% of the
outstanding voting securities of such issuer;
12. Hold securities of any issuer, any of whose officers, directors or
security holders is an officer, director or partner of the Adviser or
Sub-Adviser or an officer or director of the Portfolio, if after the purchase of
the securities of such issuer, one or more of such persons owns beneficially
more than 1/2 of 1% of the securities of such issuer and such persons together
own beneficially more than 5% of such securities;
13. Concentrate its investments in a particular industry, though, if it is
deemed appropriate to its investment objective, up to 25% of the market value of
its gross assets at the time of investment may be invested in any one industry
classification used for investment purposes;
14. Buy from or sell to any of the Trust's directors, employees, or the
Investment Adviser or Sub-Adviser or any of its officers, directors, partners or
employees, any securities other than shares of the Portfolio's common stock; or
15. Invest more than 10% of the market value of its gross assets at the
time of investment in debt securities which are in default as to interest or
principal.
With respect to investment restriction 5. above, securities subject to legal or
contractual restrictions on resale, which are determined by the Board of
Trustees, or by the Sub-Adviser pursuant to delegated authority, to be liquid
are considered liquid securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - QUALITY BOND PORTFOLIO, SELECT EQUITY
PORTFOLIO, LARGE CAP STOCK PORTFOLIO, SMALL CAP STOCK PORTFOLIO AND
INTERNATIONAL EQUITY PORTFOLIO
The investment restriction described below is not a fundamental policy of these
Portfolios and may be changed by the Trustees. This non-fundamental investment
policy requires that each such Portfolio may not:
(i) acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's total assets would be in investments that are illiquid;
(ii) Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three years;
(iii) Invest in warrants (other than warrants acquired by the Portfolio as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Portfolio's net assets or if, as a result, more than 2% of
the Portfolio's net assets would be invested in warrants not listed on a
recognized U.S. or foreign stock exchange, to the extent permitted by applicable
state securities laws; or
(iv) Purchase or retain securities of any issuer if, to the knowledge of
the Portfolio, any of the Portfolio's officers or Trustees or any officer of the
Advisor individually owns more than 1/2 of 1% of the issuer's outstanding
securities and such persons owning more than 1/2 of 1% of such securities
together beneficially own more than 5% of such securities, all taken at market.
DESCRIPTION OF SECURITIES RATINGS
A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<CAPTION>
<S> <C>
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative
degree of safety. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign designation.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely of payment. They are, however, somewhat more vulnerable to
the adverse effects changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
C&D These ratings indicate that the issue is either in default or is
expected to be in default upon maturity.
</TABLE>
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
VARIABLE RATE DEMAND BOND RATINGS
Standard & Poor's assigns "dual" ratings to all long-term debt issues that have
as part of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols are used to denote the put option (for example,
'AAA/A-1') or if the nominal maturity is short, a rating of 'SP-1+/AAA' is
assigned.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assignment:
- - Amortization schedule (the longer the final maturity relative to other
maturities the more likely it will be treated as a note).
- - Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note). Note rating
symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AAA preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance, as
B Predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from 'AA' to 'B' may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:
PREFERRED STOCK RATINGS (MOODY'S)
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated 'a' is considered to be an upper-medium
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated 'ba' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers 1,
2 and 3 in each rating classification from "aa" through "b" in its preferred
stock rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
OFFICERS AND TRUSTEES
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Lorry J. Stensrud* President and Chief President of Cova Financial Services
One Tower Lane, Suite 3000 Executive Officer Life Insurance Company ("Cova Life")
Oakbrook Terrace, IL 60181-4644 since June, 1995; prior thereto,
Age: 47 Executive Vice President of Cova Life
William C. Mair* Vice President, Treasurer, Vice President and Controller of
One Tower Lane, Suite 3000 Controller, Chief Cova Life; Vice President, Treasurer
Oakbrook Terrace, IL 60181-4644 Financial Officer, Chief and Controller of Cova Investment
Age: 54 Accounting Officer and Advisory Corporation
Trustee
Stephen M. Alderman Trustee Partner in the law firm of Garfield
211 West Wacker Drive & Merel
Chicago, IL 60606
Age: 36
Theodore A. Myers Trustee Executive Vice President and Chief
550 Washington Avenue Financial Officer of Qualitech
Glencoe, IL 60022 Steel Corporation, a producer of
Age: 65 high quality engineered steels for
automotive, transportation and capital
goods industries; Director of McClouth
Steel Co.; Prior to August, 1993,
Senior Vice President, Chief Financial
Officer and a Director of Doskocil
Companies, Inc., a food processing and
distribution company; Trustee of other
investment companies advised by VKAC
Deborah A. Vohasek Trustee Principal, Vohasek Oetjen Marketing
601 South LaSalle Street
Chicago, IL 60605
Age: 32
R. Kevin Williams Trustee Partner in the law firm of
20 North Wacker Drive O'Donnell, Byrne & Williams from
Chicago, IL 60606 June 1993 through the present;
Age: 41 Associate Attorney, Sonnenberg,
Anderson, O'Donnell & Rodriguez,
September 1988 through May 1993
William H. Wilton Vice President Vice President & Actuary of Cova
One Tower Lane, Suite 3000 Life; Prior to October, 1992,
Oakbrook Terrace, IL 60181-4844 Associate Actuary, Allstate Life
Age: 35 Insurance Co., Northbrook, IL
Jeffery K. Hoelzel Senior Vice President and Senior Vice President, General
One Tower Lane, Suite 3000 Secretary Counsel, Secretary and Director of
Oakbrook Terrace, IL 60181-4644 Cova Life; Secretary and Director of
Age: 32 Cova Investment Advisory Corporation;
prior to June, 1992, Associate Attorney
with the law firm of Lord, Bissell &
Brook in Chicago
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $10,000 and an additional fee
of $1,000 for each Trustees' meeting attended. In addition, disinterested
Trustees who are members of any Board committees will receive a separate $1,000
fee for attendance of any committee meeting that is held on a day on which no
Board meeting is held.
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed only in connection with investments
in and payments under certain variable annuity contracts ("variable contracts")
issued by Cova Financial Services Life Insurance Company and its affiliated
insurance companies. On September 30, 1996, Cova Variable Annuity Account One, a
separate account of Cova Financial Services Life Insurance Company and
Cova Variable Annuity Account Five, a separate account of Cova Financial Life
Insurance Company, were known to own of record 100%. Cova Financial Services
Life Insurance Company contributed the initial capital to the Trust.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of September 30, 1996, there were no
persons owning variable contracts which would entitle them to instruct Cova Life
with respect to more than 5% of the voting securities of the Trust.
CUSTODIAN
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts 02111, is
the custodian of the Trust and has custody of all securities and cash of the
Trust. The custodian, among other things, attends to the collection of principal
and income, and payment for and collection of proceeds of securities bought and
sold by the Trust.
PERFORMANCE DATA
As required by regulations of the Securities and Exchange Commission, the
annualized total return of the Growth and Income, Money Market, Quality Income,
High Yield and Stock Index Portfolios for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Portfolio over the period are reinvested. It
is then assumed that at the end of the period, the entire amount is redeemed.
The annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Investment operations for the Portfolios depicted below commenced on December
11, 1989 for the Quality Income and High Yield Portfolios; July 1, 1991 for the
Money Market Portfolio; November 1, 1991 for the Stock Index Portfolio; and May
1, 1992 for the Growth and Income Portfolio. The average annual total return
computations for these Portfolios are calculated from the first day of the month
following the month in which the investment operations commenced. The
performance figures shown for the Portfolios in the chart below reflect the
actual fees and expenses paid by the Portfolios.
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/95
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Portfolio Performance
----------------------
Portfolio 1 year 5 years Since Inception
- ----------------- ---------------------- --------- ----------------
Growth and Income 32.24% -- 12.26%
Money Market 6.01% -- 4.47%
Quality Income 17.99% 9.12% 8.93%
High Yield 16.69% 15.14% 13.35%
Stock Index 36.87% -- 14.59%
</TABLE>
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to the Trust
and passes upon the legality of the Trust's shares.
The independent auditors for the Trust are KPMG Peat Marwick, LLP, 303 East
Wacker Drive, Chicago, Illinois. The selection of independent auditors was
ratified by the shareholders of the Trust at a Special Meeting of Shareholders
of the Trust held on February 9, 1996.
INVESTMENT ADVISORY AGREEMENT
Cova Investment Advisory Corporation (the "Investment Adviser"), One Tower Lane,
Suite 3000, Oakbrook Terrace, Illinois 60181-4644 is an Illinois corporation
which was incorporated on August 31, 1993 under the name Oakbrook Investment
Advisory Corporation and which is registered with the Securities and Exchange
Commission as an investment adviser under the Investment Advisers Act of 1940.
The Investment Adviser is a wholly-owned subsidiary of Cova Life Management
Company, a Delaware corporation, which in turn, is a wholly-owned subsidiary of
Cova Corporation, a Missouri corporation, which in turn, is a wholly-owned
subsidiary of General American Life Insurance Company ("General American"), a
St. Louis-based mutual company. General American has more than $235 billion of
life insurance in force and approximately $9.6 billion in assets.
The Investment Adviser commenced providing investment advisory services to all
Portfolios of the Trust as of May 1, 1996 pursuant to an Investment Advisory
Agreement dated April 1, 1996 ("Investment Advisory Agreement"). Prior to this
date, VKAC had acted as the investment adviser to all Portfolios of the Trust.
The Investment Advisory Agreement, between the Investment Adviser and the Trust,
was approved by shareholders of the Trust at a Special Meeting of Shareholders
held on February 9, 1996 and was also approved by the Board of Trustees of the
Trust on that same date.
As described in the Prospectus, the Investment Adviser has retained Sub-Advisers
to assist it in managing the Portfolios. The Sub-Advisory Agreement between the
Investment Adviser and Van Kampen American Capital Investment Advisory Corp. was
approved by the Board of Trustees, including a majority of the independent
Trustees, at a meeting held on February 9, 1996 and was also approved by the
shareholders of the Trust at the Special Meeting held on that same date. The
Sub-Advisory Agreements between the Investment Adviser and Lord, Abbett & Co.
and J. P. Morgan Investment Management Inc., respectively, were approved by the
Board of Trustees, including a majority of the independent Trustees, on February
9, 1996. Cova Financial Services Life Insurance Company, as sole shareholder of
the Portfolios for which J. P. Morgan Investment Management Inc. and Lord,
Abbett & Co. act as Sub-Advisers, approved the Sub-Advisory Agreements between
the Investment Adviser and each of these two Sub-Advisers by way of corporate
resolutions adopted in April of 1996.
Under the terms of the Investment Advisory Agreement, the Investment Adviser is
obligated to (i) manage the investment and reinvestment of the assets of each
Portfolio of the Trust in accordance with each Portfolio's investment objective
and policies and limitations, or (ii) in the event that the Investment Adviser
shall retain a sub-adviser or sub-advisers, to supervise and implement the
investment activities of any Portfolio for which any such sub-adviser has been
retained, including responsibility for overall management and administrative
support including managing, providing for and compensating any sub-advisers; and
to administer the Trust's affairs. The Investment Advisory Agreement further
provides that the Investment Adviser agrees, among other things, to administer
the business affairs of each Portfolio, to furnish offices and necessary
facilities and equipment to each Portfolio, to provide administrative services
for each Portfolio, to render periodic reports to the Board of Trustees of the
Trust with respect to each Portfolio, and to permit any of its officers or
employees, or those of any sub-adviser to serve without compensation as trustees
or officers of the Portfolio if elected to such positions.
The Investment Advisory Agreement provides that the Investment Adviser will not
be liable for any error in judgment or of law, or for any loss suffered by the
Trust in connection with the matters to which the agreement relates, except a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Investment Adviser in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under the
Agreement.
The Investment Adviser's activities are subject to the review and supervision of
the Trust's Trustees to whom the Investment Adviser renders periodic reports of
the Trust's investment activities.
The Investment Advisory Agreement may be terminated without penalty upon 60 days
written notice by either party and will automatically terminate in the event of
assignment.
INVESTMENT DECISIONS
Investment decisions for the Trust and for the other investment advisory clients
of the Sub-Advisers are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their investments
generally. Frequently, a particular security may be bought or sold for only one
client or in different amounts and at different times for more than one but less
than all clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security. In addition,
purchases or sales of the same security may be made for two or more clients of a
Sub-Adviser on the same day. In such event, such transactions will be allocated
among the clients in a manner believed by the Sub-Adviser to be equitable to
each. In some cases, this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Trust. Purchase and sale
orders for the Trust may be combined with those of other clients of a
Sub-Adviser in the interest of achieving the most favorable net results for the
Trust.
PORTFOLIO TRANSACTIONS
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer. It is currently intended that the
Sub-Advisers will place all orders for the purchase and sale of portfolio
securities for the Trust and buy and sell securities for the Trust through a
substantial number of brokers and dealers. In so doing, the Sub-Advisers will
use their best efforts to obtain for the Trust the best price and execution
available. In seeking the best price and execution, the Sub-Advisers, having in
mind the Trust's best interests, will consider all factors they deem relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience, and financial stability of the broker-dealer involved, and the
quality of service rendered by the broker-dealer in other transactions.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research, statistical, and quotation services from broker-dealers who
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers with whom they place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various other clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fees paid by the Trust are
not reduced because the Sub-Advisers and/or their affiliates may receive such
services. As permitted by Section 28(e) of the Securities Exchange Act of 1934,
a Sub-Adviser may cause a Portfolio to pay a broker-dealer who provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction provided that the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Trustees may adopt from time to time.
FINANCIAL STATEMENTS
The financial statements, notes and reports of the Independent Auditors for
the year ended December 31, 1995, for the High Yield Portfolio, Stock Index
Portfolio, Quality Income Portfolio, Money Market Portfolio and Growth and
Income Portfolio of the Trust appear in the Trust's Annual Report for the year
ended December 31, 1995, which is incorporated by reference into this Statement
of Additional Information. The Statements of Assets and Liabilities, notes and
reports of the Independent Auditors as of April 1, 1996, for the Quality Bond
Portfolio, Small Cap Stock Portfolio, Large Cap Stock Portfolio, Select
Equity Portfolio, International Equity Portfolio and Bond Debenture
Portfolio of the Trust are incorporated by reference to the Trust's Post-
Effective Amendment No. 14 filed electronically on April 26, 1996. The
unaudited financial statements and notes thereto for the period ended June 30,
1996, for the Quality Bond Portfolio, Small Cap Stock Portfolio, Large Cap
Stock Portfolio, Select Equity Portfolio, International Equity Portfolio and
Bond Debenture Portfolio of the Trust appear in the Trust's Semi-Annual Report
for the period ended June 30, 1996, which is incorporated by reference into
this Statement of Additional Information.
PART C
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
(a) FINANCIAL STATEMENTS
The following financial statements of the Trust are included in Parts A and B
hereof:
Financial Highlights of the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio.
The following financial statements of the High Yield Portfolio, Stock Index
Portfolio, Quality Income Portfolio, Money Market Portfolio and Growth and
Income Portfolio of the Trust are included in the Trust's Annual Report for the
year ended December 31, 1995, filed as Exhibit 12 hereto:
Statements of Assets and Liabilities, December 31, 1995, of the High Yield
Portfolio, Stock Index Portfolio, Quality Income Portfolio, Money Market
Portfolio and Growth and Income Portfolio
Statements of Operations, For the Year Ended December 31, 1995, of the High
Yield Portfolio, Stock Index Portfolio, Quality Income Portfolio, Money Market
Portfolio and Growth and Income Portfolio
Statements of Changes in Net Assets, for the Years Ended December 31, 1995 and
December 31, 1994 of the High Yield Portfolio, Stock Index Portfolio, Quality
Income Portfolio, Money Market Portfolio and Growth and Income Portfolio
Portfolios of Investments, December 31, 1995, of the High Yield Portfolio, Stock
Index Portfolio, Quality Income Portfolio, Money Market Portfolio and Growth and
Income Portfolio
Notes to Financial Statements, December 31, 1995, of the High Yield Portfolio,
Stock Index Portfolio, Quality Income Portfolio, Money Market Portfolio and
Growth and Income Portfolio
Independent Auditors' Reports for the High Yield Portfolio, Stock Index
Portfolio, Quality Income Portfolio, Money Market Portfolio and Growth and
Income Portfolio as of and for the Year Ended December 31, 1995
The following financial statements of the Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio of the Trust
are incorporated by reference to the Trust's Post-Effective Amendment No. 14
filed as Exhibit 12 hereto:
Statements of Assets and Liabilities of the Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio as of April 1, 1996.
Notes to Financial Statements, April 1, 1996, for the Quality Bond Portfolio,
Small Cap Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio
Independent Auditors' Reports for the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio as of April 1, 1996
The following unaudited financial statements of the Quality Bond Portfolio,
Small Cap Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio are included in the
Trust's Semi-Annual Report dated June 30, 1996, filed as Exhibit 12 hereto:
Financial Highlights of the Quality Bond Portfolio, Small Cap Stock Portfolio,
Large Cap Stock Portfolio, Select Equity Portfolio, International Equity
Portfolio and Bond Debenture Portfolio, June 30, 1996 (Unaudited)
Statements of Assets and Liabilities of the Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio as of June 30, 1996
(Unaudited)
Statements of Operations of the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio For the Period Ended June 30, 1996
(Unaudited)
Statements of Changes in Net Assets for the Quality Bond Portfolio, Small Cap
Stock Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio,
International Equity Portfolio and Bond Debenture Portfolio For the Period Ended
June 30, 1996 (Unaudited)
Portfolios of Investments of the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio, June 30, 1996 (Unaudited)
Notes to Financial Statements for the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity Portfolio, International
Equity Portfolio and Bond Debenture Portfolio, June 30, 1996 (Unaudited)
(b) EXHIBITS
(1) Declaration of Trust(4)
(2) By-laws of Trust(4)
(3) Not Applicable
(4) Not Applicable
(5)(a) Form of Investment Advisory Agreement(4)
(b)(i) Form of Sub-Advisory Agreement - Lord, Abbett & Co.(4)
(b)(ii) Form of Sub-Advisory Agreement - J.P. Morgan Investment
Management Inc.(4)
(b)(iii)Form of Sub-Advisory Agreement - Van Kampen American
Capital Investment Advisory Corp.(4)
(6)(a) Principal Underwriters Agreement(2)
(6)(b) Form of Addendum to Principal Underwriters Agreement(3)
(7) Not Applicable
(8)(a) Custodian Contract
(8)(b) Not Applicable
(9)(a) Agency and Service Agreement(1)
(b) Administration Agreement
(10) Consent and Opinion of Counsel(4)
(11) Consent of Independent Auditors
(12)(a) Financial statements, notes and reports of the Independent
Auditors for the year ended December 31, 1995, for the
High Yield Portfolio, Stock Index Portfolio, Quality
Income Portfolio, Money Market Portfolio and Growth and
Income Portfolio are incorporated herein by reference to
the Trust's Annual Report for the year ended December
31, 1995, as filed electronically on February 28, 1996.
(12)(b) Statements of Assets and Liabilities, notes and
reports of the Independent Auditors as of April 1,
1996, for the Quality Bond Portfolio, Small Cap Stock
Portfolio, Large Cap Stock Portfolio, Select Equity
Portfolio, International Equity Portfolio and Bond
Debenture Portfolio are incorporated herein by reference
to the Trust's Post-Effective Amendment No. 14 filed
electronically on April 26, 1996.
(12)(c) Unaudited Financial Statements for the Quality Bond Portfolio,
Small Cap Stock Portfolio, Large Cap Stock Portfolio, Select
Equity Portfolio, International Equity Portfolio and Bond
Debenture Portfolio are incorporated herein by reference to
the Trust's Semi-Annual Report dated June 30, 1996, as filed
electronically with the Securities and Exchange Commission on
August 28, 1996.
(13) Agreement Governing Contribution of Capital(1)
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Quotations(4)
(27) Financial Data Schedules
<FN>
(1) incorporated by reference to Registrant's initial registration on Form N-1A
filed on July 23, 1987.
(2) incorporated by reference to Registrant's Post-Effective Amendment No. 8
filed on May 1, 1993.
(3) incorporated by reference to Registrant's Post-Effective Amendment No. 10
filed on January 14, 1994.
(4) incorporated by reference to Registrant's Post-Effective Amendment No. 14
filed electronically on April 26, 1996.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to Cova Variable Annuity Account One
of Cova Financial Services Life Insurance Company and Cova Variable Annuity
Account Five of Cova Financial Life Insurance Company. Cova Variable Annuity
Account One and Cova Variable Annuity Account Five currently control all
Portfolios of the Trust through their share ownership thereof.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Cova Variable Annuity Account One and Cova Variable Annuity Account Five own all
shares of beneficial interest of the Trust.
ITEM 27. INDEMNIFICATION
Please see Article 5.3 of the Registrant's Agreement and Declaration of Trust
(Exhibit 1) for indemnification of officers and trustees. Registrant's trustees
and officers are also covered by an Errors and Omissions Policy. Section 5 of
the Investment Advisory Agreement between the Registrant and Cova Investment
Advisory Corporation ("Adviser") provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
obligations or duties under the Investment Advisory Agreement on the part of the
Adviser, the Adviser shall not be liable to the Registrant or to any shareholder
of the Registrant for any error in judgment or of law, or for any loss suffered
by the Registrant in connection with the matters to which the Investment
Advisory Agreement relates.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant and the Adviser in connection with the successful
defense of any action, suit or proceeding) is asserted against the Registrant by
such trustee, officer or controlling person or Adviser in connection with the
shares being registered the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Management of the Trust" in the Prospectus and "Officers and Trustees" in
the Statement of Additional Information for information regarding the Investment
Adviser. For information as to the business, profession, vocation or employment
of a substantial nature of each of the officers and directors of the Investment
Adviser, reference is made to the Investment Adviser's current Form ADV filed
under the Investment Advisers Act of 1940, incorporated herein by reference
(File No. 801-45567).
With respect to information regarding the Sub-Advisers, reference is hereby made
to "Management of the Trust" in the Prospectus. For information as to the
business, profession, vocation or employment of a substantial nature of each of
the officers and directors of the Sub-Advisers, reference is made to the current
Form ADVs of the Sub-Advisers filed under the Investment Advisers Act of 1940,
incorporated herein by reference and the file numbers of which are as follows:
Van Kampen American Capital Investment Advisory Corp.
File No. 801-18161
Lord, Abbett & Co.
File No. 801-6997
J.P. Morgan Investment Management Inc.
File No. 801-21011
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Tower Lane, Suite
3000, Oakbrook Terrace, Illinois 60181-4644 or at Investors Bank & Trust
Company, 89 South Street, Boston, Massachusetts 02111; and (ii) by the Adviser
will be maintained at its offices, located at One Tower Lane, Suite 3000,
Oakbrook Terrace, Illinois 60181-4644; and (iii) by each of the Sub-Advisers at
their respective offices as follows: Van Kampen American Capital Investment
Advisory Corp., One Parkview Plaza, Oakbrook Terrace, Illinois 60181; J.P.
Morgan Investment Management Inc., 522 Fifth Avenue, New York, NY 10036; and
Lord, Abbett & Co., The General Motors Building, 767 Fifth Avenue, New York, NY
10153-0203.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
The Registrant will furnish each person to whom a prospectus is delivered with a
copy of the Registrant's latest Annual Report upon request and without charge.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) and has duly caused this Post-Effective Amendment No. 15 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Oakbrook Terrace, and State of
Illinois on the 17th day of October, 1996 .
<TABLE>
<CAPTION>
<S> <C>
COVA SERIES TRUST
By: /s/ LORRY J. STENSRUD
-------------------------------
Lorry J. Stensrud
President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 15 has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ LORRY J. STENSRUD President 10/17/96
- ---------------------- --------
Lorry J. Stensrud (Principal Executive Officer)
Vice President, Treasurer,
/S/WILLIAM C. MAIR* Controller and Trustee (Prin- 10/17/96
- ---------------------- cipal Financial Officer and --------
William C. Mair Principal Accounting Officer)
/S/WILLIAM H. WILTON* Vice President 10/17/96
- ---------------------- --------
William H. Wilton
/S/JEFFERY K. HOELZEL* Senior Vice President 10/17/96
- ---------------------- and Secretary --------
Jeffery K. Hoelzel
/S/STEPHEN M. ALDERMAN* Trustee 10/17/96
- ---------------------- --------
Stephen M. Alderman
/S/THEODORE A. MYERS* Trustee 10/17/96
- ---------------------- --------
Theodore A. Myers
/S/DEBORAH A. VOHASEK* Trustee 10/17/96
- ---------------------- --------
Deborah A. Vohasek
/S/R. KEVIN WILLIAMS* Trustee 10/17/96
- ---------------------- --------
R. Kevin Williams
</TABLE>
*By: /s/ LORRY J. STENSRUD
-----------------------------------
Lorry J. Stensrud, Attorney-in-Fact
Index to Exhibits
EX-99.B(8)(a) Custodian Contract
EX-99.B(9)(b) Administration Agreement
EX-99.B11 Consent of Independent Auditors
EX-27 Financial Data Schedules
CUSTODIAN AGREEMENT
between
COVA SERIES TRUST
(known as Van Kampen Merritt Series Trust until May 1, 1996)
and
INVESTORS BANK & TRUST COMPANY
TABLE OF CONTENTS
1. Bank Appointed Custodian .............................................
2. Definitions ..........................................................
2.1 Authorized Person ........................................
2.2 Security .................................................
2.3 Portfolio Security .......................................
2.4 Officers' Certificate ....................................
2.5 Book-Entry System ........................................
2.6 Depository ...............................................
2.7 Proper Instructions ......................................
3. Separate Accounts ....................................................
4. Certification as to Authorized Persons ...............................
5. Custody of Cash ......................................................
5.1 Purchase of Securities ...................................
5.2 Redemptions ..............................................
5.3 Distributions and Expenses of Fund .......................
5.4 Payment in Respect of Securities .........................
5.5 Repayment of Loans .......................................
5.6 Repayment of Cash ........................................
5.7 Foreign Exchange Transactions ............................
5.8 Other Authorized Payments ................................
5.9 Termination ..............................................
6. Securities ...........................................................
6.1 Segregation and Registration .............................
6.2 Voting and Proxies .......................................
6.3 Book-Entry System ........................................
6.4 Use of a Depository ......................................
6.5 Use of Book-Entry System for Commercial Paper ............
6.6 Use of Immobilization Programs ...........................
6.7 Eurodollar CDS ...........................................
6.8 Options and Futures Transactions .........................
6.9 Segregated Account .......................................
6.10 Interest Bearing Call or Time Deposits ...................
<PAGE>
6.11 Transfer of Securities ...................................
7. Redemptions ..........................................................
8. Merger, Dissolution, etc. of Fund ....................................
9. Actions of Bank Without Prior Authorization ..........................
10. Collections and Defaults .............................................
11. Maintenance of Records and Accounting Services .......................
12. Fund Evaluation ......................................................
13. Concerning the Bank ..................................................
13.1 Performance of Duties;
Standard of Care .....................................
13.2 Agents and Subcustodians with Respect to Property
of the Fund Held in the United States .................
13.3 Duties of the Bank with Respect to Property
Held Outside of the United States .....................
13.4 Insurance ...............................................
13.5 Fees and Expenses of Bank ...............................
13.6 Advances by Bank ........................................
14. Termination .........................................................
15. Confidentiality .....................................................
16. Notices .............................................................
17. Amendments ..........................................................
18. Parties .............................................................
19. Governing Law .......................................................
20. Counterparts ........................................................
CUSTODIAN AGREEMENT
AGREEMENT made as of this 1st day of April, 1996, between COVA SERIES
TRUST (known as Van Kampen Merritt Series Trust until May 1, 1996), a
Massachusetts Business Trust (the "Fund") and INVESTORS BANK & TRUST COMPANY
(the "Bank").
The Fund, an open-end management investment company, desires to place and
maintain all of its portfolio securities and cash in the custody of the Bank.
The Bank has at least the minimum qualifications required by Section 17(f)(1) of
the Investment Company Act of 1940 (the "1940 Act") to act as custodian of the
portfolio securities and cash of the Fund, and has indicated its willingness to
so act, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. Effective April 1, 1996, or as otherwise
agreed by the parties, the Fund hereby appoints the Bank as custodian of its
portfolio securities and cash delivered to the Bank as hereinafter described and
the Bank agrees to act as such upon the terms and conditions hereinafter set
forth. It is expressly agreed that certain portfolio securities and cash of the
Fund advised by Van Kampen American Capital Investment Advisors Corporation will
not be delivered to the Bank until May 1, 1996.
2. Definitions. Whenever used herein, the terms listed below will have the
following meaning:
2.1 Authorized Person. Authorized Person will mean any of the persons duly
authorized to give Proper Instructions or otherwise act on behalf of the Fund by
appropriate resolution of its Board of Directors (the "Board"), and set forth in
a certificate as required by Section 4 hereof.
2.2 Security. The term security as used herein will have the same meaning
as when such term is used in the Securities Act of 1933, as amended, including,
without limitation, any note, stock, treasury stock, bond, debenture, evidence
of indebtedness, certificate of interest or participation in any profit sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
a foreign currency, or, in general, any interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to, or option contract to purchase or sell any of the foregoing, and
futures, forward contracts and options thereon.
2.3 Portfolio Security. Portfolio Security will mean any security owned by
the Fund.
2.4 Officers' Certificate. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.5 Book-Entry System. Book-Entry System shall mean the Federal
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank, its
successor or successors and its nominee or nominees.
2.6 Depository. Depository shall mean The Depository Trust Company ("DTC"),
a clearing agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934 ("Exchange Act"), its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the 1940 Act, its successor or successors and its nominee or nominees,
specifically identified in a certified copy of a resolution of the Board.
2.7 Proper Instructions. Proper Instructions shall mean (i) instructions
regarding the purchase or sale of Portfolio Securities, and payments and
deliveries in connection therewith, given by an Authorized Person as shall have
been designated in an Officers' Certificate, such instructions to be given in
such form and manner as the Bank and the Fund shall agree upon from time to
time, and (ii) instructions (which may be continuing instructions) regarding
other matters signed or initialed by such one or more persons from time to time
designated in an Officers' Certificate as having been authorized by the Board.
Oral instructions will be considered Proper Instructions if the Bank reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be promptly confirmed in writing. The Bank shall act upon
and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up or
confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to report
such discrepancy to the Fund. The Fund shall be responsible, at the Fund's
expense, for taking any action, including any reprocessing, necessary to correct
any such discrepancy or error, and to the extent such action requires the Bank
to act the Fund shall give the Bank specific Proper Instructions as to the
action required. Upon receipt of an Officers' Certificate as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Fund, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank are satisfied that such procedures afford adequate safeguards
for the Fund's assets.
3. Separate Accounts. If the Fund has more than one series or portfolio,
the Bank will segregate the assets of each series or portfolio to which this
Agreement relates into a separate account for each such series or portfolio
containing the assets of such series or portfolio (and all investment earnings
thereon).
4. Certification as to Authorized Persons. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
Board, it being understood that upon the occurrence of any change in the
information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund, will sign a new or amended certification setting forth
the change and the new, additional or omitted names or signatures. The Bank will
be entitled to rely and act upon any Officers' Certificate given to it by the
Fund which has been signed by Authorized Persons named in the most recent
certification.
5. Custody of Cash. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Section 13.2 hereof, including borrowed funds, delivered
to the Bank, subject only to draft or order by the Bank acting pursuant to the
terms of this Agreement. Upon receipt by the Bank of Proper Instructions (which
may be continuing instructions) or in the case of payments for redemptions and
repurchases of outstanding shares of common stock of the Fund, notification from
the Fund's transfer agent as provided in Section 7, requesting such payment,
designating the payee or the account or accounts to which the Bank will release
funds for deposit, and stating that it is for a purpose permitted under the
terms of this Section 5, specifying the applicable subsection, the Bank will
make payments of cash held for the accounts of the Fund, insofar as funds are
available for that purpose, only as permitted in subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of securities for the Fund,
against contemporaneous receipt of such securities by the Bank or, against
delivery of such securities to the Bank in accordance with generally accepted
settlement practices and customs in the jurisdiction or market in which the
transaction occurs, registered in the name of the Fund or in the name of, or
properly endorsed and in form for transfer to, the Bank, or a nominee of the
Bank, or receipt for the account of the Bank pursuant to the provisions of
Section 6 below, each such payment to be made at the purchase price shown on a
broker's confirmation (or transaction report in the case of Book Entry Paper) of
purchase of the securities received by the Bank before such payment is made, as
confirmed in the Proper Instructions received by the Bank before such payment is
made.
5.2 Redemptions. In such amount as may be necessary for the repurchase or
redemption of common shares of the Fund offered for repurchase or redemption in
accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment on the account of
the Fund of dividends or other distributions to shareholders as may from time to
time be declared by the Board, interest, taxes, management or supervisory fees,
distribution fees, fees of the Bank for its services hereunder and reimbursement
of the expenses and liabilities of the Bank as provided hereunder, fees of any
transfer agent, fees for legal, accounting, and auditing services, or other
operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in connection with the
conversion, exchange or surrender of Portfolio Securities or securities
subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to the Fund, but, in
the case of final payment, only upon redelivery to the Bank of any Portfolio
Securities pledged or hypothecated therefor and upon surrender of documents
evidencing the loan;
5.6 Repayment of Cash. To repay the cash delivered to the Fund for the
purpose of collateralizing the obligation to return to the Fund certificates
borrowed from the Fund representing Portfolio Securities, but only upon
redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions. For payments in connection with foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery which may be entered into by the Bank on behalf of the Fund
upon the receipt of Proper Instructions, such Proper Instructions to specify the
currency broker or banking institution (which may be the Bank, or any other
subcustodian or agent hereunder, acting as principal) with which the contract or
option is made, and the Bank shall have no duty with respect to the selection of
such currency brokers or banking institutions with which the Fund deals or for
their failure to comply with the terms of any contract or option.
5.8 Other Authorized Payments. For other authorized transactions of the
Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made, setting
forth the purpose for which such obligation was incurred and declaring such
purpose to be a proper corporate purpose.
5.9 Termination. For payments upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
6. Securities.
6.1 Segregation and Registration. Except as otherwise provided herein, and
except for securities to be delivered to any subcustodian appointed pursuant to
Section 13.2 hereof, the Bank as custodian, will receive and hold pursuant to
the provisions hereof, in a separate account or accounts and physically
segregated at all times from those of other persons, any and all Portfolio
Securities which may now or hereafter be delivered to it by or for the account
of the Fund. All such Portfolio Securities will be held or disposed of by the
Bank for, and subject at all times to, the instructions of the Fund pursuant to
the terms of this Agreement. Subject to the specific provisions herein relating
to Portfolio Securities that are not physically held by the Bank, the Bank will
register all Portfolio Securities (unless otherwise directed by Proper
Instructions or an Officers' Certificate), in the name of a registered nominee
of the Bank as defined in the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, and will execute and deliver all such
certificates in connection therewith as may be required by such laws or
regulations or under the laws of any state.
The Fund will from time to time furnish to the Bank appropriate instruments
to enable it to hold or deliver in proper form for transfer, or to register in
the name of its registered nominee, any Portfolio Securities which may from time
to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank will
vote any of the Portfolio Securities held hereunder, except in accordance with
Proper Instructions or an Officers' Certificate. The Bank will execute and
deliver, or cause to be executed and delivered, to the Fund all notices, proxies
and proxy soliciting materials with respect to such Securities, such proxies to
be executed by the registered holder of such Securities (if registered otherwise
than in the name of the Fund), but without indicating the manner in which such
proxies are to be voted.
6.3 Book-Entry System. Provided (i) the Bank has received a certified copy
of a resolution of the Board specifically approving deposits of Fund assets in
the Book-Entry System, and (ii) for any subsequent changes to such arrangements
following such approval, the Board has reviewed and approved the arrangement and
has not delivered an Officer's Certificate to the Bank indicating that the Board
has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the Book-Entry System
provided that such Portfolio Securities are represented in an account
("Account") of the Bank (or its agent) in such System which shall not include
any assets of the Bank (or such agent) other than assets held as a fiduciary,
custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent) with respect to the Fund's
participation in the Book-Entry System through the Bank (or any such agent) will
identify by book entry Portfolio Securities which are included with other
securities deposited in the Account and shall at all times during the regular
business hours of the Bank (or such agent) be open for inspection by duly
authorized officers, employees or agents of the Fund. Where securities are
transferred to the Fund's account, the Bank shall also, by book entry or
otherwise, identify as belonging to the Fund a quantity of securities in
fungible bulk of securities (i) registered in the name of the Bank or its
nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve
Bank;
(c) The Bank (or its agent) shall pay for securities purchased for the
account of the Fund or shall pay cash collateral against the return of Portfolio
Securities loaned by the Fund upon (i) receipt of advice from the Book-Entry
System that such Securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Bank (or its agent) to reflect such
payment and transfer for the account of the Fund. The Bank (or its agent) shall
transfer securities sold or loaned for the account of the Fund upon (i) receipt
of advice from the Book-Entry System that payment for securities sold or payment
of the initial cash collateral against the delivery of securities loaned by the
Fund has been transferred to the Account; and
(ii) the making of an entry on the records of the Bank (or its agent) to
reflect such transfer and payment for the account of the Fund. Copies of all
advices from the Book-Entry System of transfers of securities for the account of
the Fund shall identify the Fund, be maintained for the Fund by the Bank and
shall be provided to the Fund at its request. The Bank shall send the Fund a
confirmation, as defined by Rule 17f-4 of the 1940 Act, of any transfers to or
from the account of the Fund;
(d) The Bank will promptly provide the Fund with any report obtained by the
Bank or its agent on the Book-Entry System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
Book-Entry System;
(e) The Bank shall be liable to the Fund for any loss or damage to the Fund
resulting from use of the Book-Entry System by reason of any gross negligence,
willful misfeasance or bad faith of the Bank or any of its agents or of any of
its or their employees or from any reckless disregard by the Bank or any such
agent of its duty to use its best efforts to enforce such rights as it may have
against the Book-Entry System; at the election of the Fund, it shall be entitled
to be subrogated for the Bank in any claim against the Book-Entry System or any
other person which the Bank or its agent may have as a consequence of any such
loss or damage if and to the extent that the Fund has not been made whole for
any loss or damage;
6.4 Use of a Depository. Provided (i) the Bank has received a certified
copy of a resolution of the Board specifically approving deposits in DTC or
other such Depository and (ii) for any subsequent changes to such arrangements
following such approval, the Board has reviewed and approved the arrangement and
has not delivered an Officer's Certificate to the Bank indicating that the Board
has withdrawn its approval:
(a) The Bank may use a Depository to hold, receive, exchange, release,
lend, deliver and otherwise deal with Portfolio Securities including stock
dividends, rights and other items of like nature, and to receive and remit to
the Bank on behalf of the Fund all income and other payments thereon and to take
all steps necessary and proper in connection with the collection thereof;
(b) Registration of Portfolio Securities may be made in the name of any
nominee or nominees used by such Depository;
(c) Payment for securities purchased and sold may be made through the
clearing medium employed by such Depository for transactions of participants
acting through it. Upon any purchase of Portfolio Securities, payment will be
made only upon delivery of the securities to or for the account of the Fund and
the Fund shall pay cash collateral against the return of Portfolio Securities
loaned by the Fund only upon delivery of the Securities to or for the account of
the Fund; and upon any sale of Portfolio Securities, delivery of the Securities
will be made only against payment thereof or, in the event Portfolio Securities
are loaned, delivery of Securities will be made only against receipt of the
initial cash collateral to or for the account of the Fund; and
(d) The Bank shall be liable to the Fund for any loss or damage to the Fund
resulting from use of a Depository by reason of any gross negligence, willful
misfeasance or bad faith of the Bank or its employees or from any reckless
disregard by the Bank of its duty to use its best efforts to enforce such rights
as it may have against a Depository. In this connection, the Bank shall use its
best efforts to ensure that:
(i) The Depository obtains replacement of any certificated Portfolio
Security deposited with it in the event such Security is lost, destroyed,
wrongfully taken or otherwise not available to be returned to the Bank upon its
request;
(ii) Any proxy materials received by a Depository with respect to Portfolio
Securities deposited with such Depository are forwarded immediately to the Bank
for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the Bank confirmation of any
purchase or sale of Portfolio Securities and of the appropriate book entry made
by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the Bank such records with
respect to the performance of the Bank's obligations and duties hereunder as may
be necessary for the Fund to comply with the recordkeeping requirements of
Section 31(a) of the 1940 Act and Rule 31(a) thereunder; and
(v) Such Depository delivers to the Bank and the Fund all internal
accounting control reports, whether or not audited by an independent public
accountant, as well as such other reports as the Fund may reasonably request in
order to verify the Portfolio Securities held by such Depository.
6.5 Use of Book-Entry System for Commercial Paper. Provided (i) the Bank
has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year
following such approval the Board has received and approved the arrangements,
upon receipt of Proper Instructions and upon receipt of confirmation from an
Issuer (as defined below) that the Fund has purchased such Issuer's Book-Entry
Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund,
commercial paper issued by issuers with whom the Bank has entered into a
book-entry agreement (the "Issuers"). In maintaining its Book-Entry Paper
System, the Bank agrees that:
(a) the Bank will maintain all Book-Entry Paper held by the Fund in an
account of the Bank that includes only assets held by it for customers;
(b) the records of the Bank with respect to the Fund's purchase of
Book-Entry Paper through the Bank will identify, by book-entry, commercial paper
belonging to the Fund which is included in the Book-Entry Paper System and shall
at all times during the regular business hours of the Bank be open for
inspection by duly authorized officers, employees or agents of the Fund;
(c) the Bank shall pay for Book-Entry Paper purchased for the account of
the Fund upon the contemporaneous (i) receipt of advice from the Issuer that
such sale of Book-Entry Paper has been effected, and (ii) making of an entry on
the records of the Bank to reflect such payment and transfer for the account of
the Fund;
(d) the Bank shall cancel such Book-Entry Paper obligation upon the
maturity thereof upon the contemporaneous (i) receipt of advice that payment for
such Book-Entry Paper has been transferred to the Fund, and (ii) making of an
entry on the records of the Bank to reflect such payment for the account of the
Fund;
(e) the Bank shall transmit to the Fund a transaction journal confirming
each transaction in Book-Entry Paper for the account of the Fund on the next
business day following the transaction; and
(f) the Bank will send to the Fund such reports on its system of internal
accounting control with respect to the Book-Entry Paper System as the Fund may
reasonably request from time to time.
6.6 Use of Immobilization Programs. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving the
maintenance of Portfolio Securities in an immobilization program operated by a
bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and (ii)
for each year following such approval the Board has reviewed and approved the
arrangement and has not delivered an Officers' Certificate to the Bank
indicating that the Board has withdrawn its approval, the Bank shall enter into
such immobilization program with such bank acting as a subcustodian hereunder.
6.7 Eurodollar CDS. Any Portfolio Securities which are Eurodollar CDs may
be physically held by the European branch of the U.S. banking institution that
is the issuer of such Eurodollar CD (a "European Branch"), provided that such
Securities are identified on the books of the Bank as belonging to the Fund and
that the books of the Bank identify the European Branch holding such Securities.
Notwithstanding any other provision of this Agreement to the contrary, except as
stated in the first sentence of this subsection 6.7, the Bank shall be under no
other duty with respect to such Eurodollar CDs belonging to the Fund, and shall
have no liability to the Fund or its shareholders with respect to the actions,
inactions, whether negligent or otherwise of such European Branch in connection
with such Eurodollar CDs, except for any loss or damage to the Fund resulting
from the Bank's own gross negligence, willful misfeasance or bad faith in the
performance of its duties hereunder.
6.8 Options and Futures Transactions.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or Over-the-
Counter.
1. The Bank shall take action as to put options ("puts") and call options
("calls") purchased or sold (written) by the Fund regarding escrow or other
arrangements (i) in accordance with the provisions of any agreement entered into
upon receipt of Proper Instructions between the Bank, any broker-dealer
registered under the Exchange Act and a member of the National Association of
Securities Dealers, Inc. (the "NASD"), and, if necessary, the Fund relating to
the compliance with the rules of the Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations.
2. Unless another agreement requires it to do so, the Bank shall be under
no duty or obligation to see that the Fund has deposited or is maintaining
adequate margin, if required, with any broker in connection with any option, nor
shall the Bank be under duty or obligation to present such option to the broker
for exercise unless it receives Proper Instructions from the Fund. The Bank
shall have no responsibility for the legality of any put or call purchased or
sold on behalf of the Fund, the propriety of any such purchase or sale, or the
adequacy of any collateral delivered to a broker in connection with an option or
deposited to or withdrawn from a Segregated Account (as defined in subsection
6.9 below). The Bank specifically, but not by way of limitation, shall not be
under any duty or obligation to: (i) periodically check or notify the Fund that
the amount of such collateral held by a broker or held in a Segregated Account
is sufficient to protect such broker of the Fund against any loss; (ii) effect
the return of any collateral delivered to a broker; or (iii) advise the Fund
that any option it holds, has or is about to expire. Such duties or obligations
shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges
1. The Bank shall take action as to puts, calls and futures contracts
("Futures") purchased or sold by the Fund in accordance with the provisions of
any agreement among the Fund, the Bank and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract Market, or
any similar organization or organizations, regarding account deposits in
connection with transactions by the Fund.
2. The responsibilities and liabilities of the Bank as to futures, puts and
calls traded on commodities exchanges, any Futures Commission Merchant account
and the Segregated Account shall be limited as set forth in subparagraph (a)(2)
of this Section 6.8 as if such subparagraph referred to Futures Commission
Merchants rather than brokers, and Futures and puts and calls thereon instead of
options.
6.9 Segregated Account. The Bank shall upon receipt of Proper Instructions
establish and maintain a Segregated Account or Accounts for and on behalf of the
Fund, into which Account or Accounts may be transferred upon receipt of Proper
Instructions cash and/or Portfolio Securities:
(a) in accordance with the provisions of any agreement among the Fund, the
Bank and a broker-dealer registered under the Exchange Act and a member of the
NASD or any Futures Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Options Clearing Corporation
and of any registered national securities exchange or the Commodity Futures
Trading Commission or any registered Contract Market, or of any similar
organizations regarding escrow or other arrangements in connection with
transactions by the Fund;
(b) for the purpose of segregating cash or securities in connection with
options purchased or written by the Fund or commodity futures purchased or
written by the Fund;
(c) for the deposit of liquid assets, such as cash, U.S. Government
securities or other high grade debt obligations, having a market value (marked
to market on a daily basis) at all times equal to not less than the aggregate
purchase price due on the settlement dates of all the Fund's then outstanding
forward commitment or "when-issued" agreements relating to the purchase of
Portfolio Securities and all the Fund's then outstanding commitments under
reverse repurchase agreements entered into with broker-dealer firms;
(d) for the deposit of any Portfolio Securities which the Fund has agreed
to sell on a forward commitment basis, all in accordance with Investment Company
Act Release No. 10666;
(e) for the purposes of compliance by the Fund with the procedures required
by Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the maintenance
of Segregated Accounts by registered investment companies;
(f) for other proper corporate purposes, but only, in the case of this
clause (f), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board, or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such Segregated Account and declaring
such purposes to be proper corporate purposes.
(g) Assets may be withdrawn from the Segregated Account pursuant to Proper
Instructions only
(i) in accordance with the provisions of any agreements referenced in (a)
or (b) above;
(ii) for sale or delivery to meet the Fund's obligations under outstanding
firm commitment or when-issued agreements for the purchase of Portfolio
Securities and under reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal or greater value
deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding forward commitment or
when-issued agreements for the purchase of portfolio securities or reverse
repurchase agreements or other interests are sold to other parties or the Fund's
obligations thereunder are met from assets of the Fund other than those in the
Segregated Account; or
(v) for delivery upon settlement of a forward commitment agreement for the
sale of Portfolio Securities.
6.10 Interest Bearing Call or Time Deposits. The Bank shall, upon receipt
of Proper Instructions relating to the purchase by the Fund of interest-bearing
fixed-term and call deposits, transfer cash, by wire or otherwise, in such
amounts and to such bank or banks as shall be indicated in such Proper
Instructions. The Bank shall include in its records with respect to the assets
of the Fund appropriate notation as to the amount of each such deposit, the
banking institution with which such deposit is made (the "Deposit Bank"), and
shall retain such forms of advice or receipt evidencing the deposit, if any, as
may be forwarded to the Bank by the Deposit Bank. Such deposits shall be deemed
Portfolio Securities of the Fund and the responsibility of the Bank therefore
shall be the same as and no greater than the Bank's responsibility in respect
of other Portfolio Securities of the Fund.
6.11 Transfer of Securities. The Bank will transfer, exchange, deliver or
release Portfolio Securities held by it hereunder, insofar as such Securities
are available for such purpose, provided that before making any transfer,
exchange, delivery or release under this Section the Bank will receive Proper
Instructions requesting such transfer, exchange or delivery stating that it is
for a purpose permitted under the terms of this Section 6.11, specifying the
applicable subsection, or describing the purpose of the transaction with
sufficient particularity to permit the Bank to ascertain the applicable
subsection, only
(a) upon sales of Portfolio Securities for the account of the Fund, against
contemporaneous receipt by the Bank of payment therefor in full, or, against
payment to the Bank in accordance with generally accepted settlement practices
and customs in the jurisdiction or market in which the transaction occurs, each
such payment to be in the amount of the sale price shown in a broker's
confirmation of sale of the Portfolio Securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made;
(b) in exchange for or upon conversion into other securities alone or other
securities and cash pursuant to any plan of merger, consolidation,
reorganization, share split-up, change in par value, recapitalization or
readjustment or otherwise, upon exercise of subscription, purchase or sale or
other similar rights represented by such Portfolio Securities, or for the
purpose of tendering shares in the event of a tender offer therefor, provided
however that in the event of an offer of exchange, tender offer, or other
exercise of rights requiring the physical tender or delivery of Portfolio
Securities, the Bank shall have no liability for failure to so tender in a
timely manner unless such Proper Instructions are received by the Bank at least
two business days prior to the date required for tender, and unless the Bank (or
its agent or subcustodian hereunder) has actual possession of such Security at
least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities pursuant to their terms into
other securities:
(d) for the purpose of redeeming in kind shares of the Fund upon
authorization from the Fund;
(e) in the case of option contracts owned by the Fund, for presentation to
the endorsing broker;
(f) when such Portfolio Securities are called, redeemed or retired or
otherwise become payable;
(g) for the purpose of effectuating the pledge of Portfolio Securities held
by the Bank in order to collateralize loans made to the Fund by any bank,
including the Bank; provided, however, that such Portfolio Securities will be
released only upon payment to the Bank for the account of the Fund of the moneys
borrowed, except that in cases where additional collateral is required to secure
a borrowing already made, and such fact is made to appear in the Proper
Instructions, further Portfolio Securities may be released for that purpose
without any such payment. In the event that any such pledged Portfolio
Securities are held by the Bank, they will be so held for the account of the
lender, and after notice to the Fund from the lender in accordance with the
normal procedures of the lender, that an event of deficiency or default on the
loan has occurred, the Bank may deliver such pledged Portfolio Securities to or
for the account of the lender;
(h) for the purpose of releasing certificates representing Portfolio
Securities, against contemporaneous receipt by the Bank of the fair market value
of such security, as set forth in the Proper Instructions received by the Bank
before such payment is made;
(i) for the purpose of delivering securities lent by the Fund to a bank or
broker dealer, but only against receipt in accordance with street delivery
custom except as otherwise provided herein, of adequate collateral as agreed
upon from time to time by the Fund and the Bank, and upon receipt of payment in
connection with any repurchase agreement relating to such securities entered
into by the Fund;
(j) for other authorized transactions of the Fund or for other proper
corporate purposes; provided that before making such transfer, the Bank will
also receive a certified copy of resolutions of the Board, signed by an
authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary, specifying
the Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to be
an authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made; and
(k) upon termination of this Agreement as hereinafter set forth pursuant to
Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. Redemptions. In the case of payment of assets of the Fund held by the
Bank in connection with redemptions and repurchases by the Fund of outstanding
common shares, the Bank will rely on notification by the Fund's transfer agent
of receipt of a request for redemption and certificates, if issued, in proper
form for redemption before such payment is made. Payment shall be made in
accordance with the Articles and Bylaws of the Fund, from assets available for
said purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company where
the Fund is not the surviving entity, the sale by the Fund of all, or
substantially all, of its assets to another investment company, or the
liquidation or dissolution of the Fund and distribution of its assets, the Bank
will deliver the Portfolio Securities held by it under this Agreement and
disburse cash only upon the order of the Fund set forth in an Officers'
Certificate, accompanied by a certified copy of a resolution of the Board
authorizing any of the foregoing transactions. Upon completion of such delivery
and disbursement and the payment of the fees, disbursements and expenses of the
Bank, this Agreement will terminate.
9. Actions of Bank Without Prior Authorization. Notwithstanding anything
herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, it will without prior authorization or instruction
of the Fund or the transfer agent:
(a) Endorse for collection and collect on behalf of and in the name of the
Fund all checks, drafts, or other negotiable or transferable instruments or
other orders for the payment of money received by it for the account of the Fund
and hold for the account of the Fund all income, dividends, interest and other
payments or distribution of cash with respect to the Portfolio Securities held
thereunder;
(b) Present for payment all coupons and other income items held by it for
the account of the Fund which call for payment upon presentation and hold the
cash received by it upon such payment for the account of the Fund;
(c) Receive and hold for the account of the Fund all securities received as
a distribution on Portfolio Securities as a result of a stock dividend, share
split-up, reorganization, recapitalization, merger, consolidation, readjustment,
distribution of rights and similar securities issued with respect to any
Portfolio Securities held by it hereunder.
(d) Execute as agent on behalf of the Fund all necessary ownership and
other certificates and affidavits required by the Internal Revenue Code or the
regulations of the Treasury Department issued thereunder, or by the laws of any
state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any state;
(e) Present for payment all Portfolio Securities which are called,
redeemed, retired or otherwise become payable, and hold cash received by it upon
payment for the account of the Fund; and
(f) Exchange interim receipts or temporary securities for definitive
securities.
10. Collections and Defaults. The Bank will use all reasonable efforts to
collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including dividends, interest and other income, and to
transmit to the Fund notice actually received by it of any call for redemption,
offer of exchange, right of subscription, reorganization or other proceedings
affecting such Securities. If Portfolio Securities upon which such income is
payable are in default or payment is refused after due demand or presentation,
the Bank will notify the Fund in writing of any default or refusal to pay within
two business days from the day on which it receives knowledge of such default or
refusal. In addition, the Bank will send the Fund a written report once each
month showing any income on any Portfolio Security held by it which is more than
ten days overdue on the date of such report and which has not previously been
reported.
11. Maintenance of Records and Accounting Services. The Bank will maintain
records with respect to transactions for which the Bank is responsible pursuant
to the terms and conditions of this Agreement, and in compliance with the
applicable rules and regulations of the 1940 Act and will furnish the Fund daily
with a statement of condition of the Fund. The Bank will furnish to the Fund at
the end of every month, and at the close of each quarter of the Fund's fiscal
year, a list of the Portfolio Securities and the aggregate amount of cash held
by it for the Fund. The books and records of the Bank pertaining to its actions
under this Agreement and reports by the Bank or its independent accountants
concerning its accounting system, procedures for safeguarding securities and
internal accounting controls will be open to inspection and audit at reasonable
times by officers of or auditors employed by the Fund and will be preserved by
the Bank in the manner and in accordance with the applicable rules and
regulations under the 1940 Act.
The Bank shall keep the books of account and render statements or copies
from time to time as reasonably requested by the Treasurer or any executive
officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
12. Fund Evaluation. The Bank shall compute and, unless otherwise directed
by the Board, determine as of the close of business on the New York Stock
Exchange on each day on which said Exchange is open for unrestricted trading and
as of such other hours, if any, as may be authorized by the Board the net asset
value and the public offering price of a share of capital stock of the Fund,
such determination to be made in accordance with the provisions of the Articles
and By-laws of the Fund and Prospectus and Statement of Additional Information
relating to the Fund, as they may from time to time be amended, and any
applicable resolutions of the Board at the time in force and applicable, and
promptly to notify the Fund, the proper exchange and the NASD or such other
persons as the Fund may request of the results of such computation and
determination. In computing the net asset value hereunder, the Bank may rely in
good faith upon information furnished to it by any Authorized Person in respect
of (i) the manner of accrual of the expenses the Fund, (ii) reserves, if any,
authorized by the Board or that no such reserves have been authorized, (iii) the
value to be assigned to any security for which no price quotations are readily
available and said valuation is therefore supplied by any Authorized Person,
(iv) the value to be assigned to any security for which conflicting price
quotations are available or the Bank otherwise needs further direction from an
Authorized Person, and said valuation is therefore supplied by any Authorized
Person, and (v) the use of trade information supplied by any Authorized Person
until such time as the incorrectness of such trade information should reasonably
have been discovered through the settlement process, and the Bank shall not be
responsible for any loss occasioned by such reliance. The Bank shall be
authorized to obtain quotations for use in computing the net asset value from
one or more pricing services which it believes to be reliable but, except as
expressly set forth in the preceding sentence, the Bank shall be responsible for
the accuracy of all net asset value computations made hereunder, notwithstanding
the Bank's good faith reliance on any such pricing service or its compliance
with its own reasonable monitoring and testing controls.
13. Concerning the Bank
13.1 Performance of Duties and Standard of Care.
In performing its duties hereunder and any other duties listed on any
Schedule hereto, if any, the Bank will be entitled to receive and act upon the
advice of independent counsel of its own selection, which may be counsel for the
Fund, and will be without liability for any action taken or thing done or
omitted to be done in accordance with this Agreement in good faith in conformity
with such advice. In the performance of its duties hereunder, the Bank will be
protected and not be liable, and will be indemnified and held harmless for any
action taken or omitted to be taken by it in good faith reliance upon the terms
of this Agreement, any Officers' Certificate, Proper Instructions, resolution of
the Board, telegram, notice, request, certificate or other instrument reasonably
believed by the Bank to be genuine and for any other loss to the Fund except in
the case of its gross negligence, willful misfeasance or bad faith in the
performance of its duties or reckless disregard of its obligations and duties
hereunder.
The Bank will be under no duty or obligation to inquire into and will not
be liable for:
(a) the validity of the issue of any Portfolio Securities purchased by or
for the Fund, the legality of the purchases thereof or the propriety of the
price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by or for the Fund
or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common shares of the Fund or
the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares of the Fund or the
propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the Fund or the
legality of the distribution of any Portfolio Securities as payment in kind of
such dividend; and
(f) any property or moneys of the Fund unless and until received by it, and
any such property or moneys delivered or paid by it pursuant to the terms
hereof.
Moreover, the Bank will not be under any duty or obligation to ascertain
whether any Portfolio Securities at any time delivered to or held by it for the
account of the Fund are such as may properly be held by the Fund under the
provisions of its Articles, By-laws, any federal or state statutes or any rule
or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind resulting from acts of God,
earthquakes, fires, floods, storms or other disturbances of nature, epidemics,
strikes, riots, nationalization, expropriation, currency restrictions, acts of
war, civil war or terrorism, insurrection, nuclear fusion, fission or radiation,
the interruption, loss or malfunction of utilities, transportation, or computers
(hardware or software) and computer facilities, the unavailability of energy
sources and other similar happenings or events except as results from the Bank's
own gross negligence; or
(b) for special, punitive or consequential damages arising from the
provision of services hereunder, even if the Bank has been advised of the
possibility of such damages.
13.2 Agents and Subcustodians with Respect to Property of the Fund Held in
the United States. The Bank may employ agents in the performance of its duties
hereunder and shall be responsible for the acts and omissions of such agents as
if performed by the Bank hereunder.
Upon receipt of Proper Instructions, the Bank may employ subcustodians,
provided that any such subcustodian meets at least the minimum qualifications
required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Fund's
assets with respect to property of the Fund held in the United States. The Bank
shall have no liability to the Fund or any other person by reason of any act or
omission of any subcustodian and the Fund shall indemnify the Bank and hold it
harmless from and against any and all actions, suits and claims, arising
directly or indirectly out of the performance of any subcustodian. Upon request
of the Bank, the Fund shall assume the entire defense of any action, suit, or
claim subject to the foregoing indemnity. The Fund shall pay all fees and
expenses of any subcustodian.
13.3 Duties of the Bank with Respect to Property of the Fund Held Outside
of the United States.
(a) Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Bank to employ as sub-custodians for the Fund's Portfolio
Securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities depositories designated on the
Schedule attached hereto (each, a "Selected Foreign Sub-Custodian"). Upon
receipt of Proper Instructions, together with a certified resolution of the
Fund's Board of Trustees, the Bank and the Fund may agree to designate
additional foreign banking institutions and foreign securities depositories to
act as Selected Foreign Sub-Custodians hereunder. Upon receipt of Proper
Instructions, the Fund may instruct the Bank to cease the employment of any one
or more such Selected Foreign Sub-Custodians for maintaining custody of the
Fund's assets, and the Bank shall so cease to employ such sub-custodian as soon
as alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Bank and the Fund, assets of the Fund shall be maintained in
foreign securities depositories only through arrangements implemented by the
foreign banking institutions serving as Selected Foreign Sub-Custodians pursuant
to the terms hereof. Where possible, such arrangements shall include entry into
agreements containing the provisions set forth in subparagraph (d) hereof.
Notwithstanding the foregoing, except as may otherwise be agreed upon in writing
by the Bank and the Fund, the Fund authorizes the deposit in Euro-clear, the
securities clearance and depository facilities operated by Morgan Guaranty Trust
Company of New York in Brussels, Belgium, of Foreign Portfolio Securities
eligible for deposit therein and to utilize such securities depository in
connection with settlements of purchases and sales of securities and deliveries
and returns of securities, until notified to the contrary pursuant to
subparagraph (a) hereunder.
(c) Segregation of Securities. The Bank shall identify on its books as
belonging to the Fund the Foreign Portfolio Securities held by each Selected
Foreign Sub-Custodian. Each agreement pursuant to which the Bank employs a
foreign banking institution shall require that such institution establish a
custody account for the Bank and hold in that account, Foreign Portfolio
Securities and other assets of the Fund, and, in the event that such institution
deposits Foreign Portfolio Securities in a foreign securities depository, that
it shall identify on its books as belonging to the Bank the securities so
deposited.
(d) Agreements with Foreign Banking Institutions. Each of the agreements
pursuant to which a foreign banking institution holds assets of the Fund (each,
a "Foreign Sub-Custodian Agreement") shall be substantially in the form
previously made available to the Fund and shall provide that: (a) the Fund's
assets will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign banking institution or its creditors
or agent, except a claim of payment for their safe custody or administration
(including, without limitation, any fees or taxes payable upon transfers or
re-registration of securities); (b) beneficial ownership of the Fund's assets
will be freely transferable without the payment of money or value other than for
custody or administration (including, without limitation, any fees or taxes
payable upon transfers or re-registration of securities); (c) adequate records
will be maintained identifying the assets as belonging to Bank; (d) officers of
or auditors employed by, or other representatives of the Bank, including to the
extent permitted under applicable law, the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Bank; and (e)
assets of the Fund held by the Selected Foreign Sub-Custodian will be subject
only to the instructions of the Bank or its agents.
(e) Access of Independent Accountants of the Fund. Upon request of the
Fund, the Bank will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a Selected Foreign Sub-Custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of the Fund held by Selected Foreign Sub-Custodians, including but not limited
to an identification of entities having possession of the Foreign Portfolio
Securities and other assets of the Fund
(g) Transactions in Foreign Custody Account. Transactions with respect to
the assets of the Fund held by a Selected Foreign Sub-Custodian shall be
effected pursuant to Proper Instructions from the Fund to the Bank and shall be
effected in accordance with the applicable Foreign Sub-Custodian Agreement. If
at any time any Foreign Portfolio Securities shall be registered in the name of
the nominee of the Selected Foreign Sub-Custodian, the Fund agrees to hold any
such nominee harmless from any liability by reason of the registration of such
securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the contrary, settlement
and payment for Foreign Portfolio Securities received for the account of the
Fund and delivery of Foreign Portfolio Securities maintained for the account of
the Fund may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
In connection with any action to be taken with respect to the Foreign
Portfolio Securities held hereunder, including, without limitation, the exercise
of any voting rights, subscription rights, redemption rights, exchange rights,
conversion rights or tender rights, or any other action in connection with any
other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the Fund such
information in connection therewith as is made available to the Bank by the
Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign
Sub-Custodian any instructions, forms or certifications with respect to such
Rights, and any instructions relating to the actions to be taken in connection
therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further duty
or obligation with respect to such Rights, including, without limitation, the
determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians. Each Foreign
Sub-Custodian Agreement with a foreign banking institution shall require the
institution to exercise reasonable care in the performance of its duties and to
indemnify, and hold harmless, the Bank and each Fund from and against certain
losses, damages, costs, expenses, liabilities or claims arising out of or in
connection with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges
that the Bank, as a participant in Euro-clear, is subject to the Terms and
Conditions Governing the Euro-Clear System, a copy of which has been made
available to the Fund. The Fund acknowledges that pursuant to such Terms and
Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or
assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euro-clear in connection with the Fund's securities and
other assets.
(i) Liability of Bank. The Bank shall have no more or less responsibility
or liability on account of the acts or omissions of any Selected Foreign
Sub-Custodian employed hereunder than any such Selected Foreign Sub-Custodian
has to the Bank and, without limiting the foregoing, the Bank shall not be
liable for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism, political risk (including, but not limited to, exchange control
restrictions, confiscation, insurrection, civil strife or armed hostilities)
other losses due to Acts of God, nuclear incident or any loss where the Selected
Foreign Sub-Custodian has otherwise exercised reasonable care.
(j) Monitoring Responsibilities. The Bank shall furnish annually to the
Fund, information concerning the Selected Foreign Sub-Custodians employed
hereunder for use by the Fund in evaluating such Selected Foreign Sub-Custodians
to ensure compliance with the requirements of Rule 17f-5 of the Act. In
addition, the Bank will promptly inform the Fund in the event that the Bank is
notified by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles) or any other capital adequacy
test applicable to it by exemptive order, or if the Bank has actual knowledge of
any material loss of the assets of the Fund held by a Foreign Sub-Custodian.
(k) Tax Law. The Bank shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Bank as custodian of the
Fund by the tax laws of any jurisdiction, and it shall be the responsibility of
the Fund to notify the Bank of the obligations imposed on the Fund or the Bank
as the custodian of the Fund by the tax law of any non-U.S. jurisdiction,
including responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of jurisdictions for which the Fund has provided such
information.
13.4 Insurance. The Bank shall use the same care with respect to the
safekeeping of Portfolio Securities and cash of the Fund held by it as it uses
in respect of its own similar property but it need not maintain any special
insurance for the benefit of the Fund.
13.5. Fees and Expenses of Bank. The Fund will pay or reimburse the Bank
from time to time for any transfer taxes payable upon transfer of Portfolio
Securities made hereunder, and for all necessary proper disbursements, expenses
and charges made or incurred by the Bank in the performance of this Agreement
(including any duties listed on any Schedule hereto, if any) including any
indemnities for any loss, liabilities or expense to the Bank as provided above.
For the services rendered by the Bank hereunder, the Fund will pay to the Bank
such compensation or fees at such rate and at such times as shall be agreed upon
in writing by the parties from time to time. The Bank will also be entitled to
reimbursement by the Fund for all reasonable expenses incurred in conjunction
with termination of this Agreement by the Fund.
13.6 Advances by Bank. The Bank may, in its sole discretion, advance funds
on behalf of the Fund to make any payment permitted by this Agreement upon
receipt of any proper authorization required by this Agreement for such payments
by the Fund. Should such a payment or payments, with advanced funds, result in
an overdraft (due to insufficiencies of the Fund's account with the Bank, or for
any other reason) this Agreement deems any such overdraft or related
indebtedness, a loan made by the Bank to the Fund payable on demand and bearing
interest at the current rate charged by the Bank for such loans unless the Fund
shall provide the Bank with agreed upon compensating balances. The Fund agrees
that the Bank shall have a continuing lien and security interest to the extent
of any overdraft or indebtedness, in and to any property at any time held by it
for the Fund's benefit or in which the Fund has an interest and which is then in
the Bank's possession or control (or in the possession or control of any third
party acting on the Bank's behalf). The Fund authorizes the Bank, in its sole
discretion, at any time to charge any overdraft or indebtedness, together with
interest due thereon against any balance of account standing to the credit of
the Fund on the Bank's books.
14. Termination.
(a) This Agreement may be terminated at any time without penalty upon sixty
days written notice delivered by either party to the other by means of
registered mail, and upon the expiration of such sixty days this Agreement will
terminate; provided, however, that the effective date of such termination may be
postponed to a date not more than ninety days from the date of delivery of such
notice (i) by the Bank in order to prepare for the transfer by the Bank of all
of the assets of the Fund held hereunder, and (ii) by the Fund in order to give
the Fund an opportunity to make suitable arrangements for a successor custodian.
At any time after the termination of this Agreement, the Fund will, at its
request, have access to the records of the Bank relating to the performance of
its duties as custodian.
(b) In the event of the termination of this Agreement, the Bank will
immediately upon receipt or transmittal, as the case may be, of notice of
termination, commence and prosecute diligently to completion the transfer of all
cash and the delivery of all Portfolio Securities duly endorsed and all records
maintained under Section 11 to the successor custodian when appointed by the
Fund. The obligation of the Bank to deliver and transfer over the assets of the
Fund held by it directly to such successor custodian will commence as soon as
such successor is appointed and will continue until completed as aforesaid. If
the Fund does not select a successor custodian within ninety (90) days from the
date of delivery of notice of termination the Bank may, subject to the
provisions of subsection 14(c), deliver the Portfolio Securities and cash of the
Fund held by the Bank to a bank or trust company of its own selection which
meets the requirements of Section 17(f)(1) of the 1940 Act and has a reported
capital, surplus and undivided profits aggregating not less than $2,000,000, to
be held as the property of the Fund under terms similar to those on which they
were held by the Bank, whereupon such bank or trust company so selected by the
Bank will become the successor custodian of such assets of the Fund with the
same effect as though selected by the Board.
(c) Prior to the expiration of ninety (90) days after notice of termination
has been given, the Fund may furnish the Bank with an order of the Fund
advising that a successor custodian cannot be found willing and able to act upon
reasonable and customary terms and that there has been submitted to the
shareholders of the Fund the question of whether the Fund will be liquidated or
will function without a custodian for the assets of the Fund held by the Bank.
In that event the Bank will deliver the Portfolio Securities and cash of the
Fund held by it, subject as aforesaid, in accordance with one of such
alternatives which may be approved by the requisite vote of shareholders, upon
receipt by the Bank of a copy of the minutes of the meeting of shareholders at
which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank.
15. Confidentiality. Both parties hereto agree than any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other party,
except as may be required by applicable law or at the request of a governmental
agency. The parties further agree that a breach of this provision would
irreparably damage the other party and accordingly agree that each of them is
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of this provision.
16. Notices. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
COVA SERIES TRUST
One Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181-4644
Attention:
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention:
or at such other place as such party may from time to time designate in
writing.
17. Amendments. This Agreement may not be altered or amended, except by an
instrument in writing, executed by both parties, and in the case of the Fund,
such alteration or amendment will be authorized and approved by its Board.
18. Parties. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 14 hereof will not be deemed to
be an assignment within the meaning of this provision.
19. Governing Law. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first written above.
COVA SERIES TRUST
By: /s/ LORRY J. STENSRUD
---------------------
Name: Lorry J. Stensrud
Title: President
ATTEST:
/s/ JEFFERY K. HOELZEL
- -----------------------
INVESTORS BANK & TRUST COMPANY
By: /s/ HENRY M. JOYCE
---------------------
Name: Henry M. Joyce
Title: Director
ATTEST:
- -----------------------
DATE: April 1, 1996
-----------------
ADMINISTRATION AGREEMENT
between
COVA SERIES TRUST
(known as Van Kampen Merritt Series Trust until May, 1, 1996)
and
COVA Investment Advisory Corporation
and
INVESTORS BANK & TRUST COMPANY
FORM OF
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT is made as of April 1, 1996 by and between
COVA SERIES TRUST (known as Van Kampen Merritt Series Trust until May, 1, 1996),
a Massachusetts business trust (the "Fund"), COVA Investment Advisory
Corporation, an Illinois corporation (the "Adviser"), and INVESTORS BANK & TRUST
COMPANY, a Massachusetts trust company ("Investors Bank").
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
consisting of five separate active portfolios as of April 1, 1996 and to consist
of eleven active separate portfolios as of May 1, 1996; and
WHEREAS, the Fund and the Adviser desire to retain Investors Bank to render
certain administrative services to the Fund and Investors Bank is willing to
render such services;
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Investors Bank to act as
Administrator of the Fund on the terms set forth in this Agreement. Investors
Bank accepts such appointment and agrees to render the services herein set forth
for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Investors Bank with copies
properly certified or authenticated of each of the following:
(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of Investors Bank to provide certain administrative services to the
Fund and approving this Agreement;
(b) The Fund's incorporating documents filed with the state of
Massachusetts and all amendments thereto (the "Articles");
(c) The Fund's by-laws and all amendments thereto (the "By-Laws");
(d) The Fund's agreements with all service providers which include any
investment advisory agreements, sub-investment advisory agreements, custody
agreements, distribution agreements and transfer agency agreements
(collectively, the "Agreements");
(e) The Fund's most recent Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933 and under the 1940
Act and all amendments thereto; and
(f) The Fund's most recent prospectus and statement of additional
information (the "Prospectus"); and
(g) Such other certificates, documents or opinions as may mutually be
deemed necessary or appropriate for Investors Bank in the proper performance of
its duties hereunder.
The Fund will immediately furnish Investors Bank with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing. Furthermore, the Fund will notify Investors Bank as soon as possible
of any matter materially affecting the performance of Investors Bank of its
services under this Agreement.
3. Duties of Administrator. Subject to the supervision and direction of the
Board of Directors of the Fund, Investors Bank, as Administrator, will assist in
supervising various aspects of the Fund's administrative operations and
undertakes to perform the following specific services:
(a) Maintaining office facilities (which may be in the offices of Investors
Bank or a corporate affiliate);
(b) Furnishing internal executive and administrative services and clerical
services;
(c) Furnishing corporate secretarial services including preparation and
distribution of materials for Board of Directors meetings;
(d) Accumulating information for and, subject to approval by the Fund's
treasurer and legal counsel, coordination of the preparation, filing, printing
and dissemination of reports to the Fund's shareholders of record and the SEC
including, but not necessarily limited to, post-effective amendments to the
Fund's registration statement, annual reports, semiannual reports, Form N-SAR,
24f-2 notices and proxy material;
(e) Participating in the preparation and filing of various reports or other
documents required by federal, state and other applicable laws and regulations,
other than those filed or required to be filed by the Fund's investment adviser
or transfer agent;
(f) Coordinating the preparation and filing of the Fund's tax returns;
(g) Other services as may be detailed as an appendix to this Agreement.
In performing all services under this Agreement, Investors Bank shall act
in conformity with Fund's Articles and By-Laws and the 1940 Act, as the same may
be amended from time to time; and the investment objectives, investment policies
and other practices and policies set forth in the Fund's Registration Statement,
as the same may be amended from time to time. Notwithstanding any item discussed
herein, Investors Bank has no discretion over the Fund's assets or choice of
investments and cannot be held liable for any problem relating to such
investments.
4. Fees and Expenses.
(a) For the services to be rendered and the facilities to be furnished by
Investors Bank, as provided for in this Agreement, the Adviser will compensate
Investors Bank in accordance with the fee schedule attached hereto. Such fees do
not include out-of-pocket disbursements (as delineated on the fee schedule or
other expenses with the prior approval of the Fund's management) of the
Administrator for which the Administrator shall be entitled to bill separately.
(b) Investors Bank shall not be required to pay any expenses incurred by
the Fund.
5. Limitation of Liability.
(a) Investors Bank, its directors, officers, employees and agents shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Adviser in connection with the performance of its obligations and duties
under this Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of such obligations and duties, or
by reason of its reckless disregard thereof. The Fund will indemnify Investors
Bank, its directors, officers, employees and agents against and hold it and them
harmless from any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses) resulting from any claim,
demand, action or suit not resulting from the willful misfeasance, bad faith or
gross negligence of Investors Bank in the performance of such obligations and
duties or by reason of its reckless disregard thereof.
(b) Investors Bank may apply to the Fund at any time for instructions and
may consult counsel for the Fund, or its own counsel, and with accountants and
other experts with respect to any matter arising in connection with its duties
hereunder, and Investors Bank shall not be liable or accountable for any action
taken or omitted by it in good faith in accordance with such instruction, or
with the opinion of such counsel, accountants, or other experts. Investors Bank
shall be protected in acting upon any document, certificate or instrument which
it reasonably believes to be genuine and to be signed or presented by the proper
person or persons. Investors Bank shall not be held to have notice of any change
of authority of any officers, employees, or agents of the Fund until receipt of
written notice thereof has been received from the Fund.
6. Termination of Agreement.
(a) This Agreement shall become effective on the date hereof and shall
remain in force unless terminated pursuant to the provisions of subsection (b)
of this Section 6, provided however that Section 5 shall survive the termination
of the Agreement.
(b) This Agreement may be terminated at any time upon 60 days written
notice, by vote of the holders of a majority of the outstanding voting
securities of the Fund, or by vote of a majority of the Board of Directors of
the Fund, or by Investors Bank. Should the Fund elect to terminate this
agreement prior to or on March 31, 1998, the Fund and/or Adviser will pay a
penalty amount of $400,000. Terminations occurring on or after April 1, 1998
shall occur without payment of any penalty.
7. Miscellaneous.
(a) Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or Investors Bank shall be sufficiently given
if addressed to that party and received by it at its office set forth below or
at such other place as it may from time to time designate in writing.
To the Fund and Adviser: COVA SERIES TRUST
One Tower Lane
Suite 3000
Oakbrook Terrace, IL 60181-4644
Attention:
To Investors Bank: Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Attention: Tim Murphy
(b) This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable without the written consent of the other
party.
(c) This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
(d) This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original and which collectively shall be deemed
to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
8. Confidentiality. All books, records, information and data pertaining to
the business of the other party which are exchanged or received pursuant to the
negotiation or the carrying out of this Agreement shall remain confidential, and
shall not be voluntarily disclosed to any other person, except as may be
required in the performance of duties hereunder or as otherwise required by law.
9. Use of Name. The Fund shall not use the name of Investors Bank or any of
its affiliates in any prospectus, sales literature or other material relating to
the Fund in a manner not approved by the Bank prior thereto in writing; provided
however, that the approval of the Bank shall not be required for any use of its
name which merely refers in accurate and factual terms to its appointment
hereunder or which is required by the Securities and Exchange Commission or any
state securities authority or any other appropriate regulatory, governmental or
judicial authority; provided further, that in no event shall such approval be
unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers as of the date
first written above.
ATTEST: COVA SERIES TRUST
/s/ JEFFERY K. HOELZEL By: /s/ LORRY J. STENSRUD
- ---------------------- -----------------------
Name: Lorry J. Stensrud
Title: President
ATTEST: COVA INVESTMENT ADVISORY CORP.
/s/ JEFFERY K. HOELZEL By: /s/ LORRY J. STENSRUD
- ---------------------- ------------------------
Name: Lorry J. Stensrud
Title: President
ATTEST: Investors Bank & Trust Company
/s/ By: /s/ HENRY M. JOYCE
- ---------------------- -------------------------
Name: Henry M. Joyce
Title: Director
Date: April 1, 1996
--------------
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees
COVA Series Trust:
We consent to the use of our reports incorporated herein by reference and to
the reference to our firm under the caption "LEGAL COUNSEL AND INDEPENDENT
AUDITORS" in the statement of additional information included herein.
/s/KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Chicago, Illinois
October 17, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> Cova Small Cap Stock Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5,586,640
<INVESTMENTS-AT-VALUE> 5,635,145
<RECEIVABLES> 38,602
<ASSETS-OTHER> 347,697
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,021,444
<PAYABLE-FOR-SECURITIES> 265,916
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,583
<TOTAL-LIABILITIES> 267,499
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,588,427
<SHARES-COMMON-STOCK> 549,862
<SHARES-COMMON-PRIOR> 500,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (49)
<ACCUMULATED-NET-GAINS> 117,062
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 48,505
<NET-ASSETS> 5,753,945
<DIVIDEND-INCOME> 17,224
<INTEREST-INCOME> 10,481
<OTHER-INCOME> 0
<EXPENSES-NET> 13,493
<NET-INVESTMENT-INCOME> 14,212
<REALIZED-GAINS-CURRENT> 117,062
<APPREC-INCREASE-CURRENT> 48,505
<NET-CHANGE-FROM-OPS> 179,779
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,261
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 190,781
<NUMBER-OF-SHARES-REDEEMED> 142,282
<SHARES-REINVESTED> 1,363
<NET-CHANGE-IN-ASSETS> 753,945
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,076
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25,785
<AVERAGE-NET-ASSETS> 5,904,510
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.46
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> Cova Quality Bond Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5,309,625
<INVESTMENTS-AT-VALUE> 5,276,911
<RECEIVABLES> 329,979
<ASSETS-OTHER> 682,377
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,289,267
<PAYABLE-FOR-SECURITIES> 785,544
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,482
<TOTAL-LIABILITIES> 787,026
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,566,285
<SHARES-COMMON-STOCK> 557,273
<SHARES-COMMON-PRIOR> 500,000
<ACCUMULATED-NII-CURRENT> 1,314
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (32,527)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (32,831)
<NET-ASSETS> 5,502,241
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 77,399
<OTHER-INCOME> 0
<EXPENSES-NET> 7,914
<NET-INVESTMENT-INCOME> 69,485
<REALIZED-GAINS-CURRENT> (32,527)
<APPREC-INCREASE-CURRENT> (32,831)
<NET-CHANGE-FROM-OPS> 4,127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 68,171
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 53,813
<NUMBER-OF-SHARES-REDEEMED> 3,444
<SHARES-REINVESTED> 6,904
<NET-CHANGE-IN-ASSETS> 502,241
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16,877
<AVERAGE-NET-ASSETS> 5,070,706
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> (0.13)
<PER-SHARE-DIVIDEND> (0.13)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.87
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> Cova Select Equity Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5,655,088
<INVESTMENTS-AT-VALUE> 5,557,381
<RECEIVABLES> 47,212
<ASSETS-OTHER> 42,976
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,647,569
<PAYABLE-FOR-SECURITIES> 22,222
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,530
<TOTAL-LIABILITIES> 23,752
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,721,723
<SHARES-COMMON-STOCK> 568,413
<SHARES-COMMON-PRIOR> 500,000
<ACCUMULATED-NII-CURRENT> 157
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (356)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (97,707)
<NET-ASSETS> 5,623,817
<DIVIDEND-INCOME> 27,211
<INTEREST-INCOME> 8,414
<OTHER-INCOME> 0
<EXPENSES-NET> 11,696
<NET-INVESTMENT-INCOME> 23,929
<REALIZED-GAINS-CURRENT> (356)
<APPREC-INCREASE-CURRENT> (97,707)
<NET-CHANGE-FROM-OPS> (74,134)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23,772
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 218,045
<NUMBER-OF-SHARES-REDEEMED> 2,403
<SHARES-REINVESTED> 152,035
<NET-CHANGE-IN-ASSETS> 623,817
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,320
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 21,938
<AVERAGE-NET-ASSETS> 5,718,703
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.11)
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.89
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> Cova Large Cap Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 15,230,809
<INVESTMENTS-AT-VALUE> 15,377,319
<RECEIVABLES> 49,969
<ASSETS-OTHER> 88,150
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,515,438
<PAYABLE-FOR-SECURITIES> 7,428
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,467
<TOTAL-LIABILITIES> 11,895
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,226,061
<SHARES-COMMON-STOCK> 1,522,101
<SHARES-COMMON-PRIOR> 1,500,000
<ACCUMULATED-NII-CURRENT> 944
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 130,029
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 146,509
<NET-ASSETS> 15,503,543
<DIVIDEND-INCOME> 83,181
<INTEREST-INCOME> 14,795
<OTHER-INCOME> 0
<EXPENSES-NET> 27,330
<NET-INVESTMENT-INCOME> 70,646
<REALIZED-GAINS-CURRENT> 130,029
<APPREC-INCREASE-CURRENT> 146,509
<NET-CHANGE-FROM-OPS> 347,184
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69,702
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,124
<NUMBER-OF-SHARES-REDEEMED> 1,866
<SHARES-REINVESTED> 6,843
<NET-CHANGE-IN-ASSETS> 503,543
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23,690
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 48,854
<AVERAGE-NET-ASSETS> 15,144,686
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.19
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.19
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> Cova International Equity Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5,710,279
<INVESTMENTS-AT-VALUE> 5,897,893
<RECEIVABLES> 742,975
<ASSETS-OTHER> 1,000,579
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,641,447
<PAYABLE-FOR-SECURITIES> 387,938
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,549
<TOTAL-LIABILITIES> 389,487
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,056,120
<SHARES-COMMON-STOCK> 702,142
<SHARES-COMMON-PRIOR> 500,000
<ACCUMULATED-NII-CURRENT> 23,403
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (20,609)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 193,046
<NET-ASSETS> 7,251,960
<DIVIDEND-INCOME> 86,332
<INTEREST-INCOME> 11,595
<OTHER-INCOME> (23,333)
<EXPENSES-NET> 13,261
<NET-INVESTMENT-INCOME> 61,333
<REALIZED-GAINS-CURRENT> (20,609)
<APPREC-INCREASE-CURRENT> 193,046
<NET-CHANGE-FROM-OPS> 233,770
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 37,930
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 313,795
<NUMBER-OF-SHARES-REDEEMED> 115,326
<SHARES-REINVESTED> 3,673
<NET-CHANGE-IN-ASSETS> 2,251,960
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,866
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 37,053
<AVERAGE-NET-ASSETS> 5,803,872
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 0.30
<PER-SHARE-DIVIDEND> (0.06)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.33
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial
information extracted from Cova Series Trust
financial statements at June 30, 1996
and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 11
<NAME> Cova Bond Debenture Portfolio
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 1,454,009
<INVESTMENTS-AT-VALUE> 1,449,874
<RECEIVABLES> 41,625
<ASSETS-OTHER> 681,726
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,173,225
<PAYABLE-FOR-SECURITIES> 238,939
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 190
<TOTAL-LIABILITIES> 239,129
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,915,848
<SHARES-COMMON-STOCK> 189,259
<SHARES-COMMON-PRIOR> 50,000
<ACCUMULATED-NII-CURRENT> 408
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,975
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,135)
<NET-ASSETS> 1,934,096
<DIVIDEND-INCOME> 649
<INTEREST-INCOME> 17,037
<OTHER-INCOME> 0
<EXPENSES-NET> 1,803
<NET-INVESTMENT-INCOME> 15,883
<REALIZED-GAINS-CURRENT> 21,975
<APPREC-INCREASE-CURRENT> (4,135)
<NET-CHANGE-FROM-OPS> 33,723
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,475
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 184,525
<NUMBER-OF-SHARES-REDEEMED> 46,780
<SHARES-REINVESTED> 1,514
<NET-CHANGE-IN-ASSETS> 1,434,096
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,590
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,826
<AVERAGE-NET-ASSETS> 881,391
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 0.22
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
